Q4 2022 Essex Property Trust Inc Earnings Call
Good day and welcome to the Essex property Trust fourth quarter 2022 earnings Conference call.
As 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.
All risks and uncertainties.
Forward looking statements are made based on current expectations assumptions and beliefs as well as information available to the company at this time.
A number of factors could cause actual results to differ materially from those anticipated.
Further information about these risks can be found on the company's filings with the S. E C.
It is now my pleasure to introduce your host Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Schall, you may begin.
Good morning, and welcome to our fourth quarter earnings Conference call.
Angela Kleiman, and Barb Pak will follow me with comments and Adam Berry is here for Q&A.
Today, I will touch briefly on our full year results expectations for 2023, and why we believe that our west coast rental markets are positioned to outperform over the next several years I will conclude with comments on the transaction market and the upcoming CEO transition.
Overall 2022 was a positive year for Essex as we generated full year core <unk> per share growth of 16, 2%.
Our highest year over year increase in a decade, and nine 3% above pre COVID-19 levels.
We attribute these strong results to relentless execution by the <unk> 16 improved efficiencies from the implementation of our property collections model and the strong recovery in our west coast markets for the better part of the year.
Our positive results were achieved despite the challenges associated with COVID-19 regulations that our markets are.
Our near term results will remain impacted by elevated delinquency, which we estimate will represent a 60 cent per share drag on <unk> in 2023 compared to our pre COVID-19 levels of delinquency.
Notwithstanding the impact of delinquency in 2023, we believe we are entering the final phase of these challenges and that are COVID-19 related headwinds will be will be behind us in 2024.
For 2023, we reaffirm our 2% market rent growth expectations across the Essex markets.
On page 17 of the supplemental package, which is predicated on consensus assumptions for a slowdown in the U S economy, driven by higher interest rates.
Macroeconomic visibility is limited by a variety of factors, which translates into a wider than normal range of potential outcomes. This year.
Recent economic data highlights continued resiliency in the labor market with solid reports for job growth and unemployment claims.
Even with elevated layoff announcements.
In Essex markets preliminary job growth for December was three 8% and the recent unemployment rate was only three 2% both outperforming national averages.
Looking ahead lay off announcements and lower job openings among large tech companies signal a softer employment outlook for 2023, which we incorporated into our forecast assumptions shown on page 17.
Our primary challenge since early 2020 relates to the massive layoffs that occurred as a direct result of the government's response to the pandemic.
Which eliminated nearly 3 million jobs in California alone and force people out of densely populated areas in search of work.
It has taken over two years to recover those jobs lost during the pandemic.
And I am pleased to say that the Essex markets have now fully recovered those losses.
It is notable that each of the eight major metros in the Essex portfolio have now recovered from 98, 8% to $100, 9% of the jobs lost in the early part of the pandemic.
Leading us to believe that most of the slack in the housing supply demand relationship from the pandemic no longer exists.
We believe that this is a major milestone, which should lead us back to our pre pandemic growth profile once the economy stabilizes.
As with past economic slowdowns are frequent concern and balls.
Tech companies that dominate northern California, and Seattle with nearly daily reminders of Tech layoffs amplified the newspapers.
The tech sector is often volatile yet over longer periods, we industry has reliably generated top paying jobs and wealth creation.
At the foundation of a strong rental growth.
A core strength of the tech industry is our ability to evolve in a cyclical process of reinvention, where the groundwork for new rounds of innovation are laid while the prior cycle is slowing.
I am confident that this is what is occurring today.
Going back to the 19 eighties Big Tech was focused on IBM Pcs and R&D efforts to improve semiconductor manufacturing and that phase ended with the recession in the early 19 nineties.
Growth of the Internet and E Commerce sooner emerge and then later boomed and busted capping the dotcom era from which many believe.
<unk> would never recover.
Instead, a wave of social and mobile products emerge 20 years ago, including Facebook Youtube and the I pod and iPhone setting up a much larger and more profitable era of growth.
Then following the great recession cloud computing machine learning added to the next period of rapid growth.
Both for new startups and for sector leaders like Amazon, Google and Microsoft.
And now despite a very similar set of concerns many of you.
We will have followed the explosive recent adoption of new AI products, such as chat GPT and Dolly.
Consistent with the transformative technologies of the past the innovators and investors and artificial intelligence are overwhelmingly concentrated in our markets, including open AI in San Francisco and Google Brain in Mountain view.
And despite abroad BC slowdown last year funding for AI increased 70%.
It is now poised to grow vastly more in 2023.
In a recent surge of leading at the leaving 100 startups in artificial intelligence. We found that more are headquartered in the Bay area.
Entire rest of the United States.
Thus it is a combination of entrepreneurial spirit financial capital and technical talent found on the West coast as well as housing supply constraints that drives our expectation for the west coast to generate superior rent growth over the long term.
Turning to the apartment investment markets, we continue to see muted deal volume in our west coast markets as buyers and sellers seek to compromise on their expectations for property values and yields.
A relatively small number of apartment sales indicate that pretty values and cap rates have not changed materially since last quarter and cap rates generally are in the mid to high 4% range for high quality suburban apartments.
At this point, we've seen pockets of distress, mostly focused on owners subject to variable rate debt maturing short term loans. It's possible then it extended period of elevated interest rates and slower rent growth could create new opportunities to generate <unk> and NAV per share.
We sold one property in the fourth quarter and we are working on other potential sales.
In conclusion, assuming my math is correct. This is my 115th consecutive conference call on behalf of ethics, which will be my last given my pending retirement as CEO at the end of March I am incredibly grateful for the opportunity to be part of the highly skilled discipline and folk.
This leadership team for this great company.
A step back with full confidence in Angeles ability to lead the company along with her determined like minded team.
Thank you all.
Finally, I have enjoyed working with so many of you in the investment community and I. Thank you for your trust and support over many years I remain confident that many great years for the company are on the horizon with that I'll turn the call over to Angela Kleiman.
Thank you Mike do you have the evolution of Essex under your 37 year leadership has been remarkable.
