Q3 2023 Essex Property Trust Inc Earnings Call
Good day and welcome to the Essex Property Trust third quarter 2023 earnings Conference call. As a reminder, today's conference call is being recorded.
Statements made in 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 in the company's filings with the SEC. It is now my pleasure to introduce your host Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Climate you may begin.
Good morning, and thank you for joining ethics third quarter earnings call, our packing Jessica Anderson, who will follow with prepared remarks, and wyland Burns is here for Q&A.
My comments today will focus on how we perform today, our initial outlook for 'twenty 'twenty four and a brief update on the investment market.
Overall 2023 has unfolded generally in line with our expectation we increased our same property revenue and NOI growth in middle of the year. Despite a challenging operating environment with almost 2% went delinquent for the first nine months of the year.
Or contact list delinquency level is approximately five times our historical average.
I'm precedented eviction protections enacted during COVID-19 exacerbated by subsequent court delays has resulted in protracted exposure to non paying tenants and uncertainty on timing of when we could recapture at east unit.
That said, we made considerable progress reducing delinquency as a percentage of rent, which is now at one 3% in October.
This improvement has naturally resulted in a temporary tradeoff between rate growth and occupancy well. It has proven to be an optimal strategy to maximize revenues as we make progress towards normalization in our markets.
Looking ahead to 'twenty 'twenty four we plan to publish a more comprehensive outlook or the west coast in conjunction with our full year guidance on our fourth quarter earnings call for now we have provided our initial 2024 supply outlook for our market.
17 of the supplemental which forecast total supply growth of only half a percent of total housing stock.
Unlike many other U S market total housing supply in our markets is expected to remain at low level and we do not see a near term catalyst for increasing housing supply well into ethnic markets.
The supply landscape also minimizes our risk to job growth relative to other markets, especially if we encounter a softer demand environment and will be a tailwind for ethics when the economy accelerates.
Well muted supply as part of our thesis we also see conditions that could drive demand for housing.
First after a year of retrenchment lay off in the tech industry appears to be slowing and we tried to office is gaining momentum with percent Oh no job hiring at the largest tech companies now in the low single digits.
Implying that one.
Hiring was done in a meaningful way job growth will be highly concentrated near major employment centers.
Second it remains to be seen how the artificial intelligence industry will grow we know that success in this industry will require and then scale and capital resources. In these types of companies are largely concentrated in the bay area and Seattle.
Third affordability, particularly in northern California today, the Bay area is as affordable as we've seen since we began tracking this data and we expect this will provide a long runway for that growth.
In summary, the combination of this potential demand backdrop, and a muted supply outlook gives us confidence that the west coast is well positioned to outperform in the long run.
Lastly, an update on the apartment investment market.
Deal activity slowed further in the third quarter as interest rates increase sharply in recent months compressing prospective retrans and resulting in many buyers remaining silent we have seen several marketed deals not transact this year as sellers of weight and less volatile interest rate environment.
There is little evidence to suggest transaction activity will pick up in the near term as bid ask spread remains wide we.
We have navigated through many economic cycles, and our finance team has done an excellent job in fortifying the balance sheet, which positions us well for any environment with that I'll turn the call over to Barb.
Thanks, Angela today, I will discuss our third quarter results, along with the investments and the balance sheet.
Starting with our third quarter performance I'm pleased to report that core <unk> per share for the quarter came in three cents ahead of our midpoint.
The outperformance was driven by slightly higher revenues other income and lower G&A expenses, partially offset by higher operating expenses.
Most of the beat in the third quarter is timing related.
As such we are reiterating the midpoint of our full year core <unk> per share and same property revenue expense and NOI growth.
As it relates to operating expenses of 2023 has been elevated compared to our historical run rate given above average increases in repairs and maintenance costs and insurance.
This was partially offset by real estate taxes, which increased by only 1% due to the favorable outcome we received in Seattle.
As we look to 'twenty 'twenty four we expect operating expenses will remain elevated primarily driven by non controllable items, such as insurance and utilities.
In addition, the tax benefit we received in Washington share is not expected to repeat in 2024.
However, it should be noted that we have done a good job over the past four years in improving the operating efficiency of the platform, which has led to a modest increase in our controllable expenses.
