Q1 2023 Essex Property Trust Inc Earnings Call
Good day and welcome to the Essex Property Trust first quarter 2023 earnings Conference call.
As a reminder, today's conference call is being recorded.
<unk> made on this conference call regarding.
Expected operating results and other future events are forward looking statements that involve 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 M. D C.
It is now my pleasure to introduce your host Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you Mr. Climbing you may begin.
Thank you for joining ethics first quarter earnings call or pack and Jessica Anderson will follow me with prepared remarks, and Adam Berry is here for Q&A.
We are pleased to report a solid first quarter that exceeded our initial expectations and that we are raising the mid point over I suppose I'll push your guidance for the full year.
Marvin Jessica will provide more details on the quarter one of my comments will focus on our economic outlook the opportunities within our platform and some perspective on the apartment transaction market beginning with our outlook for the remainder of the year. We continue to anticipate modest economic growth in 2023, resulting from a.
More restricted monetary policy can bring job growth nationally.
Our assumptions are detailed on page S 17 of our supplemental package.
As we all know the West coast is home to some of the largest companies to announce layoffs over the past six months.
So the west coast economies have proven resilient producing a solid job growth of two 7% on a trailing three month basis through March.
We believe there are two key factors contributing to the durability of the underlying west coast fundamentals.
First many of the lay off workers have quickly found new jobs.
And second the vast majority of the layoffs I think that people, who do not reside on the West Coast ports. For example, we continue to monitor warn notices and if the largest companies to announce layoffs only 16% of their reductions have occurred in our markets.
With the exception of a few specific submarkets, the overall labor market and demand for housing in the West Coast had a healthy start to the year.
On the supply side the outlook remains favorable with only about 60 basis points of total housing starts forecasted to deliver in 2023, the supply risk in our markets remain low we expect the continued housing production challenges such as diminished labor force and high construction costs.
Should lead to relatively light apartment deliveries for the next several years in our markets. Thus, we do not need a meaningful job growth to generate modest rent growth in 2023.
Since none of us have control after the fed or the economy. Our team will remain focused on what we can control, which is the continued enhancement of our operating platform.
We have been thoughtfully transforming our operating model for several years, which has resulted in one of the most efficient operating platforms in the industry.
Relative to our peers.
<unk> has the highest controllable operating margin and one of the lowest average controllable expense for units.
The rollout of our property collections model has contributed to the sufficiency, we are only midway through implementation.
Our next phase of expanding this operating model to the maintenance function well maximize the workflow of our associates, including reducing time and vendor cost.
These advancements will enable incremental revenue growth to flow more efficiently to the bottom line ultimately generating additional <unk> per share and dividend growth throughout all economic cycles.
Lastly, turning to investment activities.
We're still seeing institutional quality transactions occurred from the mid to high 4% market cap rate with a deeper buyer pool towards the high end of this range keeping.
Keep in mind that the transaction market is still digesting higher interest rates as evidenced by a significant reduction in volume of approximately 70% nationally.
60% in the West coast in the first quarter compared to last year.
In addition to the anemic volume our cost of capital remains unattractive from an acquisitions perspective.
Keep in mind that Essex has a long track record of creating value for our shareholders by arbitrageur discrepancies between the stock price and the underlying asset value.
Once again, we demonstrated the strategy in the first quarter locking in significant SSO and an 80 per share accretion for shareholders, which is the primary driver of raising our <unk> guidance mentioned earlier.
We continue to actively evaluate potential deal and are ready to act swiftly and thoughtfully when opportunities emerge.
That I will turn the call over to Barb Pak <unk>.
Angela I'll begin with a few comments on our first quarter results and full year guidance, followed by an update on investment activity and the balance sheet.
I'm pleased to report our first quarter core <unk> per share grew eight 3% on a year over year basis exceeding the midpoint of our guidance range by eight that.
The better than expected results are largely attributable to two factors that drove our outperformance in same property revenue growth.
First occupancy trended higher than we expected for the quarter and second net delinquencies were better than forecasted as we've received $1 3 million an emergency rental assistance.
As you May recall, we did not assume any rental assistance funds in our 2023 or forecast.
Overall gross delinquency was two 5% of scheduled rents for the quarter in line with our expectation give.
Given the favorable first quarter results. We are currently running 30 basis points ahead of our full year mid point for same property revenue growth.
However, given the macroeconomic uncertainty and the timing of recapturing delinquent units, which remains uncertain. We are holding off on changing our same property guidance range until we get further into the peak leasing season.
As for core for so we are raising our full year midpoint by three cents per share primarily related to accretion from stock repurchases completed in the first quarter and higher other income.
Turning to our stock repurchases and investments during the quarter, we sold a 61 year old student housing community located in a noncore market. The proceeds were used to buy back the stock on a leveraged neutral basis in order to arbitrage a significant disconnect between public and private market pricing. This is another example.
Ethics seeks to create value in all environments, while at the same time, improving our portfolio.
