Q1 2022 Essex Property Trust Inc Earnings Call
Good day and welcome to the Essex Property Trust first quarter 2022 earnings Conference call.
A reminder, today's conference call is being recorded.
Statements made on this conference call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties.
Statements are made based on current expectations assumptions and beliefs as well as information available to the company at this time.
Number of factors could cause actual results to differ materially from that was anticipated.
Further information about these risks can be found on the company's filings with the SEC.
It's now my pleasure to introduce your host Mr. Michael Schall, President and Chief Executive Officer.
Essex property Trust. Thank you Mr. Shaw you may begin.
Thank you for joining us today and welcome to our first quarter earnings Conference call, Angela Kleiman, and Barb Pak will follow me with prepared remarks, and Adam Berry is here for Q&A.
Today, I will comment on our first quarter results.
Recent housing demand and supply trends and a brief overview of the apartment transaction market.
We are pleased to announce our fourth consecutive quarter of improving core <unk> per share and same store revenue growth.
With this quarter's core <unk> exceeded our guidance midpoint by <unk> <unk> per share.
As mentioned in our earnings release, our results in rent growth trajectory support an increase in core <unk> and same property revenue guidance for the year, which Barb will review shortly.
Overall rents have continued to improve.
And as of April 2022, net effective rents in the Essex markets are now 11, 4% above pre COVID-19 levels and up 22% compared to one year ago.
All of our markets have a positive sequential rent growth with northern with northern California, leading the portfolio improving sequentially by approximately 3% in each month of the first quarter.
We expect further improvement in northern California as progress is made on return to office programs for the large technology companies following several COVID-19 related delays.
Top Tech companies also continue to hire rapidly in the Essex markets with over 50000 job openings posted for California, and Washington are 79% increase compared to March of 2020.
Other indicators, including job growth venture capital deployment and office investment continue to support our thesis that northern California will remain the epicenter of the technology industries.
A significant recent example came from Google, which announced the plan to invest more than three and a half billion an additional office in Datacenters in mountain view downtown San Jose and elsewhere across the Bay area.
The easing of Covid related regulation has been pivotal for return to office in our markets masked mandates had been significantly relaxed versus prior quarters, making it easier to bring employees back to the office.
Business travel in person meetings property tours and conferences have risen and we look forward to in person investor meetings once again.
As Covid related regulations continues to subside on the west coast the deadline to apply for rental relief in California has now passed as of April 1st.
Government sponsored rental relief has been a double edged sword for California apartment owners as tenants, we're often encouraged to see government rental relief programs rather than paying rent delays in government reimbursement has led to the highest delinquencies since the onset of the pandemic.
With the rental relief programme now closed to new applications, with California, where now cautiously optimistic that underlying delinquency trends will improve.
California's rental assistance program remains far behind with respect to payments providing.
Potential upside as we continue pursuing the approximately $76 million of rent owed to the company.
Given the extraordinary government restrictions during the pandemic it became clear that our portfolio would need to achieve to need to achieve two inflection points before we could be confident that a full recovery was underway. The first was the reopening of our markets, which occurred in July of 2021, and the second was a return to office to the largest tech.
Knowledge of companies over the past two months, we've seen Google, Microsoft meta and Apple all begin to reopen and re staff their offices.
Our leasing specialists are reporting more application returning from out of state as hybrid and similar arrangements require regular office attendance for employees.
Turned to office mandates are generating economic activities.
As a parent and the job growth reports with San Francisco, leaving our portfolio with eight 9% trailing three month job growth.
On average the Essex markets reported job growth of six 7% on a trailing three month basis versus the broader U S average of four 7%, marking the second consecutive quarter that Essex markets have outpaced the nation in job growth.
We expect this outperformance will continue his ethics is still all recovered 83% of the jobs compared to pre COVID-19 levels versus the U S recovery of 95%.
We expect service and hospitality related jobs to continue a strong growth trajectory supported by increased travel generally and demand for services from the well paid workforce on the west coast.
The confluence of increasing job growth, a lower unemployment rate of three 6% in the Essex markets and expensive for sale housing all contribute to favorable rental housing tailwind.
Turning to housing supply the ability to ramp up housing production is more challenging along the west coast as a result of long entitlement processes burdensome regulations labor shortages and inflating construction cost.
As a result.
Housing permits.
Six markets remain at levels, roughly consistent with our long term averages.
Our bottoms up supply analysis indicates that new deliveries will moderate for the rest of 2022 and we are also expecting a 15% decline in apartment supply in 2023, which includes a 54% reduction in new supply expected in northern California.
All of our markets remain on the lower end of the supply growth spectrum versus other U S. Metros.
Turning to the apartment investment markets.
Geopolitical events turbulent financial market conditions, and high levels of inflation create uncertainty, which may become a headwind for transactions.
However, cap rates generally don't move quickly and are mostly a function of investor demand for property.
As to the West coast, specifically strong evidence of recovering apartment market conditions higher inflationary growth expectations and significant capital pursuing apartments appear to have mostly offset the impact of higher interest cost keeping.
Keeping cap rates unchanged at this point.
Our review of cap rates for recent apartment transactions across the Essex markets indicate most institutional quality assets trading in the mid 3% range for stabilized properties with little deviation across markets building class and location.
We will continue to be selective with our capital allocation strategy focusing on deals that have the best growth potential and generate accretion to our financial benchmarks.
In closing I'd like to briefly highlight the importance of ESG and its impact on the company as a leading provider of housing along the West Coast. We know that our company has a responsibility to operate in an environmentally conscious way.
Consistent with that thesis, we recently released our TC FD report, which is the first step toward alignment with proposed SEC reporting requirements.
Last week, we announced that Essex will co anchor in ESG housing impact fund managed by our ventures.
Finally, we are also pleased to announce the upcoming publication of our fourth CSR report, which should be available in early may with that I'll turn the call over to Angela Kleiman.