Since 2019, our controllable expenses have increased around $2 75 per cent annually, despite elevated inflationary pressures and higher costs related charge of la Quinta units during this period.
This favorable outcome is primarily driven by the rollout of phase one of our big collections model.
As always we are continuously looking for ways to improve efficiencies within the platform in order to optimize our cost structure.
Turning to investment for the year, we expect to preferred equity redemptions to be around $70 million as we anticipate being fully repaid on our $40 million investment in the fourth quarter.
As we look to 2024, we expect redemptions within our preferred equity book to be around 100 million. While we are actively looking for new deals to replace these investment there could be a timing mismatch in terms of when we get repaid and when we can reinvest we are finding there are still significant capital sources eager to IND.
And this portion of the capital stack, while at the same time projects with reasonable return expectations are becoming harder to find.
We will remain disciplined in this environment, meaning on our deep network on the west coast to source deals at attractive risk adjusted returns.
Turning to capital markets and the balance sheet in July we closed $298 million in 10 year secured loan at a fixed rate of 5.08%.
The proceeds were used will be used to repay our 2024 consolidated maturities.
We were proactive in refinancing our debt early in today's volatile rate environment locking in favorable financing ahead of the recent acceleration in treasury yields.
As such the company is well positioned with minimal financing needs over the next 18 months.
We are pleased that our net debt to EBITA ratio continues to trend lower and stands at five five times today as compared to five eight times one year ago.
With over $1 6 billion in liquidity the balance sheet remains a source of strength I'll now turn the call over to Jessica Anderson.
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I think our my comments today will cover our recent operating results and strategy followed by an update on our delinquency progress and regional highlights operating results were solid for the quarter, including same property revenue growth of three 2% on a year over year basis, we experienced a normal peak.
Leasing season across all markets market rents peaked in August at 6% growth year to date compared to December 2022, and have subsequently moderated by 10 basis points in September which was consistent with typical seasonality.
We took advantage of opportunities to push friends during peak season, we shifted back to an occupancy focused strategy midway through the third quarter as we began to recapture a larger volume of units from non paying tenant.
This shift in strategy tempered our blended trade out rates in Q3, which were similar to Q2 at two 1%.
Renewal growth rates were healthy at 3% in Q3, and five 3% in October boosting our blended trade outright while new lease growth was muted at one point and 2% for Q3, reflecting new lease incentives to backfill recently vacated nonpaying unit.
Eviction related move outs increased in September, allowing for improvement in delinquency as a percentage of rents to one 9% in September and even further improvement in October to one 3%.
All of our markets, such as Santa Clara, San Mateo and San Diego have returned to delinquency levels close to the long term run rate, Los Angeles, and Alameda counties remain elevated but significant progress is also being made in these areas. After protections expired earlier in the year as Angela mentioned is the improvement in delinquency will result in a.
Temporary trade off with new lease.
And occupancy, which can be seen in our preliminary October numbers, but we view. This progress is a positive for the company.
It just didn't with our approach all year, we remain nimble and we'll shift our strategy as necessary to maximize revenue in any operating environment.
I want to thank the Essex team for their diligent efforts this past quarter, it's been a major driver of the improvement we've achieved.
Moving onto regional specific commentary.
Beginning with Seattle. This market has performed as expected. This year. One is net effective rent growth averaged 0.5% for the quarter, improving 70 basis points from Q2, despite nominal trade outgrowth demand fundamentals were solid in Q3 and I am pleased with the recovery of this market after a slow start to the year market rents.
This region were the first to peak in July on par with a typical year and we anticipate a normal seasonal moderation, although higher levels of supply deliveries in the fourth quarter may have an impact on pricing.
Turning to northern California was that net effective rent growth averaged one 4% for the quarter consistent with Q2 market rents peaked in late August later than normal and indicator of solid fundamentals in this market Santa Clara was our top performing market for the quarter as outlined on page S. Nine of the supplemental the ongoing.
Return to office, along with corporate housing activity contributed to these positive quarterly result.
San Francisco, and Oakland, CBD, which account for a small portion of our NOI have lives of regional average Oakland continues to be impacted by supply, which is expected to continue into 2024.
