Q4 2023 Equity Residential Earnings Call
Good day and welcome to the X what do we or I said until fourth quarter 2023 earnings Conference call and webcast. Today's conference is being recorded at this time I would like to turn the conference over to Marty Mckenna. Please go ahead Sir.
Marty Mckenna: Good morning, and thanks for joining us to discuss equity residential fourth quarter 2023 results and outlook for 2024. Our featured speakers today are Mark <unk>, our president and CEO, Michael <unk>, Our Chief operating Officer, Alec Brackenridge, our Chief investment Officer.
Marty Mckenna: Bob characterize our CFO our earnings release is posted in the investors section of equity apartments Dot com. Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal Securities laws. These forward looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supper.
These statements that become untrue because of subsequent events now I will turn the call over to Mark parole.
Mark J. Parrell: Thank you Marty good morning, and thank you all for joining us today to discuss our fourth quarter 2023 results and the outlook for 2024, I'll start us off and Michael <unk>, Our COO, who will speak to our operating performance in 2024 operating expectations and followed by Alec Brackenridge, Our Chief investment Officer, who will give.
Mark J. Parrell: Some color on our capital allocation activities and the transactions markets and then finally, Bob <unk>, Our CFO will review, our 2020 for guidance and our balance sheet and then we'll take your questions.
Mark J. Parrell: We are pleased with our fourth quarter performance, which was in line with our October expectations. Our performance in 2023 was supported by a strong employment situation more than $2 7 million new jobs created.
Mark J. Parrell: And while the 'twenty 'twenty four outlook for overall jobs is more muted we should benefit from a continued low unemployment rate for college educated she currently sits around two 1% as well as continued good real wage growth.
Mark J. Parrell: We will also benefit in 2020 for me, having low exposure to new supply and the vast majority of our markets, particularly when compared to the sunbelt markets as well as the customer comfortably able to pay our rents with current rent to income levels at about 20%.
Mark J. Parrell: Overall with low unemployment and rising real wages are target renter demographic remains in good shape there.
Mark J. Parrell: There are likely to rent with us longer is the prospect of homeownership in the near term seems less likely with scarce inventory and relatively high mortgage rates.
Mark J. Parrell: Less than 8% of our residents who moved out gave bought home as a reason to depart in 2023, which is the lowest we have seen since we started tracking the number.
Mark J. Parrell: Over the next decades of significant net deficit of housing across our country sets us up for good long term demand drilling.
Mark J. Parrell: Drilling down on the West Coast, we do see clear signs of improvement in quality of life and energy on the street in the urban centers that Seattle and San Francisco, We continue to believe a recovery in rental rates in the downtown Submarkets of these metros is coming and expect our shareholders will benefit from catch up rental growth in these places where rents are still at or a fair.
Mark J. Parrell: But below 2019 levels, and where incomes bolt on a nominal and real basis have risen substantially since 2019.
So while we have not baked a material improvement in Seattle, and San Francisco performance in our 2024 guidance expectations. We do note that other urban centers damaged by the pandemic and other negative trends for example, New York City reignited quickly and sharply off a depressed rent levels once quality of life and employment conditions improved.
Mark J. Parrell: <unk>.
Mark J. Parrell: Switching to the cost side of the equation, our consistent ability to grow expenses and overhead and more slowly than our competitors will preserve cash flow for our shareholders as rent growth slows across the country and positions us well once growth picks back up.
Mark J. Parrell: As it relates to capital allocation before al It goes through the details of our recent transaction activities and our view of forward market conditions I do want to highlight that we bought back some of our stock in the fourth quarter for the first time in many years, we bought back a little more than 864000, EQ, our common shares for a <unk>.
Mark J. Parrell: Total of about $49 million spent at about $57 per share. We funded this repurchase activity with proceeds from sales during January of less desirable assets that were on average 40 years old and were sold at a five 6% disposition yield and believe that at this stock price and funded with these.
Mark J. Parrell: <unk> proceeds buying our shares makes a very good investments, especially given the lack of available assets to acquire at reasonable prices.
Mark J. Parrell: Before I turn the call over I want to thank our teams across the company for their continued hard work and dedication to serving our customers and producing strong results for our shareholders now I will turn the call over to Michael <unk>. Thanks, Mark.
Michael: I will review, our fourth quarter 2023 operating performance and our outlook for 2024, we produced same store revenue growth of three 9% and same store expense growth of only one 3% in the fourth quarter, both of which were in line with our expectations.
Michael: On the expense side, our low growth in the quarter and full year of four 3% growth were helped by modest property tax costs as well as the savings produced as we continue to rollout initiatives focused on creating operating efficiencies and seamless customer experience.
Michael: On the revenue side the momentum in December was a little better than we thought as sequentially. We grew revenue in the fourth quarter by holding onto more occupancy while maintaining positive blended rate growth there.
Michael: Set us up for a good start in 2024.
Michael: Demand was solid across our markets and consistent with seasonal expectations. We finished the year with same store physical occupancy at 96% as we focused on building up occupancy in the slower part of our leasing cycle today. The portfolio is above 96% as expected we saw new lease rates go negative.
Michael: Dave in the quarter as they typically do Meanwhile, renewal rates for the quarter came in at five 1%, which was slightly above our expectations.
Michael: Together this resulted in a fourth quarter blended rate growth of positive 80 basis points.
These healthy fundamentals led to outstanding revenue growth in our east coast markets and good growth in Southern California.
Michael: As has been the case all year, the east coast markets outperformed the west coast and by and large will likely continue to do so in 2024.
Michael: As you saw in our earnings release, we have provided 2020 for same store revenue guidance range of up 2% to 3%.
Michael: The building blocks for this growth starts with embedded growth of one 4% and a midpoint assumption that both physical occupancy and cash concessions remain consistent with that of 2023.
Michael: We expect the year to follow the traditional pre COVID-19 historical patterns with rent growth sequentially picking up in the spring and likely peaking in August our.
Michael: Our midpoint assumes renewals for the year averaged just over 4% new lease change is relatively flat, which together produces blended rate growth of about 2%.
Michael: This is more modest growth in the 2023 full year blended rate growth of three 1% and is reflective of a slowing job growth environment offset by a mostly positive supply situation and our coastal markets, where we have about 95% of our NOI.
Michael: As you can see from the stats in the release January is starting out the way, we would expect with new lease change improving a strong percentage of residents renewing and our renewal rate achieved that is healthy, albeit moderating a bit.
Michael: While still early all of these January trends support our outlook for the year, which includes a view that resident retention remains very good as a result of both the benefits of our centralized renewal process, our enhanced data and analytics insights and the high cost and low availability of owned housing in our markets.
Michael: Turnover in the portfolio remains some of the lowest that we've seen in the history of our company and we expect that trend to continue in 2024.
Michael: Orange County, San Diego, Boston, and Washington D. C will lead the pack with expected revenue growth of approximately 4% New York and L. A will follow closely behind at.
Michael: At the moment, we expect slightly positive same store revenue growth in San Francisco and Seattle.
Michael: And in our expansion markets, which reflect only about five 5% of the total company NOI, we expect to produce negative same store revenue growth given the unprecedented levels of supply being delivered.
Michael: As we look to the individual markets, starting with Boston with high occupancy and limited new competitive supply. This market should continue to perform well in 2020 for the market as supported by our strong employment base and Finance Tech life Science Health and education.
Michael: New supply deliveries will be about the same this year as they were in 2023 and this is a market where our urban assets have outperformed suburban ones lately and we expect that trend to continue in 'twenty four.
Michael: New York should continue to perform well this year, but won't reach the high rate growth achieved over the last few years.
Michael: Occupancies remain high in competitive new supply is limited, which led to record high market rents, causing some rate fatigue to be observed in late in 2003, new.
Michael: New supply deliveries will be similar to last year with very little being delivered in Manhattan, where a large part of our portfolio is located.
Michael: Washington D. C continues to outperform our expectations. Despite the delivery of a good amount of new supply.
Michael: The market delivered over 13000 units in 2023 and saw the great majority of those units absorbed.
Michael: This year the market will see a similar amount of deliveries, but demand has been strong and we expect this good performance to continue we are starting the year with occupancies above, 97%, which is a great position to be in.
Michael: In Los Angeles, we expect the tailwind to growth as we work through the delinquency and bad debt issues that had been concentrated here.
Michael: We continue to make progress although the court system remains slow taking at least six months from our court filing to being able to get the unit back Bob will give some more color on the impact of bad debt net on our 2024 earnings expectations.