I am the senior team are grateful for your Mentorship and we will continue to diligently served this company as we move forward.
My comments today will start with brief operational highlights of our fourth quarter performance, followed by our current operating strategy and updates on key operational initiatives.
<unk> had a productive 2022, which included optimizing the strong leasing momentum heading into our peak leasing season, addressing delinquency and recapturing units from non paying tenants, while transforming our operating business model.
These accomplishments are the result of the exceptionally hard working operations and support teams.
Fully executing our business strategy in this highly dynamic market conditions, great job team.
Moving on to the fourth quarter, we shifted to an occupancy focused strategy in late September .
In anticipation of softening demand and elevated move outs related to eviction activity.
Confluence of these factors created a challenging operating environment in the final months of 2022.
Our switch to favoring occupancy helped us moderate the seasonal weakness.
And the elevated turnover caused by higher evictions.
Excluding L a and Alameda counties I am pleased to report that we have made significant progress recapturing approximately 50% of delinquent units compared to one year ago.
In addition, as we start the new year demand fundamentals have improved in line with our expectations. Our net effective new lease rates trust at the end of November and we have been able to reduce concessions well gradually increasing new lease rates from December to January on a sequential basis.
Yeah.
In the near term, we will maintain our occupancy focused strategy as we continue to make progress on addiction related turnover our portfolio sits at a healthy 96, 4% financial occupancy today, and we are well positioned to increase rents if demand exceeds our expectations.
Turning to key operation initiatives.
We continue to make progress with our property collections operating model Phase one is now complete which centralized administrative and leasing functions, which combine nearby properties into one centrally managed business units.
The efficiency benefit can be seen in our financial results with administrative expense growth of only 0.7% last year and for 2023, we anticipate only a 3% increase despite inflationary pressures.
Phase two expands the same operating principles should the maintenance function, we expect numerous benefits, including savings from a reduction in third party vendor contracts and unit turn efficiencies.
The maintenance collections pilot is progressing well and is expected to conclude mid year at that point, we will provide additional details on the rollout.
Lastly on the technology front, we continue to make excellent progress most recently with the launch of our proprietary revenue management software we have been developing this capability over the past two years and are excited for our platform with an integrated pricing operating strategy tailored for the nuances in our markets. This can.
With my remarks, and I will now turn the call over to Barb Pak.
Thanks, Angela today I'll focus on our 2023 guidance followed by comments on investments and the balance sheet.
Our 2023 guidance assumes same property revenue growth of 4% at the midpoint on a cash basis.
Overall, we expect healthy topline growth and stable occupancy to be partially offset by 70 basis points of higher delinquency.
The reason, we believe delinquency will be higher than 2022 is due to uncertainty around the timing of evictions and all of our markets. In addition, we do not expect to receive much in the way of emergency rental assistance as compared to $34 million. We received last year on a same store basis.
As it relates to operating expenses, we are forecasting a 5% increase at the midpoint, which is above our historical run rate.
There are a couple of reasons for the higher than expected increase.
First controllable expenses are forecasted to increase 4%, which was driven by wage inflation and elevated eviction related costs.
Partially offset by savings we achieved via the rollout of our property collections model last year.
We are experiencing elevated cost pressures within utilities and insurance.
In total we expect same property NOI growth of three 6% at the midpoint.
In terms of <unk>, our midpoint assumes one 6% growth.
Primary reason for the modest increase include higher interest expense and delinquency and lower structure financings, which are outlined on page six of the earnings release.
In total these items equate to a 50 50.
<unk> 57 per share headwind, representing nearly a 4% reduction to growth on a year over year basis.
Turning to investment given the challenging investment environment and our elevated cost of capital we have not provided specific estimates for new acquisition.
How does it is difficult to generate accretion today, given the significant disconnect between public and private market pricing.
Given this disconnect the best way to create value today is through asset sales and share buybacks or via preferred equity investments all of which we completed in 2022.
It should be noted that we have a long track record of finding ways to create NAV and <unk> per share in all environments, and we will maintain that discipline going forward. While at the same time match funding our investments on a leverage neutral basis.
As it relates to the structured finance portfolio during the quarter, we completed a comprehensive review of our investments performing a wide range of sensitivity analysis on a variety of key metrics.
Dallas is confirm the portfolio is performing as expected with the exception of two investments both located within the Oakland Submarket.
One of the investments was redeemed in the fourth quarter, resulting in a $2 million impairment.
For the other investment we took a conservative approach given the uncertainty around fundamentals in Oakland due to high apartment deliveries, which is leading to an elevated concessionary environment.
As a result, we stopped accruing on this investment during the fourth quarter, resulting in a 6% reduction to our 2023 guidance.
Overall, we have a long successful track record of investing in structure finance investments over the past 12 years, we have invested approximately $690 million in structure finance investments that have been fully redeemed achieving a 13% average annual return for our shareholders.
Lastly onto the balance sheet during the quarter. We saw continued improvement in our credit metrics with net debt to EBITA returning to pre COVID-19 levels at a healthy five six times with no debt maturing on our consolidated balance sheet until 2024 limited development funding needs and ample liquidity our bal.
She remains in a strong position I will now turn the call back to the operator for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
A confirmation tone will indicate your line is there any question queue.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.
Please limit yourself to one question and one follow up.
Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.
Thanks first of all congratulations again, Mike and Angela.
Mike I appreciate the comments on kind of the tech cycle and future thoughts there, but what gives you the comfort that the benefit for any recovery or the eventual recovery I guess attack will accrue mostly to the west coast markets like we've seen in the past.
Versus maybe some of the more newer tech markets are sunbelt markets, given the population and job growth trends that we've seen there.
Well. Thank you for the congratulations I appreciate it.
I think teck is just growing in terms of its share of the overall employment base. So we expect <unk> to grow throughout the United States and certainly wouldnt exclude the sunbelt, but.
As with the past most of the cutting edge technology.
And the people that are really driving innovation.
We will be located as they have been in the past here on the west coast. So that gives us a great deal of comfort and I went through that.