Lastly, southern California continues to be our top performing region led by San Diego market rents in Southern California, where Alaska peak in mid September and blended net effective rates remained resilient at three 7%. Despite the headwinds in Los Angeles, our market most impacted by delinquency.
In October delinquency in Los Angeles was at four 6%, reflecting a two 1% improvement since the start of the year, we anticipate making continued progress on delinquency in Los Angeles, and as such we expect rents and occupancy in this area to be more volatile in the near term.
In summary, we are encouraged by the improvement we are seeing on the delinquency front and expect continued progress heading into next year.
We conclude the balance of the year, we remain focused on preserving occupancy and positioning the portfolio favorably heading into 2024, I will now turn the call back to the operator for questions.
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Our first question comes from Austin <unk> with Keybanc. Please proceed with your question.
Great. Thank you Jessica you highlighted that you had shifted your strategy from pushing new lease rate growth to growing occupancy due in part to the elevated move outs of non paying tenants.
But from what I recall the guidance assume both an improvement in cash delinquency and re acceleration in new lease rate growth towards that that high 2% range in the back half of the year. So I guess I'm just curious if anything else change from a demand perspective.
That also contributed to that that shift in sort of operating strategy.
Well just to emphasize we are on track for the year and as I mentioned in my prepared remarks, there is essentially a trade out we did expect a delinquency to stay elevated above the one 3% that we reported for October so that is lower than than we had planned.
Although we had experienced the trade out with occupancy and our our new lease.
These trade out right so as far as demand goes all the markets are performing as expected as we move into the seasonal slow period, and we're encouraged by recapturing the nonpaying units because it will position us well as we head into 2024.
Got it that's helpful. And then can you just remind me I know you guys report financial occupancy, but does that capture cash delinquency or is that figure more reflection of gross potential rent. Thank you.
You can find.
Occupancy does not include delinquency.
Understood I appreciate it.
Our next question comes from Eric Wolfe with Citi. Please proceed with your question.
Hey, Thanks, just curious what you think drove the decline in delinquencies in October sort of specifically versus say two months ago.
A couple of months ago with some of your peers started seen it and do you think that improvement is sustainable going forward.
Okay.
Hi, Eric this is Jessica well.
Well, we're definitely encouraged by the improvement that we've seen in October and there is there are several factors that are contributing to that the first is our for all of our areas outside of Los Angeles in Alameda protections expired in July last year and at the time, we were reporting that evictions, we're taking in the range of 10 to 12 months.
Some longer and so now that we're a year plus into those areas. We are seeing a lot of those units have made their way through the system and and the move outs that we're experiencing as far as Los Angeles and Alameda go those protections expired earlier in the year and those tenants are real.
Rising that there are no more protections there is no more emergency rental assistance. So overall the tent tenant sentiment has changed and there's a greater sense of urgency. So we are seeing increased move outs as tenants are realizing this and as far as forward looking.
One month, certainly doesn't make a trend and we've seen some choppiness and delinquency is as we've worked through it the last couple of years, but we're certainly encouraged by our recent results and we're gonna be monitoring that closely and we'll have more information on our fourth quarter earnings call.
That's helpful and I guess it leads to my second question, which is around the you know you're dropping through new lease rates to increase occupancy went onto your tenants I guess, how long would you sort of expect that process to take would you expect new lease rates to sort of go back up to that sort of two 8% that you discussed on the last call or should renewals have to come down because we.
Thank you also talked about renewals tend to follow new lease. So just trying to understand you know how long the lease rates when you're depressed or if we should also expect renewals to come down to follow them.
Yeah.
Alright, let me, let me tackle that I'll tackle new leases and then renewals so as far as what we can expect for new lease rates through the quarter I expect those to remain muted we have come into a period of easier comps, but since we've increased incentives to backfill these units.
That's gonna mask some of that progress and overall, we view that as a positive I think it's neutral over the short term with only a couple of months left in the year, but a positive as we look to 2024, because essentially we have people occupying units that are not paying rent and so if that unit becomes vacant it's now.
They can see but essentially that's a neutral trade out and we're offering concessions to reap fill backfill. These units as quickly as possible and at that point you have somebody occupying a unit that will be paying full market rent and in the near term. So it sets us up favorably for 2024 and with regard.
Just two renewals renewals is where you're seeing our comp show up renewals are insulated from some of the choppiness of the day to day pricing strategy as we've increased incentives to backfill these units.