Michael: New supply deliveries will be slightly higher this year with our mid Wilshire Koreatown in San Fernando Valley portfolios seeing the largest impact from this new supply strong retention and solid demand will continue to aid our ability to fill vacant units with paying residents in this market.
Michael: Rounding out Southern California, San Diego, and Orange County should be some of our highest growth markets. This year, driven by high Occupancies and a general lack of housing.
Michael: Homeownership costs make renting in these markets by more attractive option.
Michael: San Diego will see more competitive new supply in 2024, while Orange County will see similar amounts to last year.
Michael: In San Francisco, and Seattle, we had little to no pricing power throughout 2023, and our base case expectations for this year assume that situation continues.
Michael: We have seen periods of stability and then pullbacks concession use in both markets is widespread we have strong physical occupancy with both markets being above 96%, which tells US there is demand although it is very price sensitive.
Michael: As Mark mentioned the downtown areas of both markets continue to see an improvement in the quality of life, but are still lacking the catalyst of return to office <unk> job growth.
Michael: New supply in San Francisco this year will be up from last year levels, mostly due to an increase in the South Bay, Although continued healthy demand in this submarket should aid the absorption.
Michael: Seattle is likely to be the most impacted of any of our established markets. When it comes to new supply deliveries with increases in both the city of Seattle and the east side.
Michael: Lack of expected job growth combined with this new supply have driven our low expectations in Seattle for 2024.
Michael: Both Seattle and San Francisco continued to see less than normal inbound migration.
Michael: Seattle in the fourth quarter, However, did see some relative improvement with new residents coming to us from out of state.
Michael: This positive trend is something that we will keep an eye on as we move through the spring leasing season.
Michael: Drawing new residents back to the Msas in both Seattle, and San Francisco would be a catalyst for these markets to outperform our expectations in the expansion markets. Our long term outlook remains positive that said high levels of new supply are already pressuring rents and is likely to continue throughout 2024.
Michael: At present, we are operating from a defensive position and starting the year with Occupancies that are two to three percentage points above the market averages.
Michael: Denver has demonstrated the most stability despite having limited pricing power in the portfolio and we expect the market to produce slightly positive same store revenue growth in 2024.
Michael: Currently Atlanta is using the least amount of concessions, but we expect a few of our assets to be very challenged due to the sheer number of lease ups in close proximity which will likely lead to negative revenue growth for the year in.
Michael: In Texas, Dallas, and Austin have widespread concession use and we expect all of our assets to experienced direct pressure from new deliveries all year long, resulting in negative same store revenue growth in these markets.
Michael: All of these factors together, our overall same store revenue outlook for 2024, right now anticipate solid growth led by the East coast markets, and Southern California, which collectively is almost 70% of our NOI.
Michael: We expect our coastal existing markets to outperform our expansion markets, where unprecedented supply will impact operations near term.
Michael: On the initiative side in 2024, we will continue to focus on producing operating efficiencies and driving other income with projects tied to flexible living options parking renters insurance and monetizing technology deployed for the benefits of our residents. We are almost complete with the rollout of smart home technology across.
Our portfolio, which will create further opportunities to share teams across properties and enable additional self service options for residents.
Michael: This along with other ancillary income should lead to total other income growth of 30 basis points, excluding bad debt.
Michael: As we sit here today, we like our positioning and look forward to capturing the opportunities. The spring leasing season brings which will help frame pricing power for the full year I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these results with that I will turn the call over to Alex.
Alex: To walk through our capital allocation activities and the transaction market.
Alex: Thank you Michael despite an unsettled transactions market, we remain steadfast in our efforts to continue to reposition our portfolio by increasing our presence in markets like Dallas Fort Worth Atlanta, Austin, and Denver, and expect to see more opportunities to do so as the year progresses.
Alex: As we underwrite potential acquisitions, we are always mindful of heightened levels of supply pressuring rents in our expansion markets and reflect temporary rent growth and concessions as needed in our projections.
Alex: Currently the transaction market remains unusually choppy with volumes down, 60%, 70% compared to 2022 and down 40% to 50% compared to a more typical year like 2019 Nonetheless.
Alex: Nonetheless pressures on sellers to transact continues to Mount as is the volume of new developments being delivered in these markets new developments in particular are often not capitalized to be held for the long term and even with rates decreasing over the last few months carry costs are high.
Alex: Owners of stabilized assets will also see pressure to transact as loans mature and extensions that were agreed to with lenders last year expires.
Alex: Despite the short term operating challenges in our expansion markets, we remain committed to broadening our footprint in markets that we'll see strong job growth and household formations overtime and lower regulatory risks.
Alex: As regards our own transactions activity, we didn't acquire any assets in the fourth quarter, but we did sell three a small property in Seattle, one in the Bay area and one in La on average the properties were 40 years old and total sales proceeds were $185 million at an average five 8% disposition yield while transaction volume overall is very light.
Alex: We're seeing some opportunities to lighten the load of non core older assets, primarily in our west coast markets. Since the beginning of 2024, we've sold two additional properties one in southern California, and a small deal in Boston for a total of $189 million at an average of five 6% disposition yield.
Alex: Allocated a portion of the capital from these sales to the share buyback activity Mark just mentioned.
Alex: With ample access to capital either through asset sales or debt issuance and a property management presence in our expansion markets, we are well positioned to take advantage of opportunities as they arise.
Alex: In terms of anticipated volume our guidance for 2024 is $1 billion for both acquisitions and dispositions, but market conditions will dictate whether we can hit or even exceed these goals.
Alex: Turning to development in 2024, we will complete six new apartment properties with a total cost expected to be $624 million and consisting of 1982 units with lease ups commencing for two of those projects in Q1 and four in Q2.
Alex: Three of those lease ups all through our joint venture program with toll brothers are in Dallas, while the remaining three two in Denver and one in suburban New York City, our JV with other developers given the timing for completion and lease up we don't expect a meaningful contribution to <unk> growth in 2024, but would expect these projects to contribute more to 2025 growth.
Alex: While our suburban New York project will see limited competition from new supply not unexpectedly or lease ups in Dallas and Denver, We will see substantial new competition, we acknowledged that the competition may be challenging and anticipate that as we may have to adjust pricing and concessions to meet the market are projected stabilized yields which at.
Alex: Initial underwriting where on average a mid six maybe closer to six we believe these lease ups once stabilized and past the current supply glut will provide good cash flow growth and be solid long term investments.
Alex: Beyond these deliveries we will be very selective about starting any new projects with a primary focus on locations, where it's hard to buy such as suburban Boston.
Alex: I'll now turn the call over to Bob.
Bob: Thanks Alec.
Bob: As Michael and Mark mentioned 2023 ended up right in line with our forecast last quarter. So lets get right to guidance. Michael gave you most of the building blocks for same store revenue, but I'll finish up with bad debt Walkthrough drivers of same store expenses and normalized <unk> and conclude with the balance sheet.
In 2023, we were able to reduce bad debt significantly once the regulatory environment became more constructive.
Bob: While we continue to work with non paying residents as we have during and after the pandemic. Ultimately we still ended up processing a high volume of skips and <unk> in fact about one five times pre pandemic activity levels, which coupled with not adding significant amounts of new non paying residents helped us reduce bad debt as a percentage of same store Rev.
Bob: <unk> from well over 2% to just under one 5%.
Bob: Great progress overall, but still a long way from the 50 basis points, we were accustomed to pre pandemic.
Bob: Like last year, we expect 2024 to continue to show improvement. We also expect the pace of this improvement to be dependent on the speed of the court systems, primarily in southern California, where delinquency remains highest to quickly process evictions, which is a hard thing to predict.
Bob: As a result, our guidance assumes that 2024 remains another transition year for bad debt and that we don't get all the way back to pre pandemic levels in.
Bob: Instead, our guidance midpoint assumes that full year bad debt as a percentage of same store residential revenue is slightly above 1% or a 30 basis point contribution to 2020 for growth overall.
Bob: That plays out by the end of 2024, we would expect to be a little under two times pre pandemic levels.
Bob: Turning to expenses expense management is a core strength at equity residential as evidenced by the historical performance Mark referenced.
Bob: Our same store expense guidance of 4% is also reflective of that discipline.
Bob: This year the individual drivers of growth are a little different than those from 2023. So let me give you a high level assessment and we can get into more detail in Q&A if required.
Bob: In 2024, we expect real estate taxes, and utilities to grow faster than they did in 2023 and part due to some $4 21, a step ups and commodity prices, while payroll and repairs and maintenance should be slower due to various initiatives and an expected normalization of inflationary pressures.