Relatively long.
A description of my career here at what <unk> has done.
Because really because of that because we've seen it reinvent itself. So many times over and over again and.
I have a hard time, believing that that is anywhere close to being at a node.
And finally, I guess I would I would add that would be.
The prospects and the importance of AI too.
Almost.
Any every application from.
Businesses to consumers et cetera is pretty extraordinary. So I think this is going to continue onward and alright.
I think that will be right in the center of that innovation sure on the West Coast.
Innovation is pretty exciting.
And then just on the structured finance program I guess two questions number one for the asset in Oakland that Youre not accrued income if you walk through how that potentially could play out going forward in terms of your role there and then it sounds like you ran an analysis across everything and everything.
Together our.
Are performing as expected, but are there any on the watch list or potentially maybe could become issues.
Hi, Nick its barb Yeah, we we did a comprehensive review and on the rest of the portfolio. We don't have any other assets that are on the watch list keep in mind, we leaned in heavily in 2020 and prior when cap rates were higher NOI has grown significantly since we.
This portfolio and so none of the other property screened.
On the capital stack. The one in Oakland is really a function of the high concessionary environment right now net effect of rents are lower NOI is lower than how we underwrote it.
So were higher in the stack than than what we'd like to be so that's why we took a conservative approach to stop occurring we have constant dialogue with the sponsor and they are very engaged in our.
Participating writing checks as needed and so we don't see any.
Other fall out at this time from that asset.
Thank you very much.
Our next question comes from the line of Anthony alone with J P. Morgan. Please proceed with your question.
Thank you and add my well wishes and congrats to Mike as well.
First question is I think last quarter and at NAREIT you talked about.
About a week of free rent I think in Seattle, and a couple of weeks in San Francisco.
And just wondering where those numbers sit today.
And whether or not you feel like you've you've seen the effect of all the way off that have really been announced since since the fall.
Yeah, Hi, it's Angela here on the concessions.
We have seen it.
Essentially taper off throughout the portfolio since December which is.
I've mentioned earlier that our portfolio trough late November .
Yes.
And it has significantly improved.
Overall average in the fourth quarter, particularly in December we were running about two weeks concessions and right now as a portfolio average were running less than a week. So that gives you an indication.
<unk>, how things have improved quite quickly.
Okay.
And then just one follow up for Barb, you gave us the bad debts like the.
<unk> per share drag in the 70 basis points on growth, but if I look at the fourth quarter was one 1% I think is there a way to express it in those terms in terms of where your expectations are for 2023.
Yeah, Tony for 2023, we're expecting bad debt as a percent of scheduled rent to be 2% now keep in mind, we don't expect any emergency rental assistance in 2023 as compared to the $34 million. We received on a same store basis in 2022, and so that's why the net.
Number is going to increase we were at one 3% in 2022, and it's going to 2% now the underlying gross delinquency is improving because we are able to effect. It's just taking longer than we had initially expected but we.
We are making progress on that front as Angela mentioned in her script.
Okay, great. Thank you.
Our next question comes from the line of Wes Golladay with Robert W. Baird. Please proceed with your question.
Hey, Yeah, good morning, everyone and congrats again Mike.
I'm curious how does supply pressure change throughout the year and at what point do you start to push rate.
Thank you for the congrats appreciate that.
In terms of supply pressure there are pockets of supply in a few places.
Noted Oakland earlier I think there are there are multiple lease ups in Oakland, what youre really having the effect that.
Pushing down price.
Seattle has more supply deliveries this year and especially the fourth quarter because it was generally seasonally weak period at Seattle tends to be weaker than the California markets, primarily because demand goes to zero in the fourth quarter close to zero and Seattle has more supply.
But.
Going forward the supply picture looks like it's declining and.
A result of.
Obviously.
Lack of rent growth.
The last few years, so the ability to produce housing at an accretive level is pretty challenged and we see that in our preferred equity book as well.
So I think it's going to be maybe at a period, where there is relatively.
Not a lot of supply and if we get any demand will be in good shape.
Got it and then just curious what happens all these people that are evicted if you have a new tenant coming in.
June would you know if they were a non payer at their prior apartment, where just everyone got a swap non opinion tenants.
Well on the tenant screening side, we have a pretty robust process there.
Having said that we of course will do credit checks and that'll let us know if they are.
Or did they have any prior debt that needs to be.
And so that's our best indicator.
Yeah.
Okay. So that would be relatively timely event I guess is like the tenets that are not paying its already in the books for U S. A delinquent tenants.
Right right.
Even for us.
Tenants who have left.
Yeah, we immediately.
An update of the credit report as well.
And there is of course ongoing report on.
Michael I'm going to ask.
So there are theories.
Resources that we can use and we haven't yet.
Great. Thanks for the time everyone.
Our next question comes from the line of Austin, where Schmidt with Keybanc. Please proceed with your question.
Yes, Thanks, I wanted to revisit the delinquency I think last quarter you referenced L. A county was was I believe 40% of the overall delinquency.
What is that figure today, and then I'm curious on the <unk> 60 per share.
What is the annualized run rate that youll be running at or that you are assuming.
By the fourth quarter of 2023.
I'll just touch on the delinquency population, it's Angela here in the past L. A is about 40% and it's ticked up to about 50% early delinquency and that doesn't surprise us given the.
Addition, moratorium has not been lifted we had expected to continue to accrue.
However, the good news is that the new tenants coming in we're not seeing.
Those tenants right.
Alright.
And then Austin. This is barb on the 60 cents that Mike referred to that is compared to our pre COVID-19 historical run rate for not only the revenue piece, but also the expense piece, because we have elevated eviction and turnover cost.
Associated with the delinquency and so its both pieces.
I you know what we are expecting in the back half of the year is our delinquency our gross delinquency will be around one and a half for the second half of the year, 2% for the full year. So we do expect to make progress, but given the timing on these eviction does very difficult to predict at this point.
We don't expect to be to our normalized run rate by the end of the year.