But what you're seeing in October is essentially 50 50 gross rent growth and then also concession burn off and that 5.53% and I expect for the quarter renewals will be pretty consistent we've sent them out around 5% and we'll monitor conditions closely we may negotiate.
That was a little bit, but expect those to be a fairly consistent through Q4.
Got it thank you.
Our next question comes from Nick <unk> with Scotiabank. Please proceed with your question.
It stands for Tenneco with Nick Thanks for taking the question. My first question is on market rent growth thoughts for next year with the with the with the 0.5% supply growth you gave I'm, just curious what sort of demand environment with.
Negative market rent growth next year, given that supply backdrop, just looking to sensitize the possible outcomes.
Yeah. That's a good question, it's it's Angela here.
We you know one of the reasons why we held off on publishing our macro outlook is because we listened to our investors feedback to better understand the value of our publishing that outlook because that ultimately impacts our view of market rent growth.
And we have decided not to change I mean to change our approach to so we would provide the outlook early next year or so aligns better with the timing and the release of our guidance and so you know so wanted to give you that backdrop, but ultimately.
The the market fundamentals really are going to be impacted by a couple of factors and we start with looking at the third party macro economist forecast, which is still evolving and we have not seen anyone with a robust outlook, but it is too early to predict.
And we will say is that a six is in a better position relative to other markets due to low supply that you mentioned earlier, which of course.
Reduces the risks to our rent growth and of course, having some potential upside when it comes to future demand and so those are all the different moving pieces that we are evaluating at this time.
No that's good thanks for that Angela.
And the next question would be on your just your different regions now Socal has been your strongest but curious if you can see that gap to.
Northern California, and Seattle remaining ore or maybe converging next year and any thoughts on the puts and takes there. Thank you.
Well I think northern California is our steady.
Eddie market and it's got it has.
It has a a profile employment profile, that's similar to that of the U S, but with higher level of professional services. So the NAND remains.
Hassan.
And northern California, we do expect that recovery will come of course, the timing is the question right and so.
Ultimately it should continue it should outperform if not just its nothing for the sake of it's in the still in recovery mode.
And so that's how we're thinking about the the two regions.
Great. Thanks for the time.
Our next question comes from Steve Sochua with Evercore. Please proceed with your question.
Yeah. Thanks first Jessica could you provide a kind of a loss to lease in an earn in figure for the portfolio.
Sure as far as loss to lease goes at the end of September we were looking at roughly one 5% which is consistent.
With periods pre COVID-19 for three years, our average pre COVID-19 and as far as earning goes typically in the past we look at using a roughly 50% maybe a little bit more of that loss to lease number which gets us to roughly 70 or 100 basis points and then we'll look at whatever.
Market rent forecast is for the year and take 50% of that and it's still early and we'll be evaluating that providing more information on our fourth quarter. We do see some other building blocks as far as earn in for next year with some other income initiatives as well that will contribute.
To revenue growth as well next year.
Great. Thanks, and then maybe just on the investment side I guess.
I think Bob might have talked about some repayment of of some of the preferred investments I'm I guess, just what are you seeing in the marketplace today from either developers or other investors who might be in trouble from a financing perspective.
Hey, Steve Ryan here.
We are still seeing a few opportunities I would say just a little historical context. The majority of our deals up until last year, where development based this year. It's been a mix I would say about 50 50 between development and stabilized re ups and I anticipate next year, we're going to see more opportunities for stabilized.
With above 50% leverage and very low interest rates kept or swaps that will roll in the next few years at a very different interest rate environment. So with limited NOI growth that we've seen in several of our markets. We think there are going to be opportunities to put some capital to work.
Great. Thanks, that's it for me.
Our next question comes from Joshua <unk> with Bank of America. Please proceed with your question.
Yeah, Hey, guys I appreciate that your markets have lower supply than a lot of other markets out there across the country, but just kind of curious on what you're seeing as far as the managers in San Francisco and Seattle, and then maybe what.
What do we need to see kind of see an acceleration of about demand in those markets.
Hey, it's Angela here I think you know on the demand side for Northern California, We do want to acknowledge that it remains soft, but I do think that we got two things happening one is from a year over year comp perspective, you know September was still quite robust last year because that was.