Bob: Insurance, a small category at less than 5% of total expenses, but a topic often discussed should grow more slowly than last year, but remain above the long term trend with growth in the low double digits.
Bob: Turning to normalized <unk> page two of the release provides a detailed reconciliation of our forecasted contributors to <unk> growth.
As is typical same store NOI performance is the primary driver of growth, but let me provide some color on transaction activity. We are assuming a $1 billion in both acquisitions and dispositions for 2024 with limited dilution yet we show a <unk> reduction in normalized <unk> growth there.
Bob: This is due to our assumption that our acquisition activity mostly occurs later in the year than our dispositions. This has also partially offset in interest expense and interest income as disposition proceeds are used to pay down debt or invested in interest bearing 10, 31 accounts, while we await acquisitions.
Speaker Change: Now a very brief comment on the balance sheet, because we are in really great shape here.
Speaker Change: We have no debt maturities until the middle of 2025 modest outstanding balances on our commercial paper program and less than 10% floating rate debt.
Speaker Change: So we're very well positioned in fact over 50% of our existing debt doesn't mature until after 2030.
Speaker Change: The work we've done over the last number of years has reduced our interest rate exposure and allows us for ample debt capacity to run and grow our business with that I'll turn it over to the operator.
Speaker Change: Okay.
Speaker Change: And thank you if you'd like to ask the question.
Speaker Change: Please signal by pressing star.
Speaker Change: Star one on your telephone keypad.
The speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Press Star one to ask a question. Our first question is going to come from backlog.
Backlog: Backlog from Evercore.
Backlog: Please go ahead.
Evercore: Great. Thanks, good morning.
Backlog: I guess.
Backlog: I wanted to just maybe go through some of the building.
Speaker Change: Building blocks of growth in 'twenty for either for Michael or Bob, but as you kind of look through the moving pieces here. It seemed like maybe the new new rate growth at kind of flattish may be one that that could pose maybe a bit more of a challenge here of job growth slows. So just curious how you sort of size all of those.
Speaker Change: Ponant in how did you think about the new lease component with.
Speaker Change: With the fact that you kept occupancy flat I guess within the guidance.
Speaker Change: Yeah, Steve This is Michael I'll start maybe Bob can come over the top so I think when you look at the building blocks for the guidance you need to realize one we're giving you a range and there is a lot of different ways you can get there, but it's really the top level themes that underlying in pit those midpoint assumptions. So when we thought about.
Speaker Change: New lease change we started with the fact that we know that job growth is moderating this year and therefore, we would expect market rents or asking rents.
Just to be kind of less than normal across the large majority of our markets. So we kind of model in normal seasonal slope for our kind of rent trend to build and then we plug that in and we say, okay. What does that equate to in right now across our markets its balancing out to basically be about flat on new.
Lease change for the full year some of our markets are still positive some of our markets are still positive three in some of the markets are still coming in at a negative growth through the year, but I think when you start to pull on any one of those you need to go back to the top level themes and ask yourself, okay, what's really changing so if there's a material shift in job growth.
Speaker Change: Sure I think we would experience more pressure than we underlined and at the midpoint of our range, but again, it's when does that happen in the year.
Speaker Change: And where are we because today I'll tell you we have taken a defensive position, we're starting the year with pretty strong occupancy that really gives us some confidence heading into the spring leasing season, and we'll just see kind of what pricing power emerges from that.
Speaker Change: Okay.
Speaker Change: Great and then just maybe one question on the transaction market and I know, it's not been terribly robust, but maybe Alex can you just speak to where you think you know me.
Alex: Maybe IRR hurdles are today, the 10 year sort of plus or minus 4% come down way off the hi IRA.
Alex: Realized NOI and rent growth is slowing, but where do you think investment hurdles are today either for <unk> for the market broadly speaking.
Alex: Thanks, Steve It is allocate that thanks for the question.
Speaker Change: <unk> state its a pretty choppy market right now and there aren't a whole lot of data points.
As you know the NMFC conference is going on in San Diego right. Now. So we have some pretty current time information, which is really a reiteration of what we've been experiencing the last few months, which is a standoff between buyers and sellers buyers generally looking for a five and a half ish cap and seller generally looking for something closer to five so not an insurmountable.
Speaker Change: GAAP at some point, but right now it's hard to peg things, but assuming things kind of land somewhere in between there at a five and a quarter I think most people are shooting for an eight ish IRR and obviously it depends on the rent growth assumptions and the residual cap rate, but somewhere in that range, maybe a little bit less if theyre going to be more aggressive.
Okay.
Speaker Change: Great. Thanks, that's it for me.
Okay.
Speaker Change: And our next question is going to come from Eric Wolfe from Citi.
Please go ahead.
Eric Wolfe: Thanks Scott.
Eric Wolfe: Nick here with Eric maybe just following up on that so eight ish or so IRR.
Eric Wolfe: More specifically you talked about obviously, the Sun belt supply and the impact that has on your underwriting on those deals at least initially.
Eric Wolfe: When you're underwriting deals both on the buy and sell side today.
Eric Wolfe: What are you underwriting for IRR is in the sunbelt.
Eric Wolfe: Borrowers look like for the assets, you're planning to sell more coastal.
Eric Wolfe: So.
Eric Wolfe: I'm sorry, it's out Erik it's Nick.
Eric Wolfe: Sorry.
Eric Wolfe: I'd say its Alec and.
Speaker Change: The IRR is don't end up being that different if you assume that sure theres a lot of apartments in the sunbelt right now so the next couple of years theyre going to be tough, but after that that starts already down a lot. The demand story hasn't changed I think theres still the cities that we're in we're interested in that some of which are sunbelt cities.
Like Dallas like Atlanta, like Denver, and Austin still are great job growth generators still have a lot great long term demand side story. So I think you see a couple of years that are tough, but then you have a pretty good few years after that and I think you run that through your pro forma and you're roughly the same the difference we're seeing on a lot of the things that we're selling right now.
Why the IRR for US is lower in terms of the whole scenario and why we choose to sell is a lot of its older stuff you saw that we're selling 40 years old property and that have very high capital needs.
Speaker Change: And some of that has the ROI on it some of it is just preserving the asset.
Speaker Change: And there may be a buyer that sees things differently. So there's little more upside, but in our case, we think the capital is better used elsewhere. So.
Speaker Change: It's probably a seven ish something or other.
And we think that money can be redeployed better elsewhere.
Speaker Change: Hey.
Speaker Change: Sorry to keep switching people on you but.
Speaker Change: Maybe just talking about coastal rent growth for a second.
Speaker Change: You talked about supply being in check homeownership, purion affordable solid real wage growth job growth, Okay, maybe getting a little slower, but I guess my question is why aren't we seeing stronger rent growth today, just given all of those positive dynamics and is there anything that you think in the future would turn it around so that you see that sort of more than 3% type rent growth.
Speaker Change: And those coastal markets.
Speaker Change: Hey, Eric its mark just to start and others can contribute.
Mark: You look at the numbers in D C in Boston and New York last year were outstanding. So we're being thoughtful we're being a little cautious going into a volatile year, but your restatement of the setup is correct I mean, those northeast markets have steady demand.
Mark: By and large minimal supplier in Dcs K strong absorption characteristics I mean, we're optimistic those markets can continue to do well in some cases like New York and Michael alluded that Theyre coming off really big rent growth years in some cases, there is a little bit of a pause to catch your breath and led rat resident incomes grow.
Mark: To catch up to rental growth.
Mark: I mean, we're.
Mark: If you didn't get that message, we're super optimistic about the northeast markets.
They will do very well, it's just trying to handicap all of the various cross currents in the economy that are challenging for us.
Speaker Change: Thank you.
Mark: Okay.
And our next question is going to come from Jeff Spector from Bank of America. Please go ahead.
Jeffrey Spector: Great. Thank you.
My first question is a follow up I heard a comment and I think it was on the sunbelt quota of Covid.
Jeffrey Spector: Couple of tough years.
Jeffrey Spector: I guess can you expand on that and then maybe most important is talk about when you expect supply pressure to peak, let's say in Seattle and I know again sunbelt is.
Speaker Change: Smaller markets for you, but if you have a view on the sunbelt it would be appreciated. Thank you.
Speaker Change: Okay.
Speaker Change: Yeah, Hey, Jeff This is Michael so I'll start and just specific to the Seattle and the supply that we see it is back half loaded for us in the market with basically a lot of concentration in Red man as well as the city of Seattle, So for us like the peak because of what we expect to experience is going to be somewhere in that back half of this year.