Yes, that's fair just trying to understand what sort of the earnings power going into 2020 for us.
But we'll have to revisit that later later this year.
Second question you referenced your shift to favoring occupancy late last year and you highlighted some month over month improvement from December to January I guess, what would it take for you guys to pivot towards going back to pushing rate and would that mean that the five 5% renewal rate growth that you are at in January could stir.
<unk> or even reaccelerate from here or would the benefit to create more towards new lease rates.
That's a good question.
In terms of the occupancy strategy and when we were sure its going to be a little bit different in that.
Each of the markets. So for example, we actually are seeing great strength in our southern California portfolio. However, we are running a little bit higher occupancy in anticipation of the eviction and the opportunities to vacate nonpaying units, that's coming our way so were building that now.
We're seeing a market softness issue it's more of a.
It's more of a strategic play.
Sure sure that.
We are well positioned.
And so for example in places like Seattle, which is as we noted it's highly seasonal when we see demand come back as it typically does during peak leasing season.
We would expect that we should be able to switch back to favoring.
Rent growth, especially now that we can it will chew.
Yes.
Reduced.
Sessions in a meaningful way.
Okay.
And is it safe to assume that northern California has a similar setup as Seattle in terms of some seasonality maybe.
And the opportunity being to be able to push a little bit harder as we come out of the seasonal lull if you will.
Yeah that makes sense and the one caveat is of course the supply conversation that we've talked earlier right. So for example places like Oakland.
That will continue to probably take a bit longer because of the supply.
Areas, where we are not.
Trying to manage through pockets of supply.
Okay.
There are some good opportunities there.
Okay. Thanks for the time I'll hop back in the queue.
Our next question comes from the line of Steve <unk> with Evercore. Please proceed with your question.
Yeah. Thanks.
Mike I'll offer my congratulations as well to you and to Angela on the transition.
I guess the question when you think about the cadence and timing of revenue growth.
Can you maybe just talk about how you think that progresses throughout the year and maybe what the first half looks like versus the second half I realize there's some.
Shifts in the delinquency numbers that Barb just spoke about but when you kind of look at that sort of mid point say, 4% on a cash basis. How heavy is that in the first half and I guess, how light is that in the second half.
Yes, Steve as far I would say the first half we expect to be higher than the second half.
We're about 5% in the first half the first quarter will probably be north of that and then it'll trend down throughout the year with 3% on average in the second half of the year and that's really a function of the year over year comps because last year, while rents accelerated it didn't fully hit our revenue growth line and so we expect to capture that this year.
Half would be higher than the second half.
Okay, and you talked a lot about.
Well I guess, let me just stay on on occupancy for the second question, but you know when you. When you think about some of the potential soft point that Mike talked about attack.
I guess, how are you thinking about maybe some of the potential occupancy loss in either Seattle or San Francisco or what have you baked in I guess, specifically for the Bay area and Seattle from an occupancy perspective.
So when occupancy perspective, we're not running it a whole lot different than prior periods. The one caveat is really more focused on southern California, particularly la.
Because we are anticipating some.
Some vacancies here from eviction. So for example, we saw some.
Similar headwinds in northern California in the fourth quarter and.
And we anticipated that so we employ the same strategy. So its really more focused on some of these unique situation as we come out of Covid related legislation.
Really to position us for better growth.
And Mike do you want to talk.
About the women's yes, let me just add one more thing Steve.
Question here is what is going to happen to the pace of employment as I noted in the prepared remarks.
Job growth has been really strong.
However, maybe some of the layoffs. So it was a warm notices haven't actually showed up in job growth yet so.
Our expectation for the year just to remind everyone on F 17 was for minus 2%, 2% job growth for the U S and so as we're going to be watching job growth over the next several months, but it seems like.
We are running.
Stronger than we expected certainly with respect to January as job growth number.
If that continues then you.
We'll get to a point, where maybe our U S job growth estimate on 17 is too conservative So we'll watch that closely.
Great. Thank you.
Thank you.
Comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hi, Good morning, good morning out there and just join again, Mike Congratulations.
On your tenure and your last earnings call and Angela.
Don I'm, taking the helm next quarter.
So two questions.
First maybe just sticking with that job rebound Mike.
You mentioned early on in Covid, when everything in California was shut down a lot of service industries. Those jobs literally had to flee because they were closed down they could work, whereas a lot of tech people, who could work from home as you talked about that really strong job rebound in December and the fact that California has recovered all of its jobs, how would you rate.
We see these headlines of the layoffs versus it sounds like there is a pretty good job growth is it more of the job growth coming from the service jobs and maybe that's what you're seeing more demand in Europe apartments, or as you look at your resident mix profile Youre like look our resident mix profile today is really no different than it was back in <unk>.
2019.
Yes, Alex I think.
We're normalizing from that pad.
Pandemic period, and but I.
I would say, yes, we are recovering leisure hospitality and other service jobs at a very high rate and that continues onward, and but it appears to be normalizing, but also the tech job growth. During the pandemic was incredibly strong and we think that some of the more recent tech.
Announcements are just sort of giving back a small portion of the job gains that occurred during the pandemic. So we don't even.
Consider tech to be all that weak at this point in time I think it's just transitioning from what it was.
Taking the next step or the next chapter of things. So overall, we think jobs are on the right track again R. F. 17 was based on the consensus estimates of all the big economists in the U S and it is possible and it almost seems like.
Whatever weakness, we might have as being pushed back because were stronger earlier, which would probably be a net benefit for this year if that continues.
So we will be paying close attention to that.
And I want to maybe go into the.
So two more things actually one is the the one notices.
And.
We had our data analytics team do an analysis of.
The major of the largest.
Layoffs announced and what portion of them are in California, and Washington versus the total. So this is Amazon, Google Microsoft Salesforce Cisco Bay glue.
Globally have $1 6 million employees and the lay off rate is about 4% or 64000 layoffs.
And the California, Washington market.
Employees of those companies and these markets are about 335000.