Before the tech sectors.
They're retrenchment and at this point, what we're seeing is that that has stabilized.
And so that's a it's definitely a good good indicator.
As far as other indications when you look at of course unemployment claims that remains stable and warn notices it's back to pre COVID-19 levels.
So that all points to that the market is functioning as it should in terms of looking forward. You know, we do think that the testing all these C sector or the hiring needs to return to a more robust way. It's you know there. This is what it looks like is that they're going through kind of the tail end of the retrenchment.
And so we do see light at the end of the tunnel from that perspective and of course, you know having the remote or.
Or the remote job hiring which is now 8% versus it was 25% last year and of course, 100% during COVID-19 that we need to continue to decline and which we expect that to happen and then of course. The last piece is really the international migration, which has been.
Quite muted and as a result of Covid and of course, the various that retrenchment and so with those three elements those are all potential upside for our markets.
Okay I appreciate that color and then maybe just one quick one and apologies if I missed this but just what does your guide assume for the rest of the year as far as the new lease rate growth goes.
Hi, Josh its barb so there is.
Specific number that we need to achieve to hit in the fourth quarter guidance, it's going to be a variety of factors as we've as Jessica mentioned, we got back a lot of units from non paying tenants. It has had an impact of occupancy, but theres a tradeoff. There. So there's a variety of factors that will play into the fourth quarter guidance and.
If theres not a specific rent growth number that we need to achieve because there's all the other factors play into it.
Okay. Okay. Thanks.
Okay.
Our next question comes from Jamie Feldman with Wells Fargo. Please proceed with your question.
Great. Thank you.
Can you talk about for the occupancy first initiative in the first half do you think that sets you up for a potential acceleration next year.
Hi, Jamie This is Jessica can you clarify your question are you talking in the first half of 2023.
Yeah.
The first half with the acceleration.
And I'm, just thinking about like what the what the year over year comps could be into next year like you know where did you push harder in the first half of 'twenty three but you may get the benefit.
Might be harder to have the comps for the first half of 'twenty for both on our occupancy by market and also by Ret.
Yes, I understand what you're saying, yes year to date occupancy I believe we're sitting about 96.5%.
And right now, we floated down to $95 nine but again there is theres a trade out so it's revenue neutral over the short term, but potentially positive as we head into 2024, so where we're heading right now with occupancy it's hard to peg exactly where we'll end the year.
As I mentioned, we remain focused on occupancy and in back selling units.
Seasonally slow period.
So it's uncertain how much progress, we'll be able to make with occupancy over the short term so with that said as we head into the year, we certainly could be lower than last year, but stable is what my expectation is from an occupancy perspective, but there's other components that will add to.
A favorable revenue outcome as we see our delinquency come down and as far as occupancy by area. I mean, generally speaking, we're seeing our stronger Occupancies and Orange County, San Diego Ventura.
How are those performing quite well now and having quite a stable seasonal slowdown, particularly when compared to last year and is sitting around 96%.
Los Angeles is 95, four and I would expect that market to be particularly impacted with a lower occupancy, but again an upside on the delinquency front in the Bay area is also sitting sitting around 96%.
Does that answer your question.
Yeah. That's helpful. Thank you.
And then I guess just switching gears to.
The investing here its investment potential I mean, you mentioned Oakland I mean, some of these sub market that.
But do you have more supply I mean would you want to expand their if you saw it.
Better opportunities or better pricing.
Hey, Jamie Reiland here I'd say, we are open to any good investment opportunities subject to the conditions that are presented to us at a high level as we've talked about we are relatively bullish on the prospects for northern California on the next several years and I think Angela.
It reiterated several of our reasons for that that case, Oakland will be challenged for the next year or two given the supply. That's went up there. So it would have to be a pretty compelling investment opportunity, but we.
We are open and eagerly looking for opportunities in all of our core markets.
Okay, alright, thanks Ralph.
Our next question comes from Brad Heffern with RBC. Please proceed with your question.
Everybody can you talk about some of the return to office mandates you been watching like we saw with meta in September and has there been a noticeable impact in leasing activity on the ground from those.
Yeah, Hey, it's Angela here.