As it relates to our preferred equity book, we had little activity to report this quarter. However for the full year, we still expect about 100 million of early redemption. Our sponsors are able to take advantage of the available financing via Fannie Mae and HUD to redeem a thoroughly.
We believe the additional sources of financing is one of the many benefits of being in the multifamily sector, which has over time helped to keep cap rates low.
Overall, we remain comfortable with our preferred equity portfolio, especially given how diversified it is both geographically on the west coast in terms of and in terms of the average deal size.
Finally onto the balance sheet, we plan to pay off our upcoming 2023 unsecured bonds that mature may 1st with the proceeds from the 300 million delayed draw term loan, which closed last year as such we have no funding needs over the next 12 months with $1 5 billion in liquidity limited variable rate.
That exposure and access to a variety of capital sources, our balance sheet remains in a strong position I will now turn the call to Jessica Anderson.
Thanks, Barb I'll begin my comments today by providing color on our recent operating results and strategy followed by regional commentary.
We're pleased with our operating results from the first quarter, including our same property revenue increase of seven 6% year over year as Barb mentioned, one core factor driving these results was the successful execution of our occupancy strategy that resulted in a solid 96, 7% for the first quarter up 70 basis points.
From the fourth quarter. This focus began in Q4 and was done proactively in anticipation of elevated turnover from eviction.
During the first quarter, we made progress recapturing units from non paying tenants and we experienced the highest volume of eviction related move outs today.
The number of long term delinquent residents has declined by 65% from our peak over a year ago, excluding the Los Angeles in Alameda County.
Additionally, a notable milestone in the first quarter was the entering of the eviction moratoriums in the city and county of Los Angeles, where approximately half of our delinquency reside.
Given backlog conviction courts, it will take many months to recapture these units, but steady progress throughout 2023 as expected.
I am very proud of the team and appreciate the tremendous amount of work that has gone into recapturing turning and re leasing unit. Thank you team great job.
Throughout the first quarter, we saw positive demand indicators for the portfolio lead volume, which reflects the number of initial inquiries until leasing an apartment and is a leading indicator of demand was consistent with and in some cases over the same quarter last year. Additionally, concession usage has declined from approximately two weeks free.
In the fourth quarter to a half a week free in the first quarter.
We are experiencing a relatively normal ramp up to the peak leasing season net effective blended rates accelerated through Q1, averaging two 9% for the quarter and ended with March at three 8%, although they moderated in April .
This was due to a temporary increase in leasing incentives to offset our period of heavy eviction volume while April averaged 96, 4% occupied we are at 96, 9% today and well positioned to absorb additional turnover, while still increasing rents as demand allows.
Moving on to regional specific commentary in the Pacific Northwest, our most seasonal market London net effective rents were up 30 basis points in the first quarter compared to one year ago. The elevated supply in the downtown Submarket is weighing on our regional performance the supply outlook for Seattle is comparable to 2022.
<unk> a more challenging second half of the year is expected.
In Northern California, blended net effective rents improved to two 6% in the first quarter year over year, we're seeing strength in the San Jose Submarket offset by supply driven weakness in Oakland.
The supply outlook for northern California remains relatively muted, which will benefit our ability to push rents presenting job growth continues to outpace the recently announced layoffs.
Finally in southern California blended net effective rents were up 5% in the first quarter as demand remains solid in all regions have fared well to start the year, including Los Angeles as I mentioned earlier, we're expecting elevated turnover in this region driven by a reduction in general supply outlook in Southern California is very man.
Honorable and outside of pockets of supply in Submarkets, such as West L. A this market is expected to farewell in summary, 2023 has started off slightly better than expected demand for apartments has been solid we continue to make progress with evictions and our occupancy focused strategy positions us well we are.
Consciously optimistic as we head into the peak leasing season, but also acknowledged the macroeconomic uncertainty that could influence apartment demand through the balance of this year 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.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you 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 star key please limit yourself to one question and one follow up.
Our first question comes from the line of Nick usually go with Scotiabank. Please proceed with your question.
Great. Thanks.
Appreciate some of the commentary on the markets and tech job at exposure I guess if.
If you if you would quantify you know some of the impact.
To markets, whether it's parts of Oakland downtown Seattle any other you know more difficult markets right now within the portfolio, how how would you come up with that as a as a percentage of the total company.
Yeah, Hey, Nick it's Angela here.
Good question.
Andy.
On our portfolio composition Big picture, we have about 20% of exposure in Seattle, and 40% in northern California, and 40% in Southern California.
And so when we look at the overall portfolio composition.
Actually pretty comfortable at where everything is sitting and our results have deliver especially in Q1. The way. We had anticipated now there are pockets of softness for example, I think you heard about our downtown Seattle in certain pockets in downtown L. A.
And so you know downtown L. A for example is about 2% of our portfolio and so in aggregate, it's not so meaningful that gives us pause and and as you can see by our Q1 results.
But it's it's a we're generally.
Trending well here.
Great. That's helpful. And then just the second question is I know I know you talked a little bit about the trap tracking ahead of.