People are there's about 10000 layoffs. So the the percentage of layoffs is lower actually in California, and Washington as compared to the broader enterprise. So I think that is important and then finally its interesting the unemployment rates are slow San Francisco two 2% in San.
As a <unk>.
<unk>, 4% and every everyone under the U S average, except for Los Angeles, which is at four 5% no doubt.
Because people are drawing benefits.
And able to stay in our apartment subject to the eviction moratorium.
Okay and then the second question is just getting back to the delinquencies I think you guys have highlighted obviously L. A in Oakland.
Is that the bulk of whats driving delinquencies. This year and then as a consequence, especially in L. A with the good cause eviction should we assume that you guys will look to pair your exposure to L. A county.
Yes, let me talk about that Angela or someone else may have a comment.
The two really difficult eviction moratoria are in Alameda County, which is Oakland and L. A.
L a city La city expired, however, la chunky extended to March 31.
Actually Alex City was really horrible ordinance L. A county is.
Not nearly as restrictive for example, it only applies to 80% a median income.
Tenants for example, and so there's a little bit of relief.
In L. A.
In terms of of exiting L. A I think that that is it depends I mean, we will AG.
Does it enter and exit markets as we.
Dean necessarily using a much broader set of criteria.
Yes.
Apply demand analysis rent growth expectations cap rates et cetera, and so that will drive that that discussion.
As well as.
Jobs in some of these other issues.
Okay. Thank you Alex.
On the delinquent unit front.
L. A and Alameda are the bulk of our delinquent units over 60% of our delinquent in units long term greater than three months or in la Alameda and so that that's a factor as well as the slowdown in the courts courtyard really bogged down it is taking longer traffic in our other markets and that is a factor as well in the 'twenty three guidance.
To recapture those yet.
Our next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Yeah, Hi, everyone. Thanks, Mike last quarter, you said that the 2% rent growth forecast seem pretty dire at the time and it was more based on what the fed was doing and projections from economist so much you're actually seeing on the ground I know you reiterated the 2%, but your commentary around employment seems to suggest that you still think it's a somewhat pessimistic outlook.
Am I interpreting that right.
Well I think Angela Barbell kicked me if I do anything.
Hey, anything that's inconsistent with our public position I mean, the <unk>.
Reality is I don't know and in the comments I referred to.
Range of outcomes, it's broader.
Then historically.
We've been able to triangulate in the past for most of the past.
The relationship with supply and demand much more much better than we can this year. So there are more moving pieces and given that inherent uncertainty I still think that 17 is within the range of potential outcomes, but again, we will be watching job growth and warn notices and all those various items for.
Better visibility, notably.
A warn notice out there may not have hit the lay off part of.
The reported job growth. So there is a lag there and so it's a little bit unfair to comment on that until we see how that plays out.
Okay Fair enough and then non revenue generating capex seemed elevated in the fourth quarter and I think that 2022 total was up about 40% year over year.
What's driving that and can you give any expectation for where twenty-three will shake out.
Sure Hey, it's Angela here.
I think it may be helpful to just.
Talk about how we look at Capex because.
Looking at our one year number can be misleading our Capex program is for each property is on a 10 year plan.
So on year tour there.
The large <unk>.
Improvement that needs to be made.
Replacement for example.
I'm going to show up and it's going to look lumpy, so, but having said that in 2022.
We also had to catch up from the when we pause.
You know the activities.
In 2020. So for example, pre Covid, we were running closer to about 17 $100 per door.
And.
In 2020.
We were down to like 13 contracts, so over a 20% increase and so you move play that for a couple of years later, there is that lag effect. So that's what you're seeing as well.
If you look at it.
Say 10 year average our capex per door is pretty similar to where our peers are.
Now, we do have a little older portfolio on average so it naturally we should run a slightly higher capex per door. So that's yeah, sorry for the long winded answer, but there was just a little bit more to it than just one number per year.
Next year, we're evaluating.
The expectations.
Yes, you have also inflation, so it's probably going to be similar to 2023 and 2022.
But like I said over a period of time over a long period of time, it should revert to our long term average.
Okay. Thank you.
Okay.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you congrats to everyone.
I wanted to ask about the pricing of <unk>.
In EMEA, which seem better than expected given the interest rate environment.
Any commentary you could provide on this pricing if it's reflective of other asset sales that youre working on.
And sort of on a related topic.
<unk> in L. A what do you think thats going to happen.
Impact that will have on both the transaction market near term and pricing.
Sure Hi, John This is this is Adam so beginning with <unk>.
<unk> was I would say an opportunistic sale too.
A very specific buyer and.
That.
That's reflected in the pricing.
Generally speaking, we're seeing cap rates kind of trading in the market in the mid to high fours.
So <unk>.
I'd say outperform that bye bye a bit again, just because of this very specific situation.
Regarding the mansion tax in L. A so.
We've seen a slight elevated.
Potential transaction volume in all age due to due to the mansion tax coming into effect April one for the most part I think most of those deals probably won't trade.
Just given.
They were all on very short short runways.
Pricing expectations, just doesn't seem like they are being met.
Going forward I think we've seen this in in Washington, when they bumped their transfer tax up.
Actually it did not affect transaction volume generally at all.
I think the one thing that may be an outcome.
L. A mansion tax is it could potentially hinder development within Los Angeles, any any significant headwind too.
Development returns, especially for merchant builders, that's just going to affect their backend and make it that much harder to build.
Okay. My second question, just a follow up on delinquencies.
It looks like it's going to be $40 million on a gross basis. This year, how does that compare to last year.
We estimated at about $57 million just based on your disclosure just wanted to make sure.
That was accurate and that's.
As part of that Ken E. R. A surprise to the upside if there is not much baked in guidance.
Hi, John I may have to follow up with you on those numbers when I get back to my office and have the model in front of me. So I don't know how you want to quote the numbers here on on the call in terms of E. R E D.
That would be upside if we were to collect some but we've exhausted most of that so that we don't expect much in the way.