Yeah. He returned to office mandate that we've seen so far it's been a good sign that it's sticky so what I mean by that is last year when the tech employers announce.
They had to make some adjustments now they have said all three days and then they move out to two days and they were still hiring remotely. This year. What we're seeing is that the rehearing. The remote hiring has stopped and in fact, it's become policy and the and of course the return to office has been gaining momentum.
It's difficult to point exactly.
Two the.
Two our financial lease.
Lease rates because we're in the middle of working through the evictions and delinquency issue and that's taking precedent. So there's a lot of noise and that's certainly we expect that that's been a benefit but to point to an exact number or just it's.
Not as straightforward as possible at this point.
Okay understood and then concessions have come up a few times on the call I'm. Just curious if you could walk through the individual markets and just give the average concessions that you are offering right now.
This is Jessica yes, as far as concessions go what were offering across the portfolio has an average of one week free and I anticipate that May go up we'll monitor the nonpaying units as they come in and adjust as needed to manage our new lease velocity as far.
By market, we have the largest volume of concessions concentrated in pockets of southern California.
Is still generally just a few days outside of Los Angeles, and we're seeing larger concessions and Los Angeles.
Areas The Bay area, and then Seattle surprisingly is only a few days at this point as I mentioned, a few minutes ago, it's been a very stable seasonal slowdown in that market.
Okay. Thank you.
Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question.
Hey, guys. Thanks for the time, just a couple of questions on.
A couple of different demand drivers you guys have touched on in the past I think one would just be.
So it was kind of in migration to your markets right and that can be overseas type workers.
Visa.
Kind of immigration factors I'm, just wondering if you kind of walk through that.
A lot of focus on the outward migration, so maybe just kind of thinking about the in migration into your markets.
And the other kind of demand driver question is just on kind of the the end of the writer's strike. After strike that you know what potential impact that could have.
On your business.
Hey, Adam it's Angela here good question on the in migration those betas.
The betas are.
That fund is not as readily available, but what we've been tracking is really the move ins and as I've mentioned in our last year, we saw a a a a good uptick and I think part of that relates to really a recovery and since then it's been study and so the in migration data.
Into our markets from outside of California, and Washington have generally remained steady the piece that we're still missing actually is to enter the international migration part of it and I do think that that will return and just not as immediate at this point.
And as far as the hospitality Intel at industry, it's very telling that when we look at the drivers of job growth in the third quarter, It's mainly education and ill end and health care and other services hospitality and leisure was very muted and we do think that that's.
Partly attributed to the strike and so we do think that that could be a potential.
Demand catalysts as.
As well.
Great. Thanks, I'll leave it there I appreciate the time.
Our next question comes from Wes Golladay with Baird. Please proceed with your question.
Hi, everyone, you mentioned getting repaid on 100 million extra in structured finance.
Have a timing estimate on that do you is there any chance you extend that and then I guess when looking at the entire structured finance book is there any geographic concentration.
Hi, Wes it's Barb you know I think for now you could assume mid year on the $100 million is probably a safe assumption I think we have some in the first half of the year and some in the back half there something your assumption is good there.
And then in terms of geographic concentration of our portfolio is actually it mirrors, our actual portfolio in terms of our investment so about 40% in northern California, 40% in Southern California.
And 20% in Seattle is how the portfolio aligns in terms of where it's located geographically.
Great that's all for me.
Our next question comes from John Kim with BMO Capital markets. Please proceed with your question.
Thank you on the 5.3% renewal rate growth achieved in October can you break that down between how much of that was rate growth versus concession burn off from a year ago.
Hi, John its Jessica yes that it's roughly 50 50, so we're seeing about two and a half.
Two eight or so and rate growth and then the rest is concession burn off.
So when you compare the concessions that you mentioned earlier that your offering versus a year ago is that.
Additive to our rental rate growth going forward.
Where we sit right now it is additive so last last year, we were at roughly two weeks pretty consistently across Q4 and right now we're sitting at a week like I said earlier, we may increase the volume of concessions and the amount, but we'll monitor that but as of right now that's a positive.
Okay.
Has there been an update on the gross delinquency.
Outlook for the second half this year it was less at 1.9% I think it basically there including October.
Is that Oh has it changed at all.