Speaker Change: And you can already see the starts coming way down so I think the level of competitive pressure that we face in 'twenty, five and Seattle will be less than what we're facing in 'twenty four relative.
Any different here and I think the wildcard is if you have incredible job growth in these markets you may be able to absorb some of this supply more efficiently and get through it more quickly, but the idea that 'twenty. Four is the only oversupplied year is kind of a tough one for us to accept.
Okay.
Thank you that's very helpful and is that why you're assuming acquisitions in the second half or is that just conserve conservative conservative approach I guess to the guidance on acquisitions or to your point.
Are you really expecting these opportunities to arise more second half 'twenty five in your.
Our expansion markets.
Well the guidance is just to help you model.
If ally can buy things and his team earlier at good prices, we'll buy them earlier the relationship I think youre going to see here is that prices now seem okay, maybe not quite good enough, but the discount to basis to replacement cost pardon me is very good it's the cap rate and when you look at like two <unk>.
Marty Mckenna: Ears of declining rental growth you buy in Dallas your year, two number might be lower your cap rate than your year one.
Marty Mckenna: But on the other hand later this year, you'll be past some of that in your year. Two number will look a little better sure likely paying a higher price. So thats, what youre going to see us navigate we like these markets long term, we think owning the four markets that we've <unk>.
Marty Mckenna: <unk> is our expansion markets say, 25% of the company will create more balance and drive growth better and reduce volatility over time, Jeff, but getting into them is a little bit of an art theres going to be a little bit that we probably do sooner or a little bit. We do later and you may feel better about the price in one and not as good.
Marty Mckenna: The revenue growth in the other and vice versa, but we're prepared to do that and again. The number you see there is just sort of the guidance assumption, we'd be happy to do more if we can find more.
Mark J. Parrell: Thank you.
Mark J. Parrell: Yeah.
Mark J. Parrell: And our next question is going to come from Robyn Luu from Green Street. Please go ahead.
Mark J. Parrell: The cost part of me is very good. It's the cap rate. And when you look at like two years of declining rental growth, you buy in Dallas, your year two number might be lower for your cap rate than your year one. But on the other hand, later this year, you'll be past some of that, and your year two number will look a little better, but you're likely paying a higher price. So that's what you're going to see us do.
Rob Stevenson: Good morning.
Rob Stevenson: I just wanted to touch on taxes from your conversations with any are you hearing any markets, where low valleys tied to flight reaching tax assessments.
Mark J. Parrell: Yeah, Hey, Robyn it's Bob Thanks for the question, we are seeing lower values in some markets. In fact, we've gotten some assessed values actually back already.
Mark J. Parrell: We like these markets long term. We think owning the four markets that we've tabbed as our expansion markets, say 25% of the company, will create more balance and drive growth better and reduce volatility over time, Jeff. But getting into them is a little bit of an art.
Mark J. Parrell: Looking at 2024 and on the margin you are seeing some decreases so for instance in Washington State.
We saw about a 1% decrease in we've got most of the values back there.
Mark J. Parrell: You know, there's going to be a little bit that we probably do sooner, and a little bit that we do later. And you may feel better about the price of one and not as good about the revenue growth of the other, and vice versa. But we're prepared to do that. Again, the number you see there is just sort of a guidance assumption. We'd be happy to do more if we can find more. Thank you. Questions? from Rob and Lou from Greenwich. Please go ahead. Good morning.
Mark J. Parrell: And we're seeing it in other places obviously the income as assessors look at values. The income production in 2023 was really quite good.
Mark J. Parrell: But the offset there was really the cap rate change just given risk free rates and other things and so we are seeing some acknowledgment by assessors that values are in fact.
Mark J. Parrell: Lower than what they had initially assessed that.
Mark J. Parrell: The open item as you think about real estate taxes for 2024 will be where rate comes and we have rates in some places and we'll see where they fall out and others.
Bob: I just want to touch on taxes. From your conversations with cities, are you hearing any markets where lower values are starting to flow through to tax assessments? Hey Robin, it's Bob.
Mark J. Parrell: So the magnitude of where values have fallen and let's call. It. The last couple of years haven't really fully baked in yet if it was sort of trickling into tax assessment is that you how long is that.
Bob: Thanks for the question. We are seeing lower values in some markets. In fact, we've gotten some assessed values back already as we look at 2024. And on the margin, you are seeing some decreases. So, for instance, in Washington State, we saw about a 1% decrease, and we've got most of the values back there. And we're seeing it in other places.
Speaker Change: It doesn't mean it correctly.
Speaker Change: You are correct and that makes for an excellent appeal activity for our real estate tax team as we challenge our values.
Speaker Change: I'm glad I could help them on the question.
Speaker Change: I, obviously noticed that you.
Bob: Obviously, the income, you know, as assessors look at values, you know, the income production in 2023 was really quite good. But the offset there was really the cap rate change, just given risk-free rates and other things. And so we are seeing some acknowledgement by assessors that values are, in fact, lower than what they had initially assessed them at.
Mark J. Parrell: Stock repurchase as an at the market after a long period of a point with I guess, a little less than development and no near term debt.
Mark J. Parrell: Maturity are you expecting how does buybacks rank against other capital decent if you, particularly on the way that you.
Mark J. Parrell: The cadence between dislocation acquisition for 24.
Bob: The open item, as you think about real estate taxes for 2024, will be where the rate comes from. And we have rates in some places, and we'll see where they fall out in other areas. So the magnitude of where values have fallen in, let's call it the last couple of years, hasn't really fully been baked in yet; they're still sort of trickling into tax assessment. Is that how I'm interpreting that correctly? You are correct, and that makes for an excellent appeal activity for our real estate tax team as we challenge the value. I'm glad I could help.
Mark J. Parrell: Hey, Robyn it's mark Thanks for that question.
Mark J. Parrell: Our primary capital allocation goal is going to remain building out the portfolio and the way I just described in these expansion markets.
Mark J. Parrell: Lower exposure in Washington, D C, New York, and California, again, we believe that portfolio will create the highest returns over time, the lowest volatility and that that will make the shareholders. The most money in the long haul all of that said.
Mark J. Parrell: We're going to continue to consider these share buybacks, especially when you get this big a value dislocation and when you can fund it with assets that are the least desirable among the least desirable in the portfolio against the portfolio that we think is really top notch and where there isn't a lot to buy that's an important other ingredient there wasn't a lot of opportunity.
Mark: Just on the second question, I obviously noticed that you did some stock repurchases in the market after a long period of a pause, with, I guess, little leftist development and no new term debt maturity. What are you expecting, or how does the buyback rank against other capital uses this year, particularly the way that you've dictated between decision acquisitions for 2024? Hey, Robin, it's Mark.
Mark J. Parrell: Cost here, there wasn't a lot else available to buy at prices that made sense and all those capital structure considerations have to be thought about two we've talked about on these calls things.
Things like does it create a lot of tax gain that's hard for a REIT to manage that worked out okay for us Bob has done a great job and his team on our balance sheet. So I'd have to worry about debt maturities that we need to kind of husband, our capital and another thing I want to introduce you got to be careful about platform scaling if you sell too many assets you can really increase your.
Mark: Thanks for that question. You know, our primary capital allocation goal is going to remain building out the portfolio in the way I just described in these expansion markets and lowering exposure in Washington, DC, New York, and California. Again, we believe that this portfolio will create the highest returns over time, with the lowest volatility, and that'll make the shareholders the most money in the long haul. All that said, you know, we're going to continue to consider these share buybacks, especially when you get this big of a value dislocation, and when you can fund it with assets that are the least desirable, among the least desirable in the portfolio, against a portfolio that we think is really That's an important other ingredient.
Mark J. Parrell: Head.
Mark J. Parrell: As a percentage of revenue, but all that said the board and the management team remain open to buybacks and for US. It's hard for me to give you a formula and we're just going to kind of see what market conditions are where the stock goes what's out there to buy and keep our mind open to doing more stock buybacks.
Michael: Great. Thanks for the color.
Our next question is going to come from Michael Goldsmith from UBS. Please go ahead.
Mark: There wasn't a lot of opportunity cost here. There wasn't a lot else available to buy at prices that made sense. And all those capital structure considerations have to be thought about too. We've talked about on these calls, you know, things like, you know, does it create a lot of tax gain? That's hard to read to manage. But that worked out okay for us.
Michael Goldsmith: Good morning, Thanks, a lot for taking my question. My first question kind of dovetails off of Jeff's one.
Speaker Change: If you kind of slice your portfolio between kind of core coastal.
Michael: San Francisco, Seattle, and then expansion markets, you talked quite a bit about just the.