The one thing I would I would keep in mind, though is we do have $90 million uncollectible bad debt cumulative since the start of Covid. We only have a $3 4 million accounts receivable balance. We think we will collect more than $3 4 billion. It's just a timing of when we're going to collect that so that as upside to the numbers. It's just we don't have that baked.
Into our forecast given the inherent nature of when we're going to collect that but that's really the upside is on that front more so than even eri I would say.
Okay.
Well I'll follow up with you offline, but that $57 million of calculated from the change in cumulative plus the already you received last year.
But I'll follow up offline. Thanks.
Our next question comes from the line of Josh <unk> with Bank of America. Please proceed with your question.
Yeah, Hey, everyone, sorry, if I missed it but did you guys say, we're sending out new and renewal renewal notices today.
Yes.
Haven't talked about that.
No one renewals are sending out somewhere between say, 4% to 5% depending on the market.
February and March but keep in mind that does get negotiated.
So if we're sending out.
Renewables say north of 5%, we assume maybe a 100 basis points.
Negotiation, depending on when and if some of these markets, we're sending out well and Dan. So for example, Seattle It goes out six months in advance.
So hopefully that gives you a better sense of the range of outcomes.
Okay, Yeah, no that's helpful.
Bob I wanted to touch base on you.
You mentioned conviction costs in same store expenses and I guess those were being.
Elevated I guess, how are those showing up in same store expenses.
If you kind of normalize for those what would your same store expenses look like.
Yeah, So eviction costs show up in our administrative line and obviously, we have elevated turnover as well and that's in the R&M line. So it's in both lines.
I would say in total relative to our historical average our controllable.
Are forecasted to be 4% this year, but without the elevated eviction and turnover costs, we think we'd be closer to four 3%. So it's about 100 basis points impact to the controllable line item.
For the year.
Okay. That's awesome. Thanks Mark.
Our next question comes from the line of Nick <unk> with Scotiabank. Please proceed with your question.
Thanks first question is just in terms of when you are looking at some of your data on move outs.
Maybe you could talk about how that's trending in terms of reasons for move outs.
Job losses versus you know rents being too high or even.
Move outs to other regions.
Yes, it's Angela here, that's interesting because we keep expecting big shifts coming out of Covid under move out reasons and.
Moving out just want to buy a home really still hasn't changed in the long term average I think because the cost of housing here is just.
A lot less affordable.
Job transfers or other reason pretty darn similar.
And to our historical averages.
And so we have not seen any material changes.
Uh huh.
Okay. Thanks, Angela and then I guess the other question is on move ins, whether youre seeing any.
Benefits from.
Our return to office, which has been a little bit of a slower process in some markets on the west coast I mean, youre seeing any benefits from that in recent months whether it's.
Specific.
Cities in the portfolio or even pardon me your move in date, if you are seeing any.
Instances of people relocating back into your markets because we're now required to be in some sort of hybrid job in an office in your markets increasingly and I'll. Just say this is Ralph congrats Angela and Mike as well.
Yeah.
Thank you.
Grabs and once again another good question on the in migration.
Yes.
I have mentioned in the third quarter, we saw a pretty big uptick in the in migration to our markets.
30% to 35% on average between northern and Southern California.
And.
Okay.
And of course part of that is attributed to the trend in your office, we have seen that trend continue in the fourth quarter, but keep in mind fourth quarter is.
Typically just a low demand period, so it's really difficult for us.
A particular trend the only thing I can tell you is that compared to the first quarter.
The in migration is still better marginally we're not talking huge numbers.
From that perspective once again in the fourth quarter is just a tough time trying to get an indication of that like do you have any thing you want to add yes, I just wanted to maybe.
We do some work again data analytics team.
That deals with Mike Chinn patterns, and I guess I wanted to make a comment that it seems to be normalizing as well again, you have that mass exodus early on in the pandemic and.
<unk>.
And making progress.
The point, we effectively replaced all those jobs, but the places where people are coming from and going to again using linkedin data not our own data.
Appear to be pretty similar to what they were in the past. So generally speaking the migration pattern here is we give people from.
The large eastern and Midwestern metros and actually more recently, Dallas and Atlanta are on that on that list of incoming in the top five and the place where people go typically people will retire sell their house in California. They are expensive house and used as part of their retirement.
Plan and so they go to less expensive west coast.
Cities, notably Phoenix, Denver Las Vegas.
Thanks, I appreciate that Mike any plans to move things stay in California.
I'm Stan.
I'm looking forward to spending some time with the grandkids and that type of stuff and I'm still going to be around if Angela will have me and.
April to be determined so I love the company and love what I do here so.
Not ready to completely check in.
This whole thing is really driven by Android being ready and that's what's important and so she'll do a great job I'm very confident.
Best of luck to you. Thanks.
Okay.
Our next question comes from the line of Adam Kramer with Morgan Stanley . Please proceed with your question.
Hey, Thanks for the question and congrats again.
Yes look I just wanted to ask about obviously Tec Tech markets overall, right, where you guys are located but maybe just kind of specifically.
<unk> exposure among your tenant base, if you have that number and look I get that there could be secondary.
Secondary type jobs and secondary exposure to kind of tech jobs within your market, but maybe just kind of explicitly tenants who are employed by <unk>.
Second part is if you kind of have that percentage for your residents.
Yeah, that's a that's a good question.
What we do as we attract the top or the desktop.
Because everything else.
Just two two fungible in that number. So currently we're about 7% of our tenant base is linked directly linked to the top six tech companies and.
Of course, it's much more concentrated in northern California, and Seattle, well just speaking.
But that's a very manageable base and of course at certain assets or properties.
That has a much closer proximity to.
Headquarters the percentage will be.
Disproportionately higher.
And how does that 7% kind of comparator.
Maybe pre COVID-19 or last year historical average type numbers.
Sure.
Not a big change week tend to kind of run between say.
Five 7% and it kind of hovers around there.
Got it that's really helpful. Maybe just switching gears.
So I'm wondering what kind of a new versus renewal trends.
New lease kind of modestly negative and then kind of still in the 5% range for renewals for January .