Hi, John as far we Didnt make any changes to our guidance for the full year. We believe we're on target for that there may be puts and takes and if delinquency does come in favorable there may be a tradeoff with occupancy and so net net were.
In line with our full year guidance.
Okay.
Thank you.
Yeah.
Our next question comes from John Pawlowski with Green Street. Please proceed with your question.
Good morning, and thanks for the time Barb I have a question about the potential deferred repair and maintenance capex cost that might be in the portfolio today associated with delinquent tenants.
Have you could you give us an order of magnitude sense like an order of magnitude of the total amount of dollars you think that needs to get spent over the coming years on the units I'm just trying to get a sense of what weather or early innings of seeing the costs flow through.
Evictions or your sports art, you've already worked through most of it.
Hey, John It's Angela here, let me give you just a high level answer to that because frankly, what we're seeing is the turnover as it relate to delinquent tenants.
It has not the higher level of Capex is not material relative to in the past when we have no delinquent tenants. Some ash, we have just decided to leave and so the turnover just sort of natural trend and there's going to be.
Yeah, and a bad actors from time to time, but once again its at a comparable rate as pre COVID-19 and so that's why you know there isn't a number that barb can point to them that our capex at this point is really more driven by.
Other activities like storm damage and you know as far as dividend is concerned it's a higher volume, but it's not as Oh.
Greater damage because of evictions.
Okay, maybe shifting over to the private market and I joined the call a few minutes late so I apologize if I missed this but reiland of curious what where you think market clearing cap rates are right now in light of kind of the urban cores of San Fran San Jose I imagine, they're pretty close to readily.
And right now so I'm just curious what type of pricing do you think buyers and sellers might agree on pricing and the kind of urban urban.
There have been the high rise environment, and San Fran San Jose.
Hi, John.
I appreciate the question I hesitate to give you a specific number because as you are well aware when there is not any transactions is very difficult to pinpoint where buyers are I also would take some pause with the idea of a red lining a whole city, we are still seen or we've seen some transactions.
Occur a year to date and the buyer profile is different than what we've typically seen I think youre seeing some family office buyers, who are coming in and looking at the basis versus replacement costs that are still continuing to transact in some of these there's some markets that you mentioned, so obviously a challenged market.
Mentally over the past year or two but as those turn I suspect youre going to see people investors come back in and.
Yeah.
So I'll leave it at that without giving you a specific number but hopefully that color is helpful.
Yeah no. It definitely is maybe one follow up.
Just curious I know you've been tilting more suburban in the last few years.
Like what pricing becomes interesting to you to go back into these urban urban markets that have not really healed from COVID-19.
On a range of cap rates would you be willing to be a buyer.
Thanks, John Good question as you know we force rank, our 30 plus submarkets.
Forecast of rent growth for five years forward looking based on our fundamental analysis and so the cap rates have to accommodate for a higher IRR based on those rent growth estimate so.
There is a price at which we would be willing to invest in these submarkets I will say given the performance we've seen over the past several years with the suburban strongly outperforming and where we're looking at supply for the next few years I would think on average incremental dollars will go towards.
Our portfolio.
Investments that look similar to what our portfolio mix currently.
As demonstrating but there is a price and we have we're turning over every rock and looking for opportunities and I'm I'm optimistic we're going to see more in the next few years.
Okay. Thanks for the thought.
Okay.
Our next question comes from Connor Mitchell with Piper Sandler. Please proceed with your question.
Hey, Thanks for the time just wanted to follow up on some of the in migration discussion.
Would you be able to kind of give a waiting or the amount of impact that youre expecting from international migration, maybe compared to historical figures, whether that's 10.
10% of the growth compared to the current returned to office, we're looking for it.
How much of an impact do you think that could have versus the other demand factors looking forward.
Yeah, Hey, Conor it's Angela here that sounds good question. The one thing I can point you to is California. Historically has a negative in my net in migration. So 17 out of the last 20 years.
Even during years, when we have significant growth.
And.
So once you factor in international net migration becomes positive as far as to the exact percentage that's influenced by a lot of factors you know it's influenced by of course supply.
And the the demand and where the macro economy generally is and of course, it's influenced by the affordability ratio. So.
I don't think I could do you just supposed justice by making a straight line from migration number two a absolute percentage of increase.