Same store revenue growth guidance right now are I guess in terms of you know what some of them you could talk a little bit more about some of the offsets that could.
Prevent the guidance raise and in the second quarter I don't know if it's the delinquent units coming back to market and how they get leased and then separately on the the economic forecast. It sounds like you know the job losses or playing out better than expected year to date in many cases large.
He has already come out with their announcement so.
You know maybe talk a little bit more about the decision to not chase some of the economic forecast as well. Thanks.
Yeah, It's a it's Angela here again, a good question and it's something we debated because you.
As you know in Q1 jobs did track them better than what we expected you know.
Having said that I do think that visibility. This year is just more limited than in past years, because it's because.
Because of that's positioned right in the next fed meeting isn't until May one and so we are anticipating a mild recession and that that is a factor and that's nationwide and of course, it's not Essex and Youre right you know what.
With the tech layoffs, especially looking at the warn notice is we have we saw that peaked in January .
And appears to be trending down, but it's just too early to really.
You don't have clear visibility on where the economy is headed and I will talk about guidance.
Hi, Nick Yes, I would say on the guidance piece delinquency obviously.
Is something that's still a little bit uncertain to predict in terms of getting units back as <unk>.
Jessica mentioned La Alameda, just are coming out of their eviction moratorium and so on the timing on when we're going to get those units back is uncertain and so thats a factor and we also want to get a little further into the peak leasing season, given the uncertainty that Angela just mentioned and then we will do a forward forecast for the second quarter, but you know the first quarter was very.
<unk> for us and we feel pretty good going into the second quarter.
Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.
Thanks.
I guess with respect to the stock repurchases.
An internal limit on sort of in the short term or long term or just as long as you're able to sell assets and buyback your stock at a reasonable discount.
Keep going.
Hi, this is barb.
We're gonna match fund asset sales with stock repurchases. So we know what we're locking in in terms of value. We do have an internal M D and we know where the value of our assets are and so we're gonna be cognizant of what we're gonna be mindful of the balance sheet liquidity and maintain our strong balance sheet structure and so it's not worth it.
It's going to do it to do it we want to make sure that we're thoughtful about doing it and then what we did in the first quarter as we sold an asset that's noncore it actually doesn't fit with our new operating model we.
We got a very attractive price for it and then we're able to take it and redeploy it to buyback the stock and create a lot of value that way. So we're gonna be very thoughtful going forward.
Right right and then I guess, what I was trying to understand is it just a theory.
Able to sell $200 million are able to sell 300 million successfully be willing to repurchase 300 million or is there just sort of at a certain point, where from a G&A perspective, and sticky and other sort of considerations into account.
Not as efficient for you to keep selling assets and buying back stock and then I guess just sort of add on to that question. If your internal NAV.
Are you using the cap rates that you see you transact in your markets.
Sort of making adjustments about for where it should be based on that cost because I think the the thing.
Here is that it's a pretty big transaction market right now so the cap rates, we're seeing may not be sort of reflective of where things should transact if they had to.
Yeah, our NAV is based off of.
Adam and I sit down and we talk about where transactions are happening and where.
Where we think we can sell our asset today and based off of what is happening in negotiations that are going on behind the scenes and so we feel like we have a good pulse on the market. We have sold assets over the last several years and proven out the value for the portfolio and so.
That is the process on the NAV side, and we're very comfortable.
Transacting and selling and buying back the stock.
Okay. Thank you.
Our next question comes from the line of Steve <unk> with Evercore. Please proceed with your question.
Hi, Thanks, good morning.
I guess, maybe for Jessica I was hoping you could speak a little bit to the.
Blended rates that you talked about I think in April you said, maybe there was some impact from the addiction. So I'm just hoping new.
See if you could quantify that because I think amongst all your peers you might be the only one that showed a decline in April so just trying to get a sense of the magnitude of that and maybe what your expectations are for are for May and June .
Hi, Steve Yeah.
Overall those numbers those blended numbers that we're looking at those are net effective trade out numbers and so I think it's important to point out as I mentioned in my prepared remarks that through March. So they grew sequentially throughout the quarter. So April really reflected a point in time pricing strategy.
<unk> rather than underlying market fundamentals.
We had expected with the evictions, we're working through quite a few and they do come to us and a steady stream, but we do anticipate that there might be some concentrations from time to time and so that's what's really driven our occupancy focused strategy and you really saw that play out with our April occupancy number we had floated down.
After seeing a concentration in March to 96 four but.
But ultimately when we start when we think about as far as the markets and how they're progressing through the seasonal ramp up and the strength. There we really look at our market rents, which is essentially the or gross recently achieved leases and since the beginning of the year, we have seen our market.
It's grow sequentially through April in all of our market. So.
So it does net effective trade out and of course incorporate concessions and again it really reflects the point in time, So we saw really great activity.
In April and we were at roughly one week free as far as concessions go and we've pulled back to only a couple of days today on average and you have a breakdown by market, we're actually sitting at 97% and Seattle, 97% in Northern California, and then 90.
Six 8% today. So ultimately you know we're pulling back on the concessions there might be a little bit of a spillover into may.