Michael: When you were expecting to see the second derivative and basically how long it's going to take for the expansion markets to recover can you put some more context around San Francisco and Seattle, how that timeline compares and if youre starting to see some of that second derivative recovery now or expect to see it in the.
Mark: Bob's done a great job, and his team on the balance sheet. So I don't have to worry about debt maturities that we need to kind of husband our capital. And another thing I want to introduce is you got to be careful about platform scaling. If you sell too many assets, you can really increase your overhead as a percentage of revenue. But all that said, the board and the management team remain open to buybacks. And for us, it's hard for me to give you a formula; we're just going to kind of see what market conditions are, where the stock goes, what's out there to buy, and, you know, keep our minds open to doing more stock buybacks. Great, thanks for the color.
Michael: Near future. Thanks.
Michael: Hey, Michael It's Marc and I think Michael when Alex May have something to add here. So we talked a lot about San Francisco on the call. The last one and why we like the market long term feel the same way the management team thinks there's going to be elongated recovery in that market conditions on the ground are a lot better.
Mark: If you want to come in from Michael Goldsmith from UPS, please go ahead. Good morning, thanks a lot for taking my question. My first question kind of dovetails off of Jeff's one on if you kind of slice your portfolio between kind of core coastal San Francisco and Seattle and then expansion markets, you talked quite a bit about just the times when you're expected to see the second derivative and basically how long it's going to take for the expansion markets to recover. Can you give some more context on San Francisco and Seattle? How that timeline compares? And if you're starting to see some of that second derivative recovery now or expect to see it in the near future? Thanks. Hey Michael, it's Mark.
Michael: The mayor put out some information about crime reductions they are the biggest class of police cadets.
Michael: The police Academy in San Francisco, they've had since before the pandemic. So there's some good things going on but until as Michael said, we get a little more tech job growth, which talking to the team and talking to others in the Bay area and in the city of San Francisco is probably a more later 'twenty four 'twenty five thing, that's probably where you get rent to take off.
Michael: The thing I want you to think about as you have had spectacular growth in incomes in the Bay area since 2019 and over 30% nominal.
Michael: 12 or 13% on a.
Michael: Real basis, yet our rents are down in the city of San Francisco, 20% since 2019, and they're kind of flattish to up marginally in the Bay area. So this is a market that like New York can really take off once you get some job growth because there isn't a lot of new supply housing costs are pretty high so the management team's optima.
Mark: And I think Michael Manelis may have something to add here. So we talked a lot about San Francisco on the call, the last one, and why we like the market long term. Feel the same way. The management team thinks there's going to be an elongated recovery in that market because conditions on the ground are a lot better. You know, the mayor put out some information about crime reduction. They have the biggest class of police cadets at the Police Academy in San Francisco they've had since before the pandemic.
Speaker Change: Mystic about the recovery the timing is kind of tough I don't know Michael if you've got anything you want to add yeah.
Michael Goldsmith: I think we expect these markets to be volatile this year and just starting off the year right now I got both markets at 96%.
Mark: So this is some good things going on. But until, as Michael said, we get a little more tech job growth, which talking to the team and talking to others in the Bay Area and in the city of San Francisco is probably a more later 24--25 thing. That's probably where you get your rent to take off. The thing I want you to think about is you've had spectacular growth in incomes in the Bay Area since 2019. You know, over 30% nominal and 12 or 13% on a real basis. Yet, our rents are down in the city of San Francisco by 20% since 2019. And they're kind of flattish to up marginally in the Bay Area. So there's a market that, like New York, can really take off once you get some job growth because there isn't a lot of new supply. Housing costs are pretty high, so the management team is optimistic about the recovery. The timing is kind of tough.
Michael: We issued a lot of concessions in the fourth quarter to get there, but the fact that we got there shows US there is demand in the marketplace and as we think about even like the new lease change. So both of those markets reported in December about a negative 8% new lease change when you look at the January results. There now both at about <unk>.
Michael: <unk> three 5% so it's a pretty material shift so the set up heading into the spring leasing season is really good but we've been there before and we've seen those markets kind of hit a pause and then kind of retrench a little bit. So that's why we're just being a little cautious we're going to wait until we see probably a couple.
Michael: Consecutive quarters of improving fundamentals before we kind of changed some of our long term kind of modeling on those markets. The other thing I would just add besides the value proposition of San Francisco and Seattle benefits from having like the lowest rent to income ratios out of all of our coastal markets. So we just see this.
Michael L. Manelis: I don't know, Michael, if you've got anything you want to add? Yeah, I mean, I think we expect these markets to be volatile this year. And just starting off the year right now, I got both markets at 96%. You know, we issued a lot of concessions in the fourth quarter to get there. But the fact that we got there shows us there is demand in the marketplace. And as we think about even the new lease change, both of those markets reported a negative 8% new lease change in December. When you look at the January results, they're now both at about a negative three and a half percent. So it's a pretty material shift. So the setup heading into the spring leasing season is really good, but we've been there before.
Michael: Opportunity and the fundamentals for those markets to recover it just like Mark said, it's hard to pinpoint when yeah, I forgot to mention something on Seattle I, just wanted to throw out there Seattle's nominal wage growth since 2019 as 40%.
Michael: Yet our rents in that market are up 7% and downtown there flat. So again these markets have the ability to pay more for great quality housing and again, Seattle, There's a supply push this year, but after that it gets a lot lighter so.
That's about a third of our portfolio, Seattle, and San Francisco and I I Hope, Michael we're talking about that second derivative towards the end of this year for you, but we have an embedded that into our guidance.
Michael L. Manelis: And we've seen those markets kind of hit a pause and then kind of retrench a little bit. So that's why we're just being a little cautious. We're going to wait till we see probably a couple consecutive quarters of improving fundamentals before we kind of change some of our long-term kind of modeling on those markets. The other thing I would just add, besides the value proposition of San Francisco, is Seattle benefits from having the lowest rent to income ratios out of all of our coastal markets. So we just see this opportunity and the fundamentals for those markets to recover. It's just like Mark said; it's hard to pinpoint when.
Speaker Change: Got it very helpful guys and then my second question is just related to bad debt as a percentage of revenue it was flat sequentially.
Michael: There was an expectation that it can be choppy, but continue to trend down so what's assumed in guidance for 2024 and do you expect a continued slow and steady pace of improvement or should we expect that to kind of to get better in a specific quarter or just any sort of visibility around the <unk>.
Mark: Yeah, you know, I forgot to mention something about Seattle that I just want to throw out there. Seattle's nominal wage growth since 2019 is 40%. All right, yet our rents in that market are up 7%, and downtown, they're flat. So again, these markets have the ability to pay more for great quality housing. And again, Seattle is a supply push this year. But after that, it gets a lot lighter.
Speaker Change: Piecing of improvement thank you.
Yeah, I'll grab that Michael its Bob.
Bob: So to start with what's assumed in guidance, we do assume that we will get we will improve so we ended it we ended the year at call. It one 4% of bad debt as a percentage of same store revenue I think I said in my remarks, we expect to get to 1% a little over 1% for the full year that means that by the fourth quarter, we're assuming that we're sub where sub.
Mark: So that's about a third of our portfolio, Seattle and San Francisco. And I hope, Michael, we're talking about that second derivative towards the end of this year for you, but we haven't embedded that into our guide. Got it. Very helpful, guys.
Michael: 1%.
Michael: You are correct in the kind of <unk> in 2023, it being flattish in what I would caution is that it is this is the thing that is very hard to predict because of the court system is that it has puts and takes there as more of a step function in a linear kind of improvement function associated with it so our expectations and guidance is that you know.
Bob: And my second question is just related to bad debt. As a percentage of revenue, it was flat sequentially. I think there's an expectation that it could be choppy but continue to trend down. So what's assumed in the guidance for 2024? And do you expect a continued slow and steady pace of improvement? Or should we expect that to kind of get better in a specific quarter or just any sort of visibility around the pace of improvement? Yeah, I'll grab that. Michael, it's Bob.
Michael: Q1.
Michael: Which is which we're in right now is more flattish and that you started seeing improvement later in Q2 Q3 and Q4.
Michael: Because of that kind of pace of the court system and because there is there's always been a little bit of seasonality in this number as you think about like post holiday as bad debt in the first quarter is always are typically a little bit higher anyways.
Bob: So to start with what's assumed in guidance, we do assume that we will get we will improve. So we ended the year at call it 1.4% of bad debt as a percentage of same store revenue. I think I said in my remarks that we expect to get to 1%, a little over 1% for the full year. That means that by the fourth quarter, we're assuming that we're sub 1%. You're correct in the kind of three Q to four Q in 2023, it being flattish.