Yeah look I think conceptually if I. So if I understand correctly. If you if that trend kind of continues maybe it would form a kind of a game.
So wondering maybe your thoughts on that.
If you could kind of see that happening or maybe kind of renewal and new converge over time and kind of like gain to lease isn't formed.
Yeah, a couple of things just give me a little background first on the new lease rates. That's of course is.
<unk> is heavily impacted by our concessionary strategy, which is we made to our occupancy strategy and so part of that is not as much a.
Market issue versus a strategy issue.
And of course that is something that we shift quickly away from the concessionary environment in January .
And so I don't want you to think that this is something permanent is here to stay.
So but.
Ultimately with a renewal rate.
In a environment, where new leases are.
And our <unk> expect it to be about 2% there is going to be a convergence of.
New lease and renewal rates and it will probably take two to have that play out.
Got it. Thank you for your time really appreciate it.
Sure.
Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question.
My first question.
What does the current exposure to corporate housing and then how do we reconcile the impact of job losses with return to the office.
I'm sorry can you repeat the first part on corporate housing.
What is your current exposure to corporate housing.
We have exposure got it got it so our current exposure is down 3%.
And what's.
What's interesting about that number is during COVID-19 it actually went down to zero.
And so we've been building that up.
So last year it was around <unk>.
About two 5% now keep in mind in Seattle, it's going to move around because there's it's.
It's a temporary in nature right comes in pretty heavy during the seasonal peak around July and that can ramp the portfolio up to 7% and then it goes back down you know around.
October is a lead so there is inherent there's an inherent cyclicality to that.
So to that tenant basis.
Got it and my second question is relates to the regulatory environment. Obviously the markets that you operate in have gotten increasingly difficult.
Increasingly difficult whether its rent control prop 13.
Seattle, and Washington State potentially becoming an issue. So maybe can you can you walk through kind of like you are.
<unk> thoughts around this and then whether you would look to diversify your portfolio over time, just given some of the given the more challenging operating environments.
Yes.
That's a great question.
I'll handle that one.
Yes, we have been maybe a little bit surprised just how aggressive some of these actions are.
We have a pretty strong advocacy effort that is driven by CIA in California, and the local what are the local groups up in the Washington area.
So we spent a lot of time working with those organizations and trying to advocate against those policy almost always those policies are.
Are sold on the basis of being good for the.
The housing industry and when of course, we all know that in fact is exactly.
100% wrong at the exact opposite so.
Unfortunately, it's something that we have to deal with.
It is concerning to us and we spent a lot of time on it.
The proposal in Washington, It's still very early on in the process in the house and it hasnt come out of committees.
As a result of that I think there's still a long way to go again, we will be monitoring that.
And.
But all of these different proposals.
And to make Cal.
California, less appealing to a landlord.
<unk> increased the risk of that occurring so to your point about other markets I think I want to reiterate what I've said before which is.
We are tracking more markets now 25 major metros across the country.
Looking for specific things.
The things that essentially attracted us to California, 30 years ago, let's say and.
Tried to rank those markets in terms of appeal and whether they can compete.
With the California markets.
We have some interest in some of them I don't want to get into great detail at this point in time, but as I've said before and I think actually this last couple of quarters has played this out there why this is important it's about timing and it's about <unk>.
Making a shift at the appropriate time when our <unk>.
Cost of capital is appealing and we can enter at a point, where we can feel like rent growth is going to continue it in any of the markets across the country, including our markets, San Diego, notably Orange County, et cetera, If you get 30% to 40% rent increases youre going to have a lot of supply that will hit.
And you just can't you just can't keep growing there has to be some change the market's become an affordable for the average person can't afford the rent.
In that location that causes people to move further out.
Find more affordable housing the markets.
In a certain sense have a self correcting mechanism in them and this has always been the case, it's true here, it's true everywhere and so we're going to thoughtfully.
Make that decision at the appropriate time.
Does that help.
Okay.
Very helpful and congratulations everyone.
Thank you.
Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.
Thanks for the time, Adam I wanted to follow up on your end transaction market comments.
Just curious how you.
See the depth of that there that the cap rates you throw out there.
He brought a substantial number of assets and market do you think they would trade in those.
Our core cap rates suggest.
We're still seeing a gap between between the bed and the ask but we are we are seeing I'd say, a muted volume of deals going down in that mid to high fours.
So yes, if we if we got back to I'd say kind of normal volume I think that's where we where we shake out today.
Okay.
So I understand those cap rates. So those kind of initial buyer cap rates are those your disposition yields.
Hi.
Well so for <unk>, specifically, what we quoted in the statement was disposition yield what I'm, what I'm, saying mid to high fours, that's more of a buyer cap rate.
Okay.
Last question for me just Angela curious for your thoughts on just the topic of Covid impacts fully reversing so.
Covid is in the rearview mirror would you expect market rents in any of your southern California markets that I've seen huge cumulative rent growth to actually see absolute declines in market rents over the next few years.
Well keep in mind, yeah, Mark I'd rank, both as a function of demand and supply.
So at this point, even looking out the next couple of years supply is still relatively muted in southern California.
And pre Covid, you know prepayment environment, Southern California performed really well.
And so you know.
Southern California has similar employee base and the broader U S market. That's why we like it it's less volatile, but it has a higher level of professional services so better earnings.
And for that reason and southern California continues to be a stable and so we wouldn't expect that because of COVID-19.
Some of that it's going to just fall apart.
Okay. Thanks for the time.
Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, just a question on the impact of the churn to work on the outlook.
On the West Coast, a lot of the technology standards of announced its office space rationalization.
Sales or.
Could that be a headwind for rent growth next couple of years.
Even if you have higher job growth people were in the in the cities because youre doing more hybrid work as these firms kind of reduced their footprint.
Yeah, Anthony it's Mike here.
Most of our portfolio actually is suburban in nature. So we have relatively little in the cities and we're thinking that return to office is something that will slowly evolve.
And there'll be maybe we go from an average of two days a week in the office to three days a week in the office.