We expect.
The trade out rates to Reaccelerate from here and then also you know market rents to continue to grow.
Thanks, and then I guess, maybe as a follow up just to get a little more color on Seattle I mean, some of your peers had maybe a bit more weakness and spoke to the weakness specifically in downtown Seattle I know that you are probably more east side exposure, but just any thoughts around Seattle in particular, and and you know does amazon's.
Kind of me first.
<unk> returned to office policy.
Have any influence where have you seen any influence from that or do you think people are sort of already back in the Seattle market or do you think there's a wave of people to come back to the market in the near term.
I think overall for Seattle, I mean, we have a pretty conservative outlook for Seattle This year and as I mentioned, I think it'll be more challenging in the back half.
We experienced more supply.
And we've been experiencing that really for the last six months, but interestingly yeah. In April we did see quite a bit of movement from a leasing velocity perspective. So I do feel like that may 1st return to mandatory returned to office three days a week for Amazon.
Potentially had an impact.
For us.
As far as strength does mean anytime you introduce leasing incentives or gesture rates, how how the market responds and the leasing velocity, you're able to get is really telling.
So we weren't necessarily targeting 97% and Seattle, So that really goes just to show that there is some underlying strength there and so I think Amazon did play out, but again, we have a pretty conservative outlook and we're certainly seeing the impact of that demand with the diminishing of the hiring with Amazon and Microsoft on last year having.
July August 30000 open positions that essentially disappeared.
Matter of a month or two and then obviously we have to supply factors. We have we have both things working against us, but I'm encouraged and I think Seattle is on track with our expectations for the year.
Our next question comes from the line of Austin, where Smith with Keybanc. Please proceed with your question.
Great. Thank you sort of going back to the stock buyback conversation I guess in sort of the sources and uses or match funding any future repurchases are you guys currently marketing any of additional non core assets today.
Hey, Austin this is Adam I apologies.
At the moment.
We are not actively marketing anything more always.
Opportunistically looking at potential for disposing of assets that are either noncore or in noncore markets.
This is how the CVC sweeps. So it doesn't mean you always sold last quarter, that's how that came about.
Currently no not not marketing anything right now.
Got it and then just going back to the guidance a little bit I mean, you mentioned a couple of components of driving the same store revenue outperformance in the first quarter first you know, which is obviously a nonrecurring item in there that you rent payments have you received any additionally rap payments in the second quarter and then second.
With the dip in April I guess, how is April trending relative to plan is it offsetting some of the benefit you had in <unk> or is is you know April occupancy and rents also trending ahead of plan. Thank you.
Yeah. This is barb on the emergency rental assistance payment in April we had 100000 in our same store portfolio. So nothing material.
And that is disclosed in our supplemental and then in terms of factors in the April guidance. The one thing I would say is that for delinquency. We did assume the first half of the year would be in the mid 2% range two and a half and then the back half we expect it to continue should trend down too.
Close to one and a half and 2% for the full year. So you know we're on plan with delinquency.
In April and then occupancy at 96 four is generally in line with plan as well.
Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Great. Thank you I was hoping to shift gears to the expense side can you talk about just the key items and expenses you know theres been a lot of volatility for insurance for people and taxes are just.
Kind of what gives you conviction on your current outlook for the different expense lines, and where do you think maybe there might be some some rescue to the upside or downside on the growth rates.
Yeah. This is Barbara again, so on the expense side I think the biggest variability, we're seeing is really maintenance and repairs because of them.
We have more turnover.
We had some.
More flood damage this quarter, so that that's kind of one time, we don't expect that to reoccur, but we do expect the turnover to be a recurring item given evictions I would say on the insurance we've already done our insurance renewal for the year. So that line is pretty baked in we don't expect any surprises from from here on out and is up 20%, but that that's going to be there.
Number for the year and then on the tax side, we do have the benefit of prop 13 and so.
Which is 80% of our tax base and so that is pretty well known well know Seattle taxes here in the second quarter, and then really have that drilled in and so.
For us the variability on our expenses is mostly just tied to R&M.
And then utilities I. The one thing on utilities is it can be variable we did.
We've put in place some gas hedges, which has helped us on the utility side and so it kept it to a more moderate level all else being equal.
Okay. Thanks Barb.
And then Orange County, it seems to have come through this quarter pretty well across most portfolios, including yours can you just talk more about what's going on in that sub market specifically.
Yeah as far as the Orange County goes it is.
It has performed well for the last couple of years and we're seeing good trade out numbers good leasing velocity.
Really stable as far as the supply outlook, there's nothing noteworthy there as well so overall Orange County is pretty stable. It's a lot of our southern California market San Diego is similar as well.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you.
Mark can you just.
Elaborate a little bit more on the real estate taxes.
Their decline.
And taxes and any I think you mentioned last quarter, you were budgeting, a four and a quarter increase.
Given real estate taxes are the largest components of Opex and insurance came in pretty much where you expected is there the likelihood of that.
Do you expense guidance going down junior.