Thanks, Mike first I would like to express my appreciation for our operations and support teams.
We have implemented new systems and structures to optimize our operations team.
Jim has taken on these challenges is tried and continues to demonstrate exceptional work ethic and dedication to our company's success.
In todays comments I'll begin with key operational highlights and our major regions, including our outlook for 2022 rent growth and conclude with an update on the rollout of her property collections operating model.
We are pleased with our first quarter operating results, especially in delivering a six 5% same property revenue growth on a year over year basis. This is primarily driven by increases in scheduled rent and improvements in concessions detailed on page two of our press release.
The first quarter performance exceeded our expectations and included some of our strongest leasing spreads reported in the company's history with net effective new lease is up 20% and renewals up 11, 7% compared to the same period last year.
Average concessions for the portfolio continues to remain minimal with APRA loss to lease for the same store portfolio and 95% we are well positioned heading into the summer leasing season.
What are the key operational highlights from north to South.
Beginning with our Washington portfolio rents in the Pacific Northwest had a strong start to the year improving sequentially each month since December .
In addition, we successfully decreased concession in downtown Seattle throughout the quarter.
Our supply forecast reflects a modest right in deliveries throughout 2022, and the Seattle Dropbox. It remains strong like March average trailing three month growth rate of six 1%.
Moving forward, we anticipate steady performance from our Seattle region with a loss to lease in April of seven 7%.
To northern California.
As Mike mentioned earlier once in this region are being lifted by the return to office of large tech companies and a solid rebound in job growth. After a typical seasonal slowdown in the fourth quarter concession usage in San Francisco and San Jose declined throughout the first quarter, leading to a steady improvement in net effective rents.
Looking ahead, we expect the supply picture to remain steady for the rest of the year and on the demand side job growth is accelerating with March average trailing three months ago or three of six 7%.
Northern California is in its early stages of recovery, we're seeing a steady increase to loss to lease which stands at five 1% in April and we continue to expect this region to beat our market rent growth in 2020 two.
Turning to southern California, which has been our best performing markets throughout the pandemic. We continue to be confident about southern California is rent did not experience. The typical seasonal decline in the fourth quarter and have continued to improve each month in the first quarter concessions have been below one week for almost a year.
Our turnover in southern California remains at the lowest level relative to the rest of our markets demonstrating continued strength and stability of this region.
For 2022 we have forecasted and modest increase in supply delivery and anticipate concession may temporarily elevate in areas near those development lease ups.
On the demand side, Southern California, with a top performing region with March average trailing three months of job growth of seven 9%.
Furthermore, our April loss to lease of 14% will provide a tailwind to revenue into 2023.
It is with the strong fundamental backdrop that Essex continues to make progress in advancing our property collections operating model. We discussed in previous earnings calls and how we successfully improved efficiency last year in San Diego and Orange County by operating closely located properties as a.
Oh unified business.
Benefits of this operating model include enhancing our customer service through virtual on demand experience.
Creating more career opportunities for our associates to specialization and ultimately generating a 10% to 15% reduction in administrative staffing needs through natural attrition.
Which is also mitigating inflationary pressures we are experiencing today.
Historically, our success operate with an employee to unit ratio of 42. One today, we are at 43 to one and our target by the end of 2022 is 45 to one.
At this point.
We have completed the rollout of southern California, and expect companywide implementation by year end. In addition, we have an ongoing digital platform improvements rolling out over the next few years as such we have yet to fully optimize our business and we anticipate further benefits in 2023 and thereafter.
With that I'll turn the call over to Barb Pak.
Thanks, Angela I'll start with a few comments on our first quarter results discuss changes to our full year guidance, followed by an update on co investment activity and the balance sheet.
I'm pleased to report core herself for the first quarter exceeded our expectations. The favorable outcome was due to strong operating results and higher co investment income.
For the full year, we are raising the mid point of core if I fell by 25 cents per share to $13.95. The increase is driven by two factors.
First we are raising the midpoint of our same property revenue growth by 85 basis points to eight 6% on a cash basis.
This is driven by our solid first quarter operating results and an improvement in our net delinquency expectations for the year.
Our revised guidance now assumes net delinquency of one 9% are scheduled right as compared to our original guidance of two 4% at the midpoint.
As Mike mentioned, the deadline for applying for federal tenant relief passed on April 1st. We believe this has led to an improvement in our residents paying current well at the same time. We have also seen an increase in emergency rental assistance over the past two months.
As such our April net delinquencies were 20 basis points of sketch over at which is below our historical average of 35 basis points.
While this is encouraging underlying growth so like once he is worried about 5% in April and thus, we still need to make progress before we can confidently put COVID-19 related delinquencies behind us.
A second factor in our in our improved course, I felt guidance range relates to preferred equity investment as we are now expecting approximately $215 million of redemptions compared to our initial midpoint of 350 million.
The reduction in redemptions relates to three investments that we now anticipate being paid off in 2023.
Turning to our co investment platform.
Certainly monetize the promote income within two ventures unlocking embedded value for our shareholders in the first quarter, we amended our west coast three joint venture realizing 17 million of promote income which was paid in cash debenture generated a 16% IRR for Essex shareholders.
Subsequent to quarter end, we amended our wesco four joint venture, earning 37 million of promote income which was elected to reinvest back into the venture and increase our ownership to 65%.
This venture achieved a 22% IRR. These.
These two transactions are expected to create over $2 million in additional core SSO on an annual basis.
Overall, our private equity platform continues to create value for our investors and remains an important alternative source of capital.
Finally, turning to the balance sheet in the first quarter, our net debt to EBITDA ratio improved to six one times compared to six six times at the depth of the pandemic.
We expect this ratio will continue to improve throughout 2022, driven by stronger operating results with over 1 billion of liquidity limited near term funding needs and multiple sources of capital available to US we remain in a strong financial position.