So expect it a little bit of a choppy step function, but expect improvement overall.
Speaker Change: Thank you very much.
Speaker Change: Once again, if you have a question. Please press star one our next question is going to come from Jamie Feldman from Wells Fargo. Please go ahead.
James Feldman: Great. Thank you and thanks for taking the question so I can.
Speaker Change: Just thinking about your comments on sunbelt versus coastal you think about the assets you bought last quarter.
Bob: And what I would caution you about is that this is a thing that is very hard to predict because of the court systems; it has puts and takes as more of a step function than a linear kind of improvement function associated with it. So our expectations and guidance is that, you know, q1, which is what we're in right now, is more flattish, and you start seeing improvement later in q2, q3, and q4. Because of that kind of pace of the court system, and because there is, there's always been a little bit of seasonality in this number. As you think about post holidays, bad debt in the first quarter is always typically a little bit higher anyway. So expect it to be a little bit of a choppy step function, but expect improvement overall. Thank you very much.
Michael: One year olds selling assets that are 40 years old how much of your view on those markets.
It's tied to just the types of assets you own.
If they're newer assets and lease up where you mean I mean do you have more concessions more challenging to get there.
Speaker Change: To get leased up is there some of that bias in the numbers, you're putting out or would you say your view of what youre seeing in coastal is truly a view across the markets.
Speaker Change: Yeah. Thanks for that question, Jamie I guess.
Speaker Change: Attack in another way by certainly lease ups are different but remember the numbers were telling your same store numbers. So they won't include lease up conversations.
Michael: But I would say we have relatively small portfolios in those markets. So if one property is being hit hard it could be one out of each of our same store assets in.
Operator: And once again, if you have a question, press star 1. Our next question is going to come from Jamie Feldman from Wells Fargo. Please go ahead.
Michael: Denver, So I think that is it I think different people, obviously different parts of the of the market feel it differently.
Jamie: Great, thank you. And thanks for taking the time to answer the question. So I guess just thinking about your comments on Sunbelt versus Coastal, you know, you think about the assets you bought last quarter, you know, one year old, selling assets that are 40 years old, how much of your view of those markets is tied to just the types of assets you own? You know, at least if they're newer assets, are they in lease up where you mean you have more concessions, more challenging to get, you know, Is there some of that bias in the numbers? You're putting out, or would you say your view of what you're seeing in Coastal is truly, you know, a view across the market? Yeah, thanks for that question, Jamie.
Michael: So that would be my comment we are relatively small portfolios.
Michael: And we have three same store assets so.
Michael: And Jamie This is Alex I would just add though when you're in a market, though that has got so much supply and these are historic amounts more concession levels start to get more than two months.
Michael: Excessive I think everyone gets impact whether it'd be property or in April I can't see how your immune.
Michael: Some of that pressure.
Okay. That's.
Speaker Change: That's very helpful.
Speaker Change: And then as we think about the investment market I mean, clearly the debt markets are coming back.
Michael: He quickly we've now seen some real estate M&A.
Jamie: I guess I'll attack it another way. Certainly, lease ups are different. But remember, the numbers we're telling you are same store numbers, so they won't include lease up conversations. But I would say we have relatively small portfolios in those markets. So if one property is being hit hard, it could be one out of eight of our same store assets in, you know, Denver. So I think that is it.
Michael:
Speaker Change: So I assume competition is going to get harder for the types of assets you'd like to acquire in 'twenty four and beyond.
Speaker Change: How do you think about the importance of just transitioning the portfolio.
Speaker Change: As soon as you can versus really hitting that right number do you think maybe your underwriting assumptions have to loosen up a little bit just so you can achieve some of your strategic goals.
Alec: I think different people, obviously, different parts of the market feel it differently. So that would be my comment. We have relatively small portfolios. I mean, Austin, we have three same-store assets. And Jamie, this is Alec.
Michael: Over the next couple of years, if the market gets more competitive.
Michael: Where we'd love to move more quickly and completing our.
Michael: Repositioning I don't feel any need to do that by selling assets cheap I think you'll continue to see us.
Alec: I would just add, though, when you're in a market that's got so much supply, and these are historic amounts, where concession levels start to get more than two months or, you know, really excessive, I think everyone gets impacted, whether you're a B property or an A property. I can't see how you're immune from some of that pressure. Okay, that's very helpful. And then as we think about the investment market, I mean, clearly, the debt markets are coming back pretty quickly. You know, we've now seen some real estate M&A, um, you know, so I assume competition is going to get harder for the types of assets you'd like to acquire in 24 and beyond. You know, how do you think about the importance of just transitioning the portfolio?
Michael: Pardon me sell assets that are a little bit less desirable from our point of view.
Michael: More about the difference Jamie between the sale and the buy if we can sell things well.
Michael: We can pay up a little bit on the buy side and again, we're creating that diversification we value. So it's a little bit about if we're doing trading like that it's going to depend on both the sale price and the byproducts.
Michael: Extent, we try and expand the company through debt activities than the interest rate that Bob's borrowing it is going to become more relevant. So I think right now would be somewhere in the neighborhood of 5% for 10 year money. So I hope that's helpful, but we'd like to move faster we point out that since 2019. When we started this we'd move billions of dollars of capital into those markets.
Alec: as soon as you can versus really hitting that right number, do you think maybe your underwriting assumptions have to loosen up a little bit just so you can achieve some of your strategic goals over the next couple years if the market gets more competitive? We'd love to move more quickly in completing our repositioning, but I don't feel any need to do that by selling assets cheaply.
Michael: But the transaction markets had been closed for half of the last four and a half years because of COVID-19 and because of the fed. So we're hopeful that in a wide open year, yes.
Michael: We did I think $1 7 billion back in 'twenty, two we're capable of doing $2 billion plus a year for sure if the opportunities present themselves and we push the gas hard it's gotta make some sense de Minimis dilution is one thing wholesale dilution would require some sort of justification that we could get on this call and you all would feel was.
Jamie: I think you'll continue to see us sell assets that are a little bit less desirable from our point of view. It's more about the difference, Jamie, between the sale and the buy. If we can sell things well, we can pay up a little bit on the buy side, and again, we're creating that diversification we value. It's a little bit about, if we're doing trading like that, it's going to depend on both the sale price and the buy price. To the extent that we try and expand the company through debt activities, then the interest rate that Bob's borrowing at is going to become more relevant, which I think right now would be somewhere in the vicinity of 5% for 10-year money.
Michael: Compelling.
Okay. So it sounds like it's more about the dilution than it is the absolute cap rate or the absolute IRR.
Alex: We would accept some dilution to complete our strategic repositioning.
<unk> matters I mean these deals got it makes sense, we like owning your assets because we'll have less capital at the end of the day the portfolios will own in Atlanta, Dallas, Denver, and Austin will be the youngest portfolios of our REIT competitors, we think that's beneficial to our shareholders on the IRR Capex side.
Jamie: That's helpful, but we'd like to move faster. We point out that since 2019, when we started this, we've moved billions of dollars of capital into those markets, but the transaction markets have been closed for half of the last four and a half years because of COVID and because of the Fed. We're hopeful that in a wide open year, we did 1.7 billion back in 22, we're capable of doing 2 billion plus a year for sure if the opportunities present themselves and we push the gas hard. It's got to make some sense.
Not just on the NOI side, so yeah, we want to push the gas on this we want to move this along the IRR matters a cap rate matters.
Alex: Dilution matters, but getting it done matters a lot.
Speaker Change: Okay alright, thank you.
And our next question is going to come from Brad Heffern from RBC. Please go ahead.
Jamie: De minimis dilution is one thing, but wholesale dilution would require some sort of justification that we could get on this call and you all would feel was compelling. Okay, so it sounds like it's more about the dilution than it is about the absolute cap rate or the absolute IRR. We would accept some dilution to complete our strategic repositioning. The IRR matters.
Brad Heffern: Yeah, Hey, everybody in the prepared comments you mentioned some increased price sensitivity in New York late in the year can you add some color on that and talk about what gives you confidence to ramp that market relatively high for 2024.
Alex: Okay.
Alex: Hey, Brad this is Michael So I think in the prepared remarks, I was saying we saw just that the overall market level. There was what I would describe it as just like rent fatigue, where you started to see you know certain types of units one bedrooms, all of a sudden hit a price point at like $4000 and it just kind of the activity levels slowed the RIN.