Yeah.
Yes, John .
So on the tax line it really deals with a comp issue from the first quarter of last year. So in Seattle. If you recall, we did have a favorable surprise last year, where our real estate taxes went down 4%. We didn't know that until the second quarter. The first quarter of last year was our budget and what we assume taxes would be.
So it was way too high and so we're comping off of a really easy comp and that's why you see the negative one six on the tax line.
Like I said, a few minutes ago, we will know.
Where seattle taxes come in in the second quarter, when we pay the bills and so that's still TBD, we're still assuming four in a quarter overall for the tax line for this year, it's really just accomplish in the first quarter.
Okay, I mean, I saw last year's first quarter wasn't that there was like three 3%.
But anyway. My second question is on your your Mezz opportunities it seems like with regional banks having issues.
That could be a part of the capital stack.
You could see more opportunities at higher yields and Im wondering if thats the case and how you would stack that up versus buybacks.
Yeah.
Hi, John This is Adam.
Over the last couple of months, we've seen I would say a slight uptick and possible opportunities come in the Mezz and prep World. As you said some of the some of the lending sources out there have either tightened or disappeared entirely.
It remains to be seen if if this new wave that we're seeing will actually translate into deals.
There are legacy development deals that have been out there a while there are some new actually existing deals that we're seeing as well, but but again. This process takes a long time and several months and so we're assessing a number of new opportunities but.
Too early to tell how many of them translate into actual actual deals but.
We will always we will continue to look at potential options.
When we have liquidity to you whether that's through dispositions or redemptions, what the best use of that capital is.
Our next question comes from the line of Brad Heffern with RBC. Please proceed with your question.
Yeah, Hi, everybody. Thanks, So the big take tech layoffs have already been touched on but I'm wondering what effect. If any do you think the SBB failure and the associated impact on Tech company funding may have on your restaurants I know you typically talk about a relatively small exposure to big Tech and the resident base, but I'm curious if you think that applies to startups as well.
Hey, Brad it's Angela here.
You know with with the SCB failure that occurred recently, we did not see any impact to our portfolio and so but you know looking forward obviously and.
We don't know what can happen, but we do know that the parent has filed for bankruptcy, but a subsidiary which is S. E. B has.
The fed stepped in and then it's been sold.
And so we certainly don't expect no further disruption from that and just looking at.
Some anecdotal information.
Looking at the 30 plus companies in a real estate technology ventures, there was no impact there either.
So.
As it relates to kind of that broad banking sector. It could it may play into more a.
Broad economy conversation and.
So for those that's one of those reasons that we are forecasting a mild recession in our.
Current expectations.
Okay got it thanks for that and then maybe for Barbara another one on the guide.
The increase of the Guy was smaller than the beat versus the first quarter midpoint Guide I know you mentioned that most things are outperforming and then you had the repurchase of well as well, but it seems like there was some sort of offset for the rest of the year second quarter to fourth quarter. So can you talk about what that is.
Yeah. So the vast majority of the beat in the first quarter was really tied to same store revenue growth and we didn't change our revenue outlook and so that is not carried forward through in the guidance. So that was seven centers. They tend to be the reason we changed our guidance was the stock repurchase which will carry.
Or that's three pennies.
And then we also are have higher other income mostly tied to better rates on our cash management platform and how we're managing our cash and our marketable securities.
And then on us.
Partially offset by lower co investment tied to preferred equity redemptions and the timing of those redemption. So that's what was updated in the guidance same store will be revisited here in the second quarter.
Okay. Thank you.
Our next question comes from a lot of Adam Kramer with Morgan Stanley . Please proceed with your question.
Hey, guys. Thanks for the question.
Just wanted to ask about look I know, we've touched on kind of attacking the STB, maybe asking that same question a little bit differently, which is just on kind of severance packages and just some of the early buyouts last year, maybe some even kind of later in the year.
Longer severance packages right and so maybe you wouldn't kind of see that cheap redfin behavior right away wondering if may be some time in some time has passed since then.
Kind of any differences in resident behavior kind of given the severance packages that may be expiring now.
Yeah, It's Angela here the severance packages can range up to three months, having said that you know given the bulk of the layoff announcements that occurred back in January .
And.
Tenants behavior, they tend to make decisions say 45 days to 60 days in advance of a major event, we know what our expectation is that we've seen that town that plays through our portfolio, we digested that already and once again I kind of want I want to point to the job growth numbers.
It is a good indicator, but the other good indicator is the initial unemployment claims in California, and Washington and to date, they still remain below the 15 year average.
So that's another you know.
A good data point there.
That's correct that's all Super helpful.
Maybe a follow up I think you guys have done a really good job of kind of bringing on some certain Peter minds. When it comes to kind of manage your occupancy versus pushing pushing rents I think both on this call and prior calls maybe just kind of on a go forward basis walk us through kind of kind of that tradeoff right. I know you mentioned confections now lower than we were where we were.
In April .
Walk us through maybe just kind of how youre thinking about that trade off now given kind of the demand screen today right. How are you thinking about related to occupancy versus hershey versus pushing pushing rates.