That will all anything that is more office centric will pull people closer to our apartment communities. So that would be a positive impact.
In our view.
And.
So at this point in time, because people have moved farther from the offices and.
That has caused us to readjust sort of our template for looking for potential acquisitions and other things, but over time, I think that all of us, including I would say.
Here at Essex, we have some of the same issues that we're better off were more productive we make better decisions when we're together.
As a management group senior leadership group.
Super.
Important to the overall results of the company. So we think that returned to office will be ultimately a tailwind.
Maybe one more in terms of dispositions and buyback and made some good progress there last year.
Thank you for buyers and sellers start to agree that you can maybe increase the <unk>.
By that amount year over year.
As you sell more assets.
Yeah. This is barb well assess that based on deal volume and whether we can create an EV and.
<unk> per share its hard for me to tell you right now that we can do that.
In this environment.
But it is something that we're cognizant of we have shown that we can run the machine and reverse many times over many different cycles and so we will be willing to do that if the right opportunities present themselves.
Alright, thank you.
Our next question comes from the line of Handel St. Juste with Mizuho. Please proceed with your question.
Hey, good morning out there and Mike Congratulations on a fantastic career and all the best in your next chapter and best of luck Angela.
Well I just got a couple of follow up questions back to you on our list.
I guess first of all I'd go back to expenses, Bob I think you mentioned controllable expenses that you expected to be up 4%. This year as part of the 5% guide, which I think is higher than a lot of as expected. So maybe can you go through a bit more of the building blocks of that 5% expense growth.
And maybe if there's any contrast versus say Seattle, which doesn't have the the prop 13 benefit that California does and if there's any benefit from the rollout of the property collections platform you mentioned earlier.
Yeah.
On the expense growth of 5% really the biggest driver of that is non controllable that's up 5.5% to 6% and it really the key factors are utilities, we had were up 10%. This year. We do expect high single digit increases next year insurance is expected to be up 20% next year Theres a very.
The insurance market and then on real estate taxes, we've budgeted for two 5% increase and Thats really being driven by Seattle reverting more to our historical norms. So those are the key building blocks on the non controllable piece on the controllable PS 4% at the midpoint and we do it.
Expect <unk> to be up only 3% once again, we do have elevated eviction costs in that line, which is masking some of the benefits from the rollout of the central services or the prop.
Property collections model that we rolled out last year that centralized some of those functions. So.
It's it's masking it a little bit this year, but overall that should give you. The major building blocks for why we have a little bit elevated expense growth.
No. That's helpful. I appreciate that but just so we're clear how much impact in a more normalized environment would that property questions platform has.
What's the what he said.
Eviction costs are about a 1% impact to controllable. So that's that's the factor you can.
It was 1% lower.
I appreciate it.
What's the assumption built into the guide for turnover this year and year end occupancy.
Occupancy we've assumed is stable year over year, so flat no change there.
And then in terms of turnover, we did see elevated turnover in the fourth quarter and given the eviction headwinds that we expect to face in getting the delinquent units back when do you expect that turnover to be a little bit more elevated than historical norms.
But it is good because then we get tenants that are paying rent. So we think that's actually a good thing.
Okay.
That's all for me. Thank you again.
Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Great. Thank you I just wanted to go back to a comment you made early in the call about distressed acquisitions distressed acquisition opportunities coming up with some owners with floating rate debt can you talk more about what youre seeing the magnitude and do you think thats going to be something that grows as an opportunity set.
Hey, Jamie this is Adam.
We haven't seen much of that to date.
We are.
More on the structured finance platform, where we're seeing more opportunities on existing deals with the maturing debt or with expiring rate caps.
We do think this will accelerate into the year and provide potentially more opportunities like I said, probably more focus on the structured finance platform versus acquisitions, but.
Looking at it from every angle.
Okay.
And then I guess sticking with structured finance the impairments you took.
How should we think about that the risk profile of those investments versus the rest of the book or.
Even deals going forward like was that just kind of at the higher end of your risk profile or the market conditions really just change that quickly that led to the impairment.
Yeah, I would say its the latter we didn't change our underwriting on that investment we didn't go out wire on the risk spectrum or the curve. It really is a function of the Oakland market highly concessionary the developer wanted to sell and we ultimately agreed to the sale now keep in mind, we actually mean.
Money on our investment for shareholders, we invested $11 5 million in this project and we got redeemed 14 million. So we made 7% annually for our shareholders. The coupon was 10. So we didn't quite earn what we thought we were going to earn but we thought it was in the best interest of shareholders to take our money back and read the playoffs were and so we didn't.
Lose money and I think it is a unique function of that market right now given I think there are 16 lease ups in the market right now.
Okay.
And then finally.
Just thinking about.
Just in terms of the.
Moratoriums like how much of that is actually baked into your guidance.
The upside potential upside from.
L a in Alameda County.
Well, what we have in our guidance as we do assume that gross delinquency will continue to trend down throughout the year as we are able to recapture our delinquent unit. So right now we have about 3% of our units are delinquent that's down from 5% at the start of the year of 2022.
And we expect that to continue to trend down by the back half of the year, we expect to be in the.
One and a half for lower range for the second half of the year. So it is a function of the guidance.
Do it.
We have baked that in that we will get more of our units back this year.
Okay, but in terms of the revenue upside do you also have that and really I'm just thinking if maybe they get extended past March 31.
Is that a downside risk to the guidance or no.
I don't we don't see that as being a downside risk because keep in mind.
Mike said earlier about L. A county, which is the new eviction moratorium it's actually.
More strict than L. A city was and so are we.
Don't see that being a hindrance to us. In addition, we are we are making progress. It's just it's taking a little longer than we expected. So we don't we don't see that as a significant downside at this point.
Okay, great. Thank you.
Okay.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Thank you operator.
I want to thank everyone for joining us today.
Hope to see many of you at the Citi Conference and we definitely appreciate all the world wishing for Angela.
I want to note that it's been an absolute honor to work with so many of you and so have a great day. Thank you for joining us.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect your lines Goodbye and have a wonderful day.