Jamie: I mean, these deals have to make sense. We like owning newer assets because we'll have less capital. At the end of the day, the portfolios we'll own in Atlanta, Dallas, Denver, and Austin will be the youngest portfolios of our competitors. We think that's beneficial to our shareholders on the IRR CapEx side, not just on the analysis side. So yeah, we want to push the gas on this. We want to move this along. The IRR matters. The cap rate matters. Dilution matters
Alex: Conversations became a little bit.
Alex: More challenging so I would say, we still expect pretty good growth out of New York in 'twenty 'twenty four we're just saying we're tempering those expectations a little bit the fundamentals. There would all suggest that you have pretty good pricing power all year long because you are almost little to no competitive supply in Manhattan.
Jamie: But, you know, getting it done matters a lot. Okay, all right, thank you. Next, we're going to have Brad Heffern from RBC. Please go ahead.
Alex: Got good demand drivers.
Alex: In those markets, but I just think we're realistic that we've had two really good years of rent growth of rate growth that we're just kind of saying, okay. Let's just take a pause on that and let's wait until the spring leasing season shows us exactly what the market's willing to absorb.
Brad: Yeah, hey, everybody. In the prepared comments, you mentioned some increased price sensitivity in New York late in the year. Can you add some color on that and talk about what gives you confidence to rank that market relatively high for 2024? Hey Brad, this is Michael.
Speaker Change: Okay got it thanks for that and as a follow on to your earlier comments about wage growth on the west coast versus where rents have gone I guess, how much of that opens up an opportunity for future rent growth versus how much of that just reflects that those markets have become unaffordable before the downturn and they've been you know.
Michael: So I think in my prepared remarks, I was saying that we saw just that the overall market level, there was what I would describe as just like rent fatigue, where you started to see certain types of units, one bedrooms, all of a sudden hit a price point at like $4,000. And that just kind of slowed the activity level, and the renewal conversations became a little bit, you know, more challenging. So I would say we still expect pretty good growth out of New York in 2024. We're just saying we're tempering those expectations a little bit. The fundamentals there would all suggest that you have pretty good pricing power all year long because you have almost little to no competitive supply in Manhattan.
Alex: Permanent permanently repriced.
Alex: Yeah.
Speaker Change: Right I guess, we'll see.
Alex: Our sense again from all our comments on San Francisco and Seattle is that they still are appealing places for our demographic to live that people will want to live in the center of those cities and the whole market and that.
Alex: I don't know about a some sort of wholesale re pricing you saw in New York recover smartly on the rent side.
Michael: You've got good demand drivers in those markets. But I just think we're realistic that we've had two really good years of rent growth and rate growth, and we're just kind of saying, okay, let's just take a pause on that, and let's wait till the spring leasing season shows us exactly what the markets are willing to absorb. Okay, got it. Thanks for that.
Alex: And there are some deals going on in the investment sales market that would support New York trading at a lower cap rate as it historically has and the national average. So I think the story is yet to be told on the west coast markets, because there's just no one's selling.
Alex: In the in the urban centers, but I don't think there's a there's an answer to that but I think the appeal of those centers is true and obvious and will come and we've kind of given you our view of that.
Michael: And as a follow-on to your earlier comments about wage growth on the West Coast versus where rent has gone, I guess how much of that opens up an opportunity for future rent growth versus how much of that just reflects that those markets have become unaffordable before the downturn, and they've been, you know, semi-permanently repriced? I guess we'll see. Our sense again, from all our comments on San Francisco and Seattle, is that they still are appealing places for our demographic to live, that people will want to live in the center of those cities and the whole market, and that I don't know about some sort of wholesale repricing. You saw New York recover smartly on the rent side. And there are some deals going on in the investment sales market that would support New York trading at a lower cap rate as it historically has and the national average. So I think the story is yet to be told on the West Coast markets because there's just no one selling in the urban centers. But I don't think there's an answer to that.
Alex: Yeah.
Okay. Thank you.
Alex: Yeah.
Alex: And our next question is going to come from Alexander Goldfarb from Piper Sandler. Please go ahead.
Yes, Hey.
Speaker Change: Good morning.
Speaker Change: So two questions here first on the renewals of <unk>.
Speaker Change: In addition to jobs I guess renewals also seem to be a wildcard I realize theres, a frictional cost to moving especially in urban assets, but can you just walk through you know your views on renewal activity for this year and it seems like you guys think it will hold up much better than new rents and I'm sort of curious.
Alex: Would think those same existing residents would see the new rates that newcomers are getting would want a rent reduction not a rent increase.
Alex: Yeah, Alex this is Michael so.
Michael Goldsmith: I think it's a great question and what I can tell you right now is that the quotes for the next 90 days have already been issued.
Michael: But I think the appeal of those centers is true and obvious and will come, and we've kind of given you our view of that. Okay, thank you. Conor. We'll come from Alexander Goldfarb from Piper Sandler. Please go ahead.
Bob: We do expect to continue to renew about 55% to 60% of our residents and achieve approximately anywhere between four and four 5% growth off of about 6% quotes that are out in the marketplace. You got to remember in the last couple of years I mean, we put a lot of effort into this renewal process, we've centralized our renewal Nick.
Alexander Goldfarb: Yes, hey, good morning. So I have two questions here. First, on renewals, you know, in addition to jobs, I guess renewals also seem to be a wild card. I realize there's a frictional cost to moving, you know, especially for urban assets, but can you just walk through your views on renewal activity for this year? And, you know, it seems that you guys think it will hold up much better than new rents. And I'm sort of curious. I would think, you know, those same existing residents would see the new rates that, you know, newcomers are getting in, would want a rent reduction, not a rent increase. Yeah, Alex, this is Michael.
Bob: <unk>, that's really helped us navigate.
Bob: The negotiation conversations with residents, we're leveraging all new processes in both the quote generation as well as the negotiations we're layering in data science to help enhance some of these results and right now we do expect renewal performance to be fairly stable, but we have modeled for further deceleration like later in the year.
Bob: So the full year is expected to come in just over 4%.
Bob: Which is still a pretty solid growth but.
Bob: But we do expect to see some deceleration and I think when you look at the spreads right now that you see in the markets with new lease change our market pricing and renewal sure Theres more stickiness when it comes to the renewals and we have a lot of great rich history and data going all the way back to like 2006 that shows us that.
Michael: So yeah, I think it's a great question, and what I could tell you right now is that the quotes for the next 90 days have already been issued. We do expect to continue to renew about 55 to 60% of our residents and achieve approximately anywhere between a four and four and a half percent growth off of about 6% quotes that are out in the marketplace. You have to remember that in the last couple years, we put a lot of effort into this renewal process. We've centralized our renewal negotiations, that's really helped us navigate the renewal conversations with residents. We're leveraging all new processes for both the quote generation as well as the negotiations. We're layering in data science to help enhance some of these results.
Bob: Even when markets are dislocating and I could use a San Francisco back in like 2016, where it was just getting a lot of new supply right on top of that market held up pretty well from a renewal standpoint and landed somewhere in that back half of the year with about 2% averages. So it's not uncommon to see these <unk>.
Bob: Reds in the marketplaces and the other thing I guess I would point out as we start getting into 24, our concession use was elevated back in 'twenty three so I can renewal out of these residents flat and some of these expansion markets, Seattle, and San Francisco and still walk away with a six 8%.
Michael: And right now, we do expect renewal performance to be fairly stable, but we have modeled for further deceleration later in the year. So the full year is expected to come in just over 4%, which is still pretty solid growth, but we do expect to see some deceleration. And I think when you look at the spreads right now that you see in the markets with new lease change or market pricing and renewal, sure, there's more stickiness when it comes to the renewals. And we have a lot of great rich history and data going all the way back to like 2006. That shows us that even when markets are dislocating, and I could use San Francisco back in 2016, where there was just a lot of new supply right on top of us, that market held up pretty well from the renewal standpoint and landed somewhere in that back half of the year with about 2% averages. So it's not uncommon to see these spreads in the marketplaces. And the other thing I guess I would point out is that as we start getting into 24, our concession use was elevated back in 23. So I can renew a lot of these residents' leases and some of these expansion markets, like Seattle and San Francisco, and still.
Bob: Kris on renewals so it kind of takes away some of the the spread that you are looking at and why we have so much confidence in that renewal number being right around 4%.
Speaker Change: Okay. The second question sort of dovetails on the rent fatigue comments. It seems I mean, using New York as an example.
Bob: No new supply people want to be back in the city.