Hey, Adam this is Jessica yeah, so and.
We're progressing through the peak leasing season and of course, we're always going to be opportunistic with a focus on maximizing revenue I think overall with our outlook for the year I think we'll probably spend the bulk of the year focused on occupancy based on we know we're going to continue to have to work through evictions, but.
Rent growth is moderating and when you think about as far as rate grows you know anytime you're turning an apartment you're experiencing the turn cost and the cost of vacancy.
And so you really have to be getting some some really strong trade out numbers to make it make sense to be focused on rate over occupancy, but certainly we'll monitor the market closely.
And just like we've pulled back concessions at the end of April and leaving us well positioned for the peak growth period that typically occurs in Q2, we certainly have opportunities again to maximize maximize revenue overall.
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning, good morning out there. So two questions first just going back to Silicon Valley.
Let me ask the question this way.
You guys mentioned that you anticipate the 100 billion of.
Yeah.
Inferred equity being taken out this year and that the.
The owners of those properties have capital options and Fannie and Freddie.
So are you, saying that whats going on in banking and where we see people lenders pulling back from real estate loans that is having no impact on your debt and preferred equity portfolio or is it just this $100 million that you are slated for being taken out is fine but.
Broader speaking there are bank fallouts.
To the debt and preferred equity business.
Hi, Alex its barb what I was speaking to is that there is still capital available in the multifamily space I know in other sectors. It is definitely pulled back and I definitely think the banks have pulled back.
But the gun.
Government financing is still available life insurance companies are stepping in and I think youre seeing other lenders step in.
And then our preferred but keep in mind the deals that we're getting taken out of it.
They were underwritten 2019, 2020 long time ago when cap rates were in the mid three and a half and so we can get fully taken out and so I think they're there.
The second question is going back to supply.
It sounded like the only market that was an issue as Seattle and I'm, assuming that's Seattle downtown not the suburbs, but in general as you look at your portfolio into next year and the year. After do you see supply coming down everywhere like Northern Cal is clearly that's been a pullback, but do you see.
See any area, where theres going to be a deluge of supply that's going to deliver next year or as you look across your portfolio. Whatever this sort of is the peak and.
Next year should be less supply across your markets.
Hey, Alex it's Angela here, that's a good question I'm trying to figure out you know looking ahead, what's happening here at <unk>.
In terms of our portfolio just big picture are starting this year compare to last year overall supply is slightly down but the vast majority as you pointed out its northern California, it's down over 20%.
In Southern California is up slightly about 14% and the bulk of it is in the downtown.
Downtown L a and and then some of these other.
West L. A you know certain other markets.
Yeah, but overall of course that supply numbers is quite muted.
Look for 2022 'twenty 'twenty four.
What we're seeing preliminarily at the moment the landscape and so not a huge drop off.
But similar level, but keep in mind, we're already operating at a pretty darn low level right I mean total supply.
As a percentage of.
Total stock is only 60 basis points.
And so we do foresee that to continue, especially given the environment of a much more challenging.
Labor force available in and higher construction costs, and lastly rents in the northern region haven't moved significantly past pre COVID-19, So northern California.
It's still slow.
Below pre COVID-19 levels and so it.
It didn't surprise us that southern California.
<unk> picked up slightly this this this year.
And I think you kind of see that throughout the country, where you have significant rent growth, that's where supply will occur.
So that's that's the big picture for overall this year and next year similar levels and it's going to.
Our markets.
Okay. So just to clarify the Seattle It is just downtown Seattle, that's the issue right.
Seattle overall are slightly down but downtown is up.
Okay. Yeah. Thank you. Thank you.
Sure.
Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning, going back to the share buybacks do you have a number of assets or a dollar number in terms of a non core that you would sell and if you were to get offers on core assets at those four to high four cap rates would you opportunistically sell those to buy back stock recently.
So on the first.
This is Adam.
The first part of your question do we have less of noncore assets. The answer is yes, and we're constantly having discussions and going through those to see where they could potentially sell and what we can do with the proceeds.
As to the amount with which we can buy stock back there there are challenges always with with disposition dispositions theres always be the different ramifications of it.
Tax gains prop 13, so all of those are taken into account when we assess what we can do with those proceeds theres also.
Another tool in the Shadows to use 10, 31 exchanges to exchange out of non core assets into markets that we think will overall affect the portfolio in a positive way.
Okay. Thanks, So maybe more broadly it sounds like youre a bit more.
Optimistic on kind of a west coast markets recovering this year. Despite the layoff activity does it make you does it just reinforce your view on the West Coast is the best.
Use of capital a best place to invest or would you still consider maybe diversifying into the east coast of Sunbelt as we've talked before about in prior calls.
Yeah, Hi, it's Angela here I'm the diversification.
Question, you know, we're expanding outside of West coast. It is something that we have.
Been disciplined about evaluating and so that just just the basic discipline has not changed we're going to continue to monitor those markets and look for opportunities, but that your original point I think you hit the nail on the head, especially as it relates to northern California.