Yeah of course, and then just another question you've.
You've talked about the secured financing a little bit. So after you issued the.
Secured debt earlier this year or recently.
I was just wondering if you could give an update on how the unsecured market is looking now versus the secured market and whether there's been any.
The narrowing of the spreads the unsecured market has improved a little bit since then.
Thanks.
Yeah.
Yeah. This is barb so on the unsecured bond market for US today, we would probably be in the high 6% range to do a 10 year unsecured bond offering.
And if we were to go do a secured long 10 year secured loan like we did I think we're in the yeah.
<unk> six so there hasnt been a little bit of a narrowing from when we originally did our.
Our secured loan back in July but.
Yeah, there hasn't been a lot of transactions the unsecured bond market as well and so it's a little unknown at this time, but we feel good about where we executed and.
Our capital needs for next year, we don't have a lot of capital needs next year.
Yeah.
I appreciate the color. Thank you.
Our next question comes from <unk> St Juste with Mizuho. Please proceed with your question.
Hey, guys.
Couple of quick ones for me.
First one is I guess I'm curious on your perspective on there's an article in New York Times, the other day called.
California called Slam San Francisco for egregious values to housing I think was better so.
I'm curious you have any thoughts on on this certainly the idea of a low barrier to entry.
I'm curious if there's any updated perspective reviews on on the barriers to building if theres any changes that are being constantly that could be real.
It could impact the marketplace.
And then Dallas Angela here, that's a good question I think.
We've all seen the the acute.
Housing shortage in California and.
Despite governor newsome to efforts to enact multiple legislations to spur.
Housing production. It just has not moved the needle in a meaningful way and you know you may recall that.
He he campaigned on building three and a half million homes by 2025.
And as part of that there were numerous legislation passed and even recently a few more past.
But that theory of continues because there's a cost barrier. There is you know as part of legislations.
They enacted requiring prevailing wages there was environmental protections and so it just is very challenging and so I go back to that original goal of three and a half million homes to be built by 2025.
Currently they're on track and have issue about 450000 permits so now units built and we're two years away.
So that gives you.
The magnitude of.
How of how we view supply and why we do believe that it will remain favorable and when we look at the permit data is still remains very low as well.
Got it got it thank you for that.
Then one more I believe earlier, you mentioned that concessions in San Francisco broadly in your portfolio average one week I was hoping you could bifurcate that a bit further maybe San Francisco proper versus a down the peninsula.
Hello. This is Jessica I don't have that information in front of me I mean, San Francisco as such a such a small market for US with just 1000 units in a couple of large large buildings, but like I said as far as what we're currently offering I would say roughly one week free with a little bit more.
And pockets of the Bay area like San Jose Oakland as supply impacted so we have higher concessions there Seattle very minimal concessions all of southern California outside of Los Angeles minimal concessions.
Thank you.
Our final question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question over the next 12 months to cross, which markets would you expect the highest rent growth and how much faster growth be in these markets versus your portfolio average.
Yeah.
Hi, It's Angela here, we do expect our northern region to outpace the southern region, and so, particularly in northern California, and Seattle and for different reasons, you know northern California, much lower supply and of course, we will have a benefit ultimately from the are they.
Tech hiring when they comes and Seattle.
It's been our strongest my job growth market of Seattle also has a higher level of supply about two times of that of California, as a percentage so about 1% of stock versus half a percent, having said that both of these markets, particularly in northern region.
Or are in the Uh huh rebounding.
Rebounding and of course, Northern California, as I've mentioned before has a much better our affordability metric and so for those reasons, we do expect the northern region to outperform the southern region.
And then just one quick follow up on expenses, given the commentary about higher utility insurance costs and 24 do.
Do you see more markets, where there's some more pronounced versus others.
Yeah. This is barb.
On the insurance front, that's just a broad it's actually a national issue not an ethics specific or west coast issue. We're just seeing a lot of pressure on insurance cost and.
We expect that to continue it was it's been an issue in 'twenty three we expected to issue in 'twenty four and then on the utilities front, where we're up about 6% year to date and we do expect that utility pressures will continue to be above inflationary levels.
The near term.
Despite all of the ESG efforts, where we're putting into place and so those two.
Well.
Cause expense growth to be elevated next year.
Thank you.
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