Bob: And we don't really hear stories anymore about doubling up or even moving to new Jersey is still an expensive proposition. So from a pricing perspective do you feel more comfortable today sort of across your portfolio, especially in markets like New York in pushing pricing versus years ago.
Bob: When renters and I'm, not just talking about new supply, but we're doubling up or maybe moving to.
New Jersey, or outer boroughs or something was more of an option do you feel like you have more pricing power today to push rents more than historically.
Bob: Yeah. Alex This is Michael I'll start maybe somebody can layer on top of that.
This is really a market and submarket kind of look so it really just depends as what is the spread how much is brooklyn's rents compare to Manhattan, what is that trade off decision to happen. So I don't know that I'd say I have more pricing power today than I have had historically I would say we have real.
Speaker Change: Really good processes in place today that help us navigate through these situations and each market is going to deliver different rate growth based on a whole lot of factors that go into the strengths of markets and as we look for 2024, all I can say is that the setup feels.
Pretty good it's like normal, but the rents are doing what they seasonally should be doing sequentially building. Each week. Our application volume is sequentially building each week I think we need to see that momentum in that early part of the spring leasing season to really be able to answer that question until you do I feel like I've got more.
Speaker Change: Pricing power or less than the historical times.
Speaker Change: Thank you.
Yes.
Speaker Change: Okay.
And our next question is going to come from Rich Anderson from Wedbush. Please go ahead.
Richard Anderson: Hey, Thanks, good morning, everyone.
Speaker Change: So I'm on the topic of.
Backlog: Spansion markets.
Is it.
Speaker Change: Absolutely a fee simple type of investment or would you be open given the sort of the complexities of all the lending lending environment, and all that sort of stuff and some distressed balance sheet distress and whatnot would you be willing to invest in different areas of the capital stack and with an intention to ultimately own ore.
Speaker Change: Are you going to have enough opportunity to keep it simple.
Speaker Change: And just go you know.
Speaker Change: Through equity channels.
Hey, rich it's Alec.
Alec Brackenridge: We prefer simple of its available, but if theres a good opportunity that would require us to participate elsewhere in the capital stack that would lead to us likely owning the property. We're wide open for that as well. So I do think theres going be a lot of fee simple stuff out there, though so we'll balance that out but what we're happy to talk to anyone that owns it well located apartment in the expansion markets, but any structure.
Speaker Change: They have.
Speaker Change: Okay, Great and then.
Speaker Change: If I could just sort of as the sort of a different question about what you said Mark earlier about 2025 being a tougher year in the Sun belt versus 'twenty 'twenty four.
Speaker Change: <unk>.
Speaker Change: But then you said something like.
Speaker Change: But the second derivative might be thought to be better I didn't quite understand that so maybe you can clarify that but but.
Speaker Change: Would you would you say generally speaking that the Sun belt sort of recovery process is maybe a year behind San Francisco and Seattle is that like does that sort of help define the the condition as you see it today.
Speaker Change: Yes.
Speaker Change: Going to say is just how we've seen things play out in our market. So the first thing that you see as you start to see a decline in occupancy when you get all of this.
Speaker Change: When you get a lot of supply or a big demand drop or both.
Speaker Change: So the markets you've seen competitors and the real page numbers sort of show declines in occupancy that pressures owners to give concessions and lower face rate and then that in turn eventually affect same store revenue, which is of course, the interplay between occupancy rate renewals and the whole nine yards.
Speaker Change: In when it reverses exact opposite happens first you start to see I'm building my occupancy a little as Michael spoke to Seattle, and San Francisco that gives you a little bit of confidence. So now youre going to take away. Some of your concessions and you can try to move rate up a little especially in the spring leasing season, you're going to test that is that <unk>.
Alex: Proves and eventually that will flow through to your same store revenue number. So that's what I mean by that comment. So that this year same store revenue might hold up better in a heavily supplied market or demand challenged market. Because you are looking at a situation where your rents you havent rewritten every lease down yet right, but over the course.
Speaker Change: A two years, you will and in that process that second year of same store revenue number is often lower GOR, often telling you hey, you know what new leases going up we're feeling better in a market and thats, what I am sort of expecting we'll see how it goes but my expectation is sometime in 'twenty five.
Speaker Change: We'll be talking about an improvement in some of those I call. It second derivative, but new lease rates Street rent numbers and it isn't going to be dramatic right away, but it's sort of some solidification of that that's really built on occupancy starting to improve so again, you've got all this supply our experiences of compounds. It gets worse before it gets better.
Speaker Change: And it just takes a little while to run through the entire P&L is that helpful. Rich Yeah. That's really helpful. Thanks, and then would you then sort of characterize sunbelt as being X money months behind San Francisco, Seattle would you is it a year in your mind, if you were to sort of simplify it.
Eric Wolfe: I I don't have a prediction on that we told you we didn't put San Francisco and Seattle in this year's improvement bucket.
Eric Wolfe: I have high hopes, but it feels like because of supply in Seattle, and just job conditions in San Francisco and could take a little longer and I think the sunbelt is just starting its challenges so I.
Eric Wolfe: I think both mark areas will be a little challenged in 'twenty four.
Speaker Change: Okay fair enough thanks very much.
Eric Wolfe: Yeah.
Eric Wolfe: And our next caller is gonna be John Kim from BMO.
Speaker Change: Capital markets. Please go ahead.
Speaker Change: Yes.
Speaker Change: Thank you on your blended lease growth improvement in January can you comment on how you think this trends for the remainder of the quarter I realize you're expected to improve in the second quarter.
Speaker Change: And if there's any discrepancies in the market performance versus what you had in the fourth quarter.
Speaker Change: On an exception of your supplement.
Speaker Change: Hey, John This is Michael I could start with that so I mean, I think as you look at this and I cited before just the improvement that we saw in San Francisco and Seattle coming off of December and into January with the new lease trends going from like a minus eight and December down to like the minus three.
Speaker Change: And a half the portfolio itself was at minus five seven for new lease change in December and is now in January that we put in the release at a minus three seven.
Speaker Change: Expectations clearly is that you can see was sequential rents improving each week that number is going to continue to drop.
Speaker Change: As you work your way through the quarter. So on the renewal side, it's a little bit of the opposite story you saw renewals were up five two in the month of December and in the release, we have January at the four nine the quotes are out there, but we do expect this renewal number to keep trending down as we work our way through.
Speaker Change: Somewhere in that four to four 5% range is what we expect to achieve off the quotes that are in the marketplace. So I think youre going to see the interplay between these two shift a little bit where you're gonna have strengths because youre going to have new lease change starting to recover and hopefully turning positive as we start off the spring leasing season, we'll see if we.
Mark: Keep this kind of momentum in place to do that and you'll see the moderation of renewals, but still at a really strong number if we come in anywhere between four and four 5%.
Speaker Change: Okay and my second question is on your development yields.
Speaker Change: Thank you said were trending closer to 6% given higher concessions.
Mark: Can you comment on the level of concessions that you are providing today and if it is really driven by your Texas and Denver developments or is this broad based.
Speaker Change: Hey, John its sounds like well, we are literally just starting up our lease ups right. Now. So we don't have a lot of data yet we are assuming a month right now but that could be flexible over time.
Mark: Those lease ups are three in Texas, one in suburban New York, which we'll probably see very little of that kind of concessions and then two in Denver.
Speaker Change: Okay great.
Speaker Change: Great. Thank you.
Jeffrey Spector: And our next question is going to come from Adam Kramer from Morgan Stanley. Please go ahead.
Adam Kramer: Hey, yes, maybe a little bit more of a conceptual question and I guess also kind of in line with ours with Alex Goldfarb question earlier, but just looking at kind of a new lease change by market comparing that to the renewal change by market.
Jeffrey Spector: It's kind of interesting that new lease can can vary pretty significantly by some of these markets where renewals are in a pretty tight band you'll call. It 200 basis point band give or take and so I guess the question is kind of twofold right is there an ability to maybe push renewals even more.
Speaker Change: Say, a market like D C, where new lease holding them a lot better.
Speaker Change: Versus kind of expansion markets, right or San Francisco, where I guess I'm kind of surprised by that historically wide widespread between the new and the renewal rate.
Speaker Change: A little bit worried about renewals kind of falling a little bit getting closer to that to that kind of deeply negative or somewhat negative new lease change again, a little bit more of a conceptual question, so apologies, but hopefully hopefully that makes sense.
Speaker Change: Adam It's Michael So I mean, I think there's just more stickiness into the renewal stats that you look at this and you're also coming off of a period of time with just low transactions.
Speaker Change: There is a little bit of that in these numbers I think as we think about this I mean like I said, we have this data