You know a couple of things going for four of our markets why we have the lowest supply deliveries and especially northern California supply is down 22% were just starting to rebound in terms of job growth getting.
Jeffs number is getting back to pre COVID-19 levels and market rents still below.
With gradual improvements.
We're in the best affordability position from a rent to income perspective in the northern region.
Along well.
Well below our long term average and so that would point to you all the.
The best growth prospects.
And on the just broad picture on the migration front and we all experienced meaningful net migration during COVID-19 well the migration landscape has been improving gradually as well and so you know you've put together all those pieces to point to that where we want to deploy our dollar well.
We see the most upside ahead of us it's in the West coast.
Alright, thank you.
Our next question comes from the line of Wes Golladay with Robert W. Baird. Please proceed with your question.
Hey, everyone I just wanted to get your view on maybe starting developments.
With the hopes of delivering into a better part of the cycle.
Hi, This is Adam.
It's the development landscape today is challenging for a number of reasons Angela.
Angela pointed to a few of them with a challenging labor market construction costs have remained elevated and so when solving for a call it 20% premium over where market cap rates are.
It just.
Basically we will.
Lead to a to a lower land price than land owners are willing to go so.
Sure, we would love to be delivering into a.
Lesser supply market, but right now it's just a development deals just don't pencil.
Okay.
Don't you have a few covered land place or did you get rid of those.
We do yes, and those are those are still generating active revenue and with some we are pursuing entitlements in the meantime, so parallel processing and I and others have just longer term lease commitments.
Okay and then.
Could you talk about you know maybe the demand from people that are currently have an H one b visa do you view it as maybe a potential positive with more people getting pieces, where with tech what else, maybe you might lose a few people.
We actually see the international part should be a tailwind for us because it's it's just starting.
And so I think it's no surprise that.
Historically, California has a net out migration if you only look at domestic numbers in fact <unk>.
17 out of the last 20 years, it's net migration domestically and even during those periods. We had you know meaningful rent growth acceleration.
The international component is what drives our migration to become positive for California, and Deb virtually disappeared I mean, it was zero during COVID-19 and so that is just starting to come back and so we are hopeful.
That will.
It will be additive to the demographics piece.
Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Good afternoon. Thanks, a lot for taking my question.
My question's about migration, how is demand from customers.
How is demand been from customers currently living outside ethics is market and how does that compare with normal and then also the other side have you seen increased or decreased move outs to non Essex markets.
Yeah. That's a good question you know compared to the.
Migration in from.
Outside of Essex markets. We are generally just domestically speaking of course, we're generally back to pre COVID-19 levels.
And so so that's a good thing.
And.
With.
Of course with the international we do see that's what the tailwind is as far as the out migration piece. When we look at the migration numbers, we look at it on a net basis.
And so we're continuing to see gradual improvements.
Got it.
My follow up you know we've talked a lot about.
<unk> Tec layoffs, but have you seen any specific changes and the reasons for move out.
Yeah, we really haven't I mean, we track of course, the usual you know move outs to purchase a home that's below the long term average.
Move out for jobs, new jobs or transfers or loss on that one bucket and in totality is.
Generally in line with historical norms.
So what I think is happening is you know what we're seeing which is that the job losses are being quickly absorbed and benefited.
Benefited by that gradual in migration.
On a net basis.
Our next question comes from the line of Jeremy Lutheran with Goldman Sachs. Please proceed with your question.
Jeremy Little throw your line is large.
Sorry, I was on mute sorry about that.
Could you give us any thoughts around the real page issue any changes you're making to your operating platform. Considering this dynamic and then how are you thinking about the holdup class action suit.
Hey, Sean it's Angela here.
<unk>.
We actually have been reducing our uses usage of real page as we develop a new revenue management system or the over the past several years.
And so we started as well before the the real page lawsuit for the reasons that Jessica I mentioned earlier. So we believe that their claim is without any merit and were very confident about our defense prospects.
Great and as a follow up and sorry, if I missed it but what was gross delinquency in the first quarter. I believe net was 2.1 and then you know as we sort of think about delinquencies improving faster than expected with any eviction moratorium going away.
And the cost is becoming easier could there be upside to that 2% growth delinquency numbers that you laid out one yet.
Hi, Sean its far so in the first quarter gross delinquencies were two 5% versus the reported number of $2. One a 40 basis point improvement tied to emergency rental assistance and then for the outlook for the year, the 2%, we're still holding to it.
I think L. A and all of them either have just come off it's really going to depend on how quickly the port.
On these eviction, just taking six plus months right now and so.
It really is going to depend how quickly either people go through the whole eviction process or whether they just skip and thats a little known at this point I think in the next few months, we'll have a better visibility on that.
Great. Thank you for the detail.
Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.
Thanks, maybe just a follow up question to that bad debt topic bar, but just one question on the longer term debt profile of their markets based off the current trajectory of gross delinquencies and just the payment behaviors, you're seeing among tenants.