That concludes my prepared remarks, and I will now turn the call back to the operator for questions.
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Okay.
Our first question will come from the line of Rich Hill with Morgan Stanley . Please proceed with your questions.
Hey, guys. Thanks for taking my my question hopefully, it's a relatively straightforward one.
Given the really impressive new and renewal growth.
You're putting up right now I'm, hoping you can disclose for us what the earn in for 2023, that's right now.
Hi, Rich, it's Angela I would love to see if that gives you the earn in for 2023, but it's one Barb will kill me and two it's just too early you know I think you can see that our fundamentals are there I saw it and we're doing quite well.
Okay. So I figured I'd I'd figured I'd try it so maybe its just one follow up question.
I don't know if some of your peers talk about it. So I know, it's not yes, that's the way, but I figured I'd give it a go.
We did not we did notice that your occupancy dipped a little bit in April I'm wondering if you can just walk us through if that was intentional pushing rates into the peak leasing season, and how you think that might trend getting turned over that feels pretty low.
Sure. That's a that's a good question rich and you've seen us do that switches one we see market strength, we would.
Change our strategy from favoring occupancy to pushing rents, especially when we see you know when we are anticipating a more market strength coming ahead of us. So it is very much intentional and and you'll see that when we are past the leasing season, usually during third quarter and especially in the fourth quarter. We went.
Change that strategy back to pushing occupancy instead.
Okay. That's great Mike if I had another question, which I, which I don't I'd asked about solar panels, but maybe we can table that for for NAREIT.
About what I missed that.
Just about so far with that.
Oh solar panels.
I mean, the whole the CSR effort yeah, yeah. So I'll just make a couple of quick comments and then yeah.
Then we'll move on from there we have actually for over 10 years now been had our own what we call resource management group. So we've got a pretty long history of pursuing things that we thought were good for a property is good for values and create more efficient ways of doing things. So.
CSR efforts have been there nothing new and that's been part of our our past and but I would say as we think about California, especially there is a mandate here too.
Remove gas cars by 2035.
There are other mandates as you all know and they keep us focused on on that I think that there is a strong intersection between opportunity to add value to the portfolio and many of these ESG efforts and you've mentioned one of them, which is solar panels, but it goes well beyond that.
Electronic vehicle charging stations et cetera.
We'll be part of the mandate as well. So we're excited about it. We're we were excited to announce our.
Co anchoring of that new fund that.
Or by our <unk> ventures and.
I think it's consistent with our past and the way we think about ESG.
Great. Thanks, guys.
Yeah.
Thanks Rich.
Thank you our next that's come from the line of Nick Joseph with Citi. Please proceed with your questions.
Thanks, you talked about the strong rent growth and demand in northern California.
As you survey those incoming residents.
Where are they moving from are they within the MSA are they coming from kind of other areas of California or is it coming from other areas of the country. What migration trends are you seeing maybe.
Vic to northern California.
Hey, Nick it's Mike and maybe Angela will want to make a comment.
By the way, if you're a bar brands high around [laughter].
That comment but really.
I think opening up.
Number of different things you know the normal migration pattern typically has retirees with expensive, California homes, leaving.
As you enter into a recessionary period, we certainly saw that and then normally thats those retiring workers moving out of California are replaced by younger workers that are coming into California to take.
Higher paying jobs and some of the opportunities that the tech company. So the younger workers, who are largely told to stay put until the tech companies opened up and so now we're starting to see them return. In addition to that there are some foreign migration that is that has picked up also and we're starting to see more demand for.
Corporate housing units.
As these big Tech companies in terms of their training.
And on boarding activities.
Definitely a pickup in demand.
From a corporate housing for corporate housing so it's really across the board, we're seeing more normalization of our activities and.
Theyre coming from a number of different areas.
Thanks, and then maybe just on the transaction environment and I recognize that the environment is different but just based on your past experience how.
Are you thinking of asset pricing trending from here, obviously, theres high rent growth, but negative leverage but with higher interest rates. So in the past and as you've seen some of those.
Inputs, what is that going into the transaction market on a lagged basis.
Hey, Nick this is Adam.
So going forward, we don't see.
Don't see transaction.
Values changing a whole lot I think Mike mentioned in his opening comments you are seeing some some interest rate pressures, obviously, but but with the growth that we're seeing throughout our markets.
And with the amount of capital in the market chasing deals, we're really not seeing a dramatic move in pricing.
For for deals that are kind of on the market right now, we're seeing that somewhat less profitable than we've seen over the last call. It six to nine months.
But that's the that's an extra 5% the groups.
After the second best and final round that we're not seeing today. So it really like I said, we're not seeing a dramatic shift in pricing.
Thanks.
Thank you. Our next question is coming from the line of Steve <unk> with Evercore. Please proceed with your questions.
Yeah. Thanks, I guess good morning still out there Barb I just wanted to try and clarify some things a man I'm a little confused I know there were a lot of numbers on on delinquencies and bad debt. So F. 16, you show you had to point to in the first quarter. It dropped to point to in April , but then I think I heard you say that that Lincoln's suite.
<unk>, sorry, delinquency gross delinquencies were 5% in April and that your guidance you know now incorporates 1.9%. So I'm just sort of trying to put the gross and then that's together and really figure out you know how conservative how aggressive you are on the delinquency front and you know what sort of upside maybe there is if the you know the.
Rental assistance programs, which is kind of burned off a lead to better collections, you know what kind of upside can we see.
Hi, Steve Yeah. That's a great question, so what I was alluding to in our guidance we've assumed one 9%.
Scheduled rent and that's on net delinquency basis, so that would be after emergency rental assistance, that's for the full year, which implies 2% in the back half of the year and that would compare to the 2.2% in the first quarter in terms of net delinquencies on a cash basis.
And then the other number I provided was two 5% on growth because we do still have high underlying gross delinquencies. We're working through those and you know we have seen a positive change over the last couple of months for example in January February six and a half and we've come down to five and we believe that part of that is a function.
The change in the law that occurred in April .
That said.
We still have a lot of what a lot of work to do there and we've only seen one month of data our guidance doesn't assume that that materially changes from here, especially with Alameda in L. A county, where eviction protections remain in place. So the combination of emergency rental assistance and gross delinquency has kind of gets us to our <unk>.
One 9% for the full year.
And if you were just put the 5% growth in perspective say pre pandemic in 2018 or 2019.
Now before all of these issues, where you know what are the gross delinquencies are sort of look like just to help frame the 5% number.
It would be less than 1% because if you remember our net delinquencies were 35 basis points. Historically, so our gross delinquencies were less than 1%.
On average so the 5% is definitely very high.
Steve Let me throw out one other set of numbers. So that is where over $76 million I think that was in my script of which we booked I believe 4 billion of that is as revenue of war accounts receivable.
So we have a long way to go a lot of collection potential collections out there. We just don't know when or how much given the most of it comes from the state run a relief program and.
It is impossible for us to predict when that's going to come in.
Right now and I understand it's hard to kind of figure out when you'll get it.
Okay. So there's a fair amount of conservatism there that could lead to further upside I guess, Mike and I know you're not big on the development side, but just you know how are you thinking about new development opportunities. If at all and are you seeing any changes in land prices or more opportunities coming your way and you know how do returns sort of pen.
So given the big inflation, we've seen but also the starting to improve rent growth picture.
Yes, Steve I mean, I'm going to turn that over to Adam here in a second but I will say that in the recent past. We press released a couple of development deals one in Seattle and one in northern California.
It doesn't speak to our pipeline so with that I'll turn it over to Adam to talk about development.
Steve.
We're not seeing I'm not seeing a huge increase in ngls coming out on the development side those that we've seen trade in the Bay area.
The crude oil price has definitely gone up they are generally solving to a loan workouts, which which that does not provide the spread that we need in order to justify the risks associated with development deals.
We have seen.
More tertiary markets increase their potential for new development deals.
That really hasnt been as much of our focus either so generally we have as Mike mentioned, we we press released the last last year and up in the Bay area and we have we have a couple in the pipeline that we're working through but.
But we are staying selective and disciplined as to what kind of spread necessary for these deals.
One additional note went Adam talks about a four cap use sand today and trended for cap. So we compare an acquisition yield today I get to state development yield today. So it's not trended just FYI.
Great. Thanks, that's it for me.
Thanks, Steve.
Thank you our next questions come from the line of Jeff Spector with Bank of America. Please proceed with your questions.
Great. Thank you My first question Mike is on your supply comments I believe you said that for 'twenty three.
It will be down I think you said maybe 11%.
And I was and I'm, sorry, if I am saying the wrong percent. Please correct me I'm just curious how confident you are at this point on 23 and has that changed in the last couple of months as it has it always been the expectation been lower in 'twenty three are similarly, let's see.
A few months ago, where we're something changed.
Yes, Hi, Jeff.
Abuse numbers I didn't change a lot from last quarter and that overall reduction in 2023.
Was minus 15% made up of minus 54%.
The Bay area. So.
Pretty flat in southern California, and up a little bit in Seattle So.
What's happened here is that you know in the early phases of Covid people pulled back on development and so we're starting to see the impact of that now.
A couple of years later, and so I think that there will be a lull period for development starts and then we'll see what happens in the further and further along in the cycle, but.
In my prepared remarks, I noted that the deliveries we've actually had that.
<unk> deliveries in Q1, Q2, 'twenty two so they moderate a little bit towards the end of for the rest of the year less the next six months and then next year.
Again down 15%, so that's the trajectory and we do our own fundamental analysis on this so we actually.
Have people look at deals and see where they stand and so we're a lot more accurate than some of the other data that you see out there not that some of these can't change their construction delays et cetera that happened.
I think our numbers are.
Spot on with respect to what's coming at us.
Great. Thank you.
Then just a follow up Mike on some of the comments about you know San Francisco and the return to work. It's interesting it seems to be one of the the only markets where really the return to work has been a catalyst for a.
Apartment demand you know a lot of other cities are most have seen that strong demand without companies, let's say, forcing people back to work and.
And I guess I'm, a I'm a more of a worry I guess to me that it feels a bit negative like why is that is that a problem longer term I guess, how would you counter that like you know at the end of the why is that a positive I know, it's a pause just because youre seeing people come in.
On the return to work, but I guess what are your thoughts on that.
Well my initial thought goes back to the first chapter of Covid, which the city has basically shut down the shutdown all the restaurants they shut down.
Hotels, all the leisure all the service jobs were pretty much eliminated and so if you're one of those people who generally is not a high wage earner. What are you going to do it you just lost your job and you don't have any certainty about getting another one because basically everything shut down in the city. So those people all left and so now what you're starting to see.
Is <unk>.
Demand for those services really didn't change all that much but you got to bring all of those workers back in order to.
Reengage in those businesses and so I think that's what's happening. So if this was not a voluntary choice people had too.
Stay in the cities and pursue their their livelihood they were effectively.
First out so as the city's recover.
Ken.
We have some concerns about the disease, given defund, the police movements et cetera, [noise] homelessness, and but it's the city's recover we think that theres good upside.
Tirelessly due to real demand for travel for services for restaurants, or hotels et cetera. So we don't view it as artificial at all we view it as a policy choice largely that caused the deep hole and now were just recovering to a natural place.
Okay, great. Thank you see at NAREIT.
Yep.
Thank you. Our next question is coming from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.
Hey, good morning, good morning out there.
So two questions Mike.
In northern California with the.
City reopening.
Job coming back are you seeing more of the renters flood back to San Francisco the city or are you seeing more come back to the burbs because they want the extra space or what sort of the dynamic just trying to see where youre seeing more of the demand as people come back to the market in the region.
Well, maybe Angela will.
Add to that because I don't I don't have anything that tells me.
On a more granular basis exactly what's happening.
I do think the suburbia has done better.
Virtually all cases.
The cities.
The concern in the cities.
As I mentioned before homelessness et cetera.
But also there's more supply in the cities like for example, almost all of the supply.
In Los Angeles, where the greatest percentage of supply increase from Los Angeles is in the CBD same with San Diego and kind of same throughout so it's really the confluence of both more suppliers in the cities and the demand is maybe a little bit.
Delayed from the suburban markets and the suburban markets generally don't have nearly.
The extent of the problems is there are the cities. So they are recovering faster and doing very well.
Hey, Alex if it helps just a few data points on what Mike just said.
Angela here when we're looking at the sequential.
Net new leases net effective new leases.
The best performing our San Mateo and Santa Clara those are the two top one so that is evidence of the strength of the Super California.
Okay. The second question is on on the delinquencies.
Barb I appreciate your color or to one of the.
Previous analyst questions, but how soon can you guys get aggressive and start turning.
Tenants residents over to the credit agencies start you know talking their credit reports just housekeeping can you guys take a quicker and quicker comprehend and then two if the state is hang all these people peoples rents.
Where is the I mean that sounds like a big moral hazard that people know next time, they don't have to pay rent. It looked like it seems to just set up for another repeat of this is there any sort of guard against that or are we just setting ourselves up to that I guess, it's a two parter one what can you report to the credit agencies.
It seems to be setting up for another state is going to pay all of his background.
Hey, Alex it's Angela here, maybe I'll start with the.
The tenant.
Behavior first and likes me want to Tesla moral hazard.
[laughter], it's our favorite topic, you know in terms of how aggressively we can push on that front. There are a couple of out there. There are a couple of factors. One is that we still have addiction protection in place for L. A and elevate our county.
And so that well need to work itself out and that Seattle that goes to the legislative issues right as far as our ability to collect going forward.
Keep in mind that the protection.
Delinquencies protection remain for any delinquencies that occurred during the period before September 2021 .
So we're really talking about April delinquency, so under new April delinquency, we can take action.
Outside of L. A of course, and Alameda and so it's a it's a whole process that involves I'm going through.
Asian of.
Putting people on payment plans.
Hum.
Hum.
How how to.
Manage through this period of time and so we do at this point have the ability to report to the credit agency everywhere. It's really how we want to go about it that will make the most sense to be able to maximize our collections effort.
Okay.
Mike did you want to add.
Maybe add again back to where is the delinquency it's in.
L a county, and Alameda County, and then the other part which is state law statewide which.
Effectively says if you have a rental relief application outstanding.
The courts will not Huron eviction case.
Through June 30, and so there are there are still reasons why we can't do.
Do the things we would ordinarily do at this point in time, but.
The good news is I think that all of these programs appear to be getting close to there and then we will pretty soon and have a good idea of where we stand.
Thank you.
Alex.
Thank you. Our next question comes from the line of Austin <unk> with Keybanc. Please proceed with your questions.
Great. Thanks, and Hello, everybody. So barb if I heard you correctly the same store revenue guidance increase was really two parts.
Neither which seem to include any change to your projections for market rents or our occupancy through the balance of the year. So I was curious you know where our market rent, whereas market rent growth year to date across the portfolio relative to the I think it was seven 7% projection you assumed for this year.
So I'll take the first part and then I'll, let Mike and Angela let's take the second part so in terms of the the same store guidance raise so 50 basis points out of the raise was due to delinquency. Another 30 basis points was due to lower concessions and higher net effective rents and then the balance was due to higher rubs and then in terms of where we are in terms of.
Right.
Yeah, I'm happy to cover that it's Angela here.
<unk>.
And the market brands, we are tracking pretty much in line in northern California, and Seattle and keep in mind, we had anticipated.
That northern California recovery would be quite strong and so that is consistent with our expectation Southern California is outperforming and it is tracking ahead.
And so we are in the middle of in the midst of yeah. We're looking at our modeling assumptions and will provide a midyear update having said that keep in mind that when we're looking at leasing spreads year over year leasing spreads.
We will have the yeah. It will be strong the strongest in the first half because last year around this time, we still had negative leasing spreads in fact that negative leasing spreads went.
Through the second quarter, we didn't turn until July .
And so for those reasons with the year over year comparable we need to evaluate the magnitude of what that means.
And maybe one final piece and that is we'll be looking at F 17 at our rent forecast our economic forecast on 17 and the net net is we're ahead and we generally don't do that every quarter. We do it by annually. So we'll be looking at that for next quarter.
All very helpful and just to clarify barb on the 35 basis points, you mentioned a couple of items, there, but I thought I heard you say in the prepared remarks that was mainly driven by first quarter performance and you know so not necessarily that you've assumed that the even though it's decelerating in the back half of the year, but that that growth.
We'll be.
Higher than what was assumed in your original projection is that correct.
He said it was driven by strong first quarter results and then better in that delinquency collection. So we like I said, we factored and 30 basis points improvement in concessions and higher net effective rents for our full year guidance, and then 50 basis points on delinquency.
The bulk of the same store guidance race got it. Okay. That's helpful. And then Mike you've provided a lot of data and data points, you know and the demand to supply ratio.
And setup.
For the recovery on the West Coast.
And how these markets have historically outperformed in an upturn, but obviously, we're amidst sort of some crosscurrents today and concerns about a recession on the horizon. So just curious how that impacts your view about the trajectory of the recovery on the West coast.
Coast.
Well I will start by citing the.
Fearful of Barb comment though.
So we already noted, but we feel good about conditions and where we stand. So just recovering the things that were shut down during the pandemic now again all of the mass mandates where most of them have been removed and it feels like we're in a better state I think I think that that's most of it and it feel.
Like we didn't have a lot of catching up to do and we're at the front end of that that process were.
Obviously late to the dance and but we feel good about where we stand and expect.
To continue to perform well.
Okay.
Alright, Thank you for the thoughts.
Okay.
Thank you our next questions come from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thanks. Good morning, just wanted to ask you for an update on where you are sending out renewals for.
May and June and.
What's your ability to achieve high renewal rates that may approach, the new lease growth rate of 22%.
So on the you're asking about the.
The three new ones that we're sending out for the second quarter right.
Correct. So just wanted to clarify.
Yeah, Okay, and when I assume yes, okay. So on the renewals worth companywide were sun setting at about slightly above 11%.
And that distribution is actually not that not a huge variance socal at about 10.5% and northern California.
Close to 12, and Seattle are close to 13.
So those are the dead.
The averages and trust of our confidence level.
Given.
Where we're seeing the activities and the demand we are quite confident that these are achievable right.
So if that continues in the second quarter whats implied in your guidance of eight 6% same store revenue for the second half of the year I know Angela you mentioned that there are tougher comps.
That youre approaching but at the same time the loss to lease went up to 95% of the market rent forecast of seven 7%.
What do you what do you expect to happen in the third and fourth quarter.
Right no. That's that's a good question so first quarter.
Same store was six 5%, we do expect that to gradually increase from a revenue perspective, because that is essentially theres a lag effect right between revenues and economic rents so as market rents taper off.
Revenues is following but it's continuing to increase so there is that catch up effect.
And so what's implied in your guidance currently.
For the back half.
In terms of Rep in terms of rent growth or.
I'm trying to understand what you're asking for.
Yes, I don't have that I'm trying to ask.
Actively skirts I don't have that in front of me I have to follow up with you after.
It's consistent though we haven't changed our full year outlook on 17 in terms of market rent growth. So there hasn't been a change to that assumption.
As of right now we're revisiting that.
And John maybe as it relates to <unk>.
John as it relates to 2017 keep in mind that if we get if we get it sooner it doesn't necessarily mean that we're going to get what we got sooner and in addition, we're going to get what we thought were going to get so.
There could be just it happened faster than we thought and so keep that in mind. That's why we want to make sure that we wait for kind of a full review of 17 before we start taking it apart if that makes sense.
It does thank you.
Yeah.
Thank you our next questions come from the line of Yoga with Scotiabank. Please proceed with your question.
Thanks, I just wanted to go back to the delinquency number the $76 million, which is the cumulative number and I know previously I didn't see an update on this but in terms of you know the.
<unk> that you've already applied for and haven't received that number you know back in March was I think $59 million is that still the number that change.
Hi, Nick its far so that number is $64 million as of last week of which half relates to our current residents and a half relates to <unk>.
Our landlord initiated applications on behalf of past residents.
Okay bladder group is the one that the residents the former but it has to engage which is obviously more uncertain, if how long you're able to collect that.
Okay helpful. And then in terms of the guidance then how should we think about that $64 million is any of that factored into our full year guidance collecting that money.
Yeah, what's what's implied is effectively that the first group the resident in the current resident applications. We have high confidence we will get the vast majority of that and given the programs now ended in terms of applying for new applications. We think that that will come in this year.
Okay, so about half of it.
Yeah. It won't all be same store, though because thats for our total portfolio, including joint venture properties and so a portion of that will be same store.
Okay, but about it about half of it we should think about and then you know because I know the number the number is like over a dollar of SSO per share. So we should think about it about half of that is in the full year guidance. This year, and maybe half could flow and still or maybe next year, depending on that piece. The other half is.
Well you know.
Seeking alternative ways to.
Recruit that money, but the timing is very uncertain on that portion of it.
Very helpful.
Thank you.
This comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Yeah. Thanks, so in the prepared comments you mentioned the three co investments that are expected to be paid off in 'twenty three now versus 2022 previously.
Not a headwind, it's just moving into 2023.
The overall macro environment.
Redemptions.
And better reinvestment opportunities overall in that some of the headwinds that we've seen might be rebating.
Hi, Brad this is barb so.
The three part or the three investments that were pushed so it's really a function of the interest rate environment today, and where these properties are going to be in lease up keep in mind in 2021.
Given the low interest rate environment developers, we're able to get takeout financing before they were fully leased up and given the higher interest rate environment and debt service coverage ratios, we don't see that happening anymore and so that's really a function of what caused us to be pushed nothing the properties arent behind on schedule or anything like that it's just that.
A change in the environment that's occurred from an interest rate perspective.
Okay and are you seeing any additional.
Reinvestment opportunities just given I imagine the financing side of things is more difficult now than it was a few months ago.
Yes, Brad.
I think that we will see more again, we have this lag after COVID-19 when construction starts.
Turned downward and.
I suspect that we will see a lot of those deals come back and that will create more demand for the preferred equity program. So I think that will right. That's in the process of right sizing itself as well.
Okay. Thank you.
Thank you. Our next question is from the line of Rich Anderson with <unk>. Please proceed with your questions.
Thanks, Good morning out there.
Yes.
Mike I don't know if you remember a long time ago I talked to you about a mood ring.
I do have that converse ideally.
It doesn't matter.
If you think about your if I want to ask about your near term mood ring.
For.
For San Francisco, and a little our bay area, a little bit different format. Given F 17, I know youre going to update it but right now it's the leader Northern California is the leader in terms of market rent growth, we've gone through that and AD nauseum to this point, but you you also reported.
First quarter same store revenue in Northern California was the laggard of the three regions should we be.
Sort of.
Extrapolate what youre thinking rent market rent growth wise into your portfolio shouldn't this just flip it.
In the coming quarters in terms of the composition of same store revenue growth in 2022 were northern California should really become the leader in the back half relative to the other regions or am I thinking about that wrong.
Well Angela will maybe have some comments, but to your mood ring thing. So I actually because of you know what a mood ring is and.
I have different color.
Colors that I have in my mind because of your script so.
Forget bread would have to be the right color for us I mean, I think that we feel good energized et cetera.
Todd already read in the wrong color or you'd think below.
[laughter] unfortunate by mood ring thing energized as Red has provided an adventurous or red so well.
Well I'll, let you bill.
But what I have the wrong mood right.
[laughter] App I guess, so but.
I think we feel we're.
We're feeling good about things.
Northern California long term is our number one market I think it is the number one market in America.
In terms of long term CAGR of rent growth, it's fallen well behind the curve in this case and.
This world because rents are always hazard at some level to income levels, it's really important that they move together and.
On the income side.
Still seeing some recovery happening there so.
I don't think you should just grow forever unless incomes are growing very rapidly and one number that I was told by the group here is that our.
Our income.
For our move ins are up something like 15%, which is pretty darn. Good it makes us feel better about.
The rents were charged to discuss especially in southern California. So.
Things look good I expect northern California to really pick it up here and.
It will become once again as it has for the long term our number one market is what I would guess.
And rich it's Angela here, Thanks for making my point for me, which is that in the second half we do see that flip we do see northern California.
Rent growth will then outperformed southern California rent growth.
Okay.
And then second question for me is.
You know we talk a lot about service is coming back in restaurants, and hotels and all of that.
But also reemployment orange to reuse of office buildings with Tech is it not true that hybrid office would be a better model for you rather than five days a week only because where you guys are located.
Primarily outside of San Francisco, So you know maybe a two or three day a week type of model would be good for your portfolio relatively speaking because you know people might be able to put up with a longer commute for a variety of reasons in that area, but just because they don't have to go into the office every single day is that the right way to think of it or is there any kind of.
Return to office work for you and Youre not going to really kind of dig into too much more detail beyond that.
Yes, no I think youre thinking about it the right way I think that because of the hybrid workforce and I think.
Everyone, including the tech workers and actually Essex is a company.
Most of them are pursuing a hybrid model of some kind that require some tether into an office and.
We're actually no different from that obviously and so I think what the effect of that is is that it makes the downtowns, which have all of the office buildings, a little less desirable and probably as we've talked about this before another ring, let's say another 10 miles out from where we would have drawn our line because our portfolio is.
Planned around the key job nodes and a commute patterns to those job. So now we will expand that a bit and good example, as we we've been.
Buying in San Diego County, some of the areas that are farther from the major job nodes and but that will be true of northern California.
In Seattle as well, so I think it does push out.
The convertible.
Space and therefore, it is expands our geography accordingly.
Great. Thanks very much.
Thank you.
Thank you our next questions come from the line of John Pawlowski with Green Street. Please proceed with your questions.
Thanks, I just had one question and I'll, let somebody else jump on.
The revenue enhancing capex spend this year $100 million in the big number can you just remind us what are the what are the drivers what are you actually spending money on and then how do you kind of.
<unk> returns are ours.
Compare versus alternatives, either buying real estate or buying back stock.
Okay.
Sure I'll talk about the Capex program for a sudden and.
As far as the redevelopment spend and also just a straightforward capex spend under redevelopment side, we are targeting 8% to 10% cash on cash yield and this is consistent with pre COVID-19 levels and its primary primarily because we're seeing the demand in our market and the rent growth to.
To support this program now that the elevated level that you may be referring to when it comes to the Capex per door I think that's what you're referring to itself. It's really driven by two factors. One is of course the.
Material cost.
Cost increase but the other one is a catch up.
So yes.
During the Covid period, we of course were there.
Very careful and brand much leaner from a capex perspective, both in terms of just.
Trying to minimize contact.
And and and also being sensitive to what we can achieve.
The top line and because of that.
Our normal.
Capex per door of somewhere around $17 50 dropped down to almost below a fortune $100 and so that there is a catch up that that just needs to happen and it normally.
And then John this is barb in terms of where to put capital obviously redevelopment at the 8% to 10% returns are obviously, our best use of cash proceeds today relative to buying an asset in the mid threes or even buying back the stock so.
It's just hard to put a lot of money to work remembering our.
He's got an occupied building in and you can only put so many dollars to work. So there's a capital constraint on how much we can put to work there, but we think that is the best alternative source of capital outside of preferred equity, which we've discussed in the past.
Okay. Thanks for the time.
Yeah.
Thank you our next questions come from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Hey, everyone. Good afternoon, and thank you.
We're taking the question I know, it's gone on a little over an hour now so I'll be quick.
First one on the <unk>.
<unk> G.
Our a cheap on the you know the ones that.
The climate change fund just curious about how you guys. When you were talking about that with your either border internally and investment committees.
What are you guys trying to achieve given that China, and India are by far the biggest polluters and emitters of carbon.
In the world.
Okay.
It's a good comment.
I'm not going to make any comments about China or India, but.
But I would say that.
Again, we saw as I mentioned earlier, we see good.
Opportunities to invest in our own portfolio and make it better and.
By better I mean.
Produce a return on investment that makes sense and we see the cost of electricity trash removal water issues et cetera, as being longer term issues for all of us and if we can solve some of those issues and get a payback by lowering our bills et cetera.
Then so be it we think in thanks.
It makes good sense and.
Initially we had.
I know <unk> ventures was thinking about that as part of their existing fund and in fact had made a number of investments.
Out of their main fund in ESG.
Couple of them are super important.
One of them is where the SEC requirements. So the company called measurable was one of the key investments before this new fund and it helps us organize our data.
And getting ready for the SEC requirements that are coming down the road. So there are a lot of important reasons why we should be doing this and we see a lot of opportunity out there and it's not just <unk>.
Investing money, it's actually getting a return on your investment.
I appreciate that Mike last one real quick maybe Adam for you.
Anyone really but.
Your stock price as you know.
Pretty much right around all time high I know that you know I think the typical model is stock price up issue equity and buy stuff stock.
Stock write down so asset JV stuff.
Maybe just talk about the I think maybe some I touched on before the acquisition pipeline you know around in.
In your markets potentially.
Maybe some suburban locations et cetera.
Has that picked up recently, just kind of the things that you're looking at them.
Potential.
Potentially maybe in the in the West Coast.
Any commentary on how you think the rest of the year is going to shake out.
On the acquisition side, obviously in the face of higher debt costs. Thanks.
Sure.
This is Adam.
As to what's going to come later in the year, it's hard to say.
Over the end of Q4 and early Q1.
The volume generally on the market was pretty low.
There's a pretty significant decline in overall transaction volume quarter over quarter, there is quite a bit on the market today.
As I noted before over this last six to nine months, we really didn't partake.
And the frenzy that was happening in those best and best final rounds.
We're always constantly assessing.
What's on the market and where we see more growth going forward and so we're looking at those deals we're not going to be in the low threes and so.
If theres any sort of adjustment or if we see that.
Opportunity that comes up and we did see a few of those.
We closed on in early Q4.
Early this quarter, then we will jump in those windows.
Okay. So just seems like it's going be a little bit harder to kind of do the types of things you did maybe in years past when your stock price was up.
You're heavily.
It seems like that.
Maybe you are a little tougher hurdle now just.
Given cap rates and overall cost of capital is that is that fair.
Yeah, that's fair I mean, if you take the cap rates that Adam was talking about and you compare them to the company you have climbed to the company.
You will find that issuing stock is something that we really shouldnt do.
And so we have not done that and trying to use our co investment platform to <unk>.
Fund most of the deals and obviously, having positive leverage cap rates over that cost.
It helps a lot when it comes to dealmaking and so we're no longer in that world and so there's a bit of an impediment on the deal side caused by negative leverage once again.
Thank you guys.
Thanks.
Thank you our next questions come from the line of Chad and the new threat with Goldman Sachs. Please proceed with your questions.
Hi, good.
Good afternoon.
Thank you for taking my question.
He could perhaps.
More clients into the collections, operator, Martin and I know you have lined up to be the ones that.
Its coming across the fourth quarter year over at the end of 2022.
The digital platform improvement next year, so is there a way to quantify.
Our marginal cost benefits and then how do you think of all of that so that you know, culminating together somebody timing standpoint.
Hey, it's Angela here.
Thank you are asking about how we look at or how we evaluate the success of our property collections.
Operating model.
Yeah. This is Todd.
Okay. Okay.
You know from a numbers standpoint, I know you've given that they show off 45 to one some quality, which is very helpful. But how does that translate into the P&L a down the line.
What sort of benefit as you think about you know running got mountains.
Sure sure. So we think about the benefit in three key ways first is <unk>.
Our customer interactions and we can look at that by the retention rate and.
And the second one is operating efficiency and that is the 40 to one ratio that I talked about that we now have improved to 43 to one in terms of.
Units to employees.
And ultimately what that means for the financial impact and that's the third key metric.
A metric and so when I taught referred to the 100 to 200 basis points of margin improvement.
When we implemented San Diego Orange County that translated to about $15 million of benefit to NOI.
And we have realized that savings when we were only about one third way through our implementation back then.
So the expectation is that going forward.
Once we complete the rollout now keep in mind, we also have a digital platform.
Wow, that's embedded in all of the cost savings, but upon completion and this is several years out we would expect an additional 200 to 300 basis points of margin improvement.
The trick here is or the challenge is trying to figure out it's not a dollar for dollar because when we when I talked about the $15 million savings.
We were now under such extreme inflationary pressure today.
And so there will be ups offsets.
Which will go towards helping us.
To manage our controllable expenses.
Got it. Thank you I'll talk from me.
Thank you our next questions come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.
Oh, Yes, hi, I just wanted to fall back on the delinquencies.
You like it.
Wanted to understand something the rent payments to state is making for the $76 million of delinquencies is the state, making all of that or the half of that I think that passes that that you've mentioned or by former residents that you said those residents have to initiate.
Is that it sounds like the whole 76 may not get paid back it sounds like only the existing residents get paid by the state otherwise the former residents have to you know.
We do it on their own is that is that the correct understanding or did I misunderstand.
Hi, Alex it's Bob So the total that we've applied for a 64 million.
As of today, the cumulative delinquency that Mike alluded to a $76 million. So there is a delta there.
And then of the $64 million an application it's made up of two components, our existing residents, which it has and then.
Past residents now we've applied on behalf of those pass resident those past residents have to engage in that process for us to get our money. If they don't engage then the application doesn't move forward and that's why I'm, saying, it's a little bit uncertain in terms of whether the pass resident will engage and whether we'll collect.
That that portion of the emergency rental assistance.
And what's the incentive for them to engage.
But once they get there they get their rep had keep in mind, Alex we cant the landlord just not a landlord program. It's a teller program and they have to have a COVID-19 related hardship. So they have to certify as to the hardship basically and so we can't do it by ourselves so, but its really their reimbursement paying us off and their incentive is theyre going to owe some money if.
They don't process the application.
Yeah, Alex it's Angela here and that includes the impact to their credit reports, because we can and we actually have ripped.
Our reported on our past.
But also there are other means for us too.
To try to connect with them, which is we can go through the small claims court.
There are other means and so it is actually to their benefit to engage with us and and get this assistance from this from the state.
Okay. Okay. Thank you for the for the follow up I appreciate it.
Thank you there are no further questions at this time I would now like to turn the call back over to management for any closing comments.
Okay. Thank you.
And thanks, everyone for joining our call today.
Looking forward to NAREIT and hopefully we will see many of you there have a great day. Thank you.
Thank you. This does goodbye. This teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.