I think when the dust settles bad debt actually settled out at a structurally higher level versus pre pandemic behavior.
And if not what is your best guess someone bad debt does get back to pre pandemic levels.
Yeah, John It's a great question, something we talk about internally a lot.
Historically it has been at 35 basis points pre Covid, we believe we will ultimately get back there.
Because there won't be any loss to protect tenants like there was during COVID-19, which allowed tenants to have this behavior and so now that we're coming out of all of the moratoriums I think the city of Oakland is the only one that really remains we think we will get back there, but its going to take until into 2024.
To get there and it won't be for the full year of 2024, it's going to take into that year because of the eviction process and how long is it taking but structurally we don't believe that there will be a fundamental shift in delinquency in our long term trends will go up.
Cause of Covid.
Okay.
And your unregulated sub markets within the portfolio has bad debt regarded fully back to pre COVID-19 levels.
I don't think we no I don't think we've gone back fully to pre COVID-19 levels and our other markets as Jessica said in the call.
In our prepared comments that.
We've gotten over 60% of our long term delinquent residents out over the past hour since the start of 2022, So we're making good progress.
But we're not fully back to where we should be at this point.
Okay.
And then last question from me is more of a regional question for Angela or Jessica If you start the clock today, which region do you think will generate the highest and lowest revenue growth for the next two or three years, Seattle, Northern California, or southern California.
Well, it's Angela here I'll start and Jessica welcome to add.
In terms of.
The upside or the most of the revenue growth.
Growth, we definitely see northern California being at the top of that list.
Followed by Seattle, and then southern California, and both for.
With our northern California, because of you know as I said earlier the job growth is just getting back to pre COVID-19 level market rents are still below pre COVID-19, but it has been gradually improving proving it has the lowest level of supply deliveries relative to our other portfolio and the best affordability position.
And so that for those reasons, just ranked number one and Seattle for similar reasons, but it does have a higher supply.
And then its more volatile or more seasonal.
And so and so which means that so with southern California.
Coming in you know less than that because we.
Don't like it it just because it's just done so well I mean, it's you know it's.
15 in some cases 2030 basis, 30% rent growth above pre COVID-19.
And we're starting to see some supply pressure, which yeah.
It's still in check.
Relative to the rest of the U S, but relative to our markets.
Its starting to creep up and so that's the order of the ranking Jessica.
I have nothing to add.
Okay. Good got you.
Okay.
Okay.
Yeah.
Our next question comes from the line of Handel St. Juste with Mizuho. Please proceed with your question.
Hey, it's barely on the line for handouts entrust.
I just wanted I had a quick follow up on the.
Regulatory question. So I was wondering if you could provide any color on the eight and a half million in legal settlements out of back to your core so I.
I'm wondering if that's from one big settlement and if theres any piece of that that will trickle into future quarters. Thank.
Thank you.
Yeah. This is barb it was primarily related to a legal settlement for construction defect at one of our properties and there is no carryforward on that though just a one time item that occurred in the first quarter. It was paid in cash so.
So that's done.
Got it thanks.
Our next question comes from the line of Ashwin <unk> with Bank of America. Please proceed with your question.
Yeah. Thanks for the time everyone.
I just wanted to touch base on the new revenue management software you rolled out at the start of the year.
Curious to kind of hear your experiences as they're using that now.
How it's trending versus your expectations and just maybe just the capabilities versus your old software.
Hi, This is Jessica yes, things are going very well, we're very pleased with.
With the platform, thus far and we have a long development pipeline.
For that revenue management system. So all is going well I mean, a couple of benefits to point out that we're looking at is it's in alignment and allows us to price at a portfolio level with our property collections model versus the commercially available systems, you're often pricing at the property level and then.
A portion of their rent is not optimized and so if you look at that on an annual basis, what that is for us at the 100 over $100 million.
Not optimized so thats one opportunity we also see moving forward with the system. So there is there is a few value add opportunities to give you a couple of examples.
Okay. Thanks, Jessica and then maybe just.
One follow up on that.
What exactly do you mean by like price of the portfolio level and kind of like.
What's the benefit to having it done that way.
Well when you are looking at I mean, we have a high geographic concentration and so when you're pricing properties individually, sometimes you can be kind of cannibalizing yourself based on the occupancy position at a property and so when youre looking at an entire portfolio collectively one bedrooms two.
Bedroom and ultimately you can maximize revenue through more stable approach to to rents and the balance with occupancy.
I appreciate that thanks Jessica.
Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question just one on the job market you know to the extent that job growth has fully recovered to pre COVID-19 warn notices are below average and then laid off people are finding jobs quickly again.
Do you have a sense of what industries people are getting hired too.
Okay.
Yeah, you know in in our markets well in the northern.
<unk> is of course.
Okay.
Centric, but.
Southern California, it's more service driven leisure and hospitality and you know it's much more diversified mirrors that of the U S broad economy with a more professional services and of course, you know higher income levels.
Are the is the tech hiring from the ones that are also laying off or is it more diversified.
It's more diversified.
Got it thank you.
Okay.
There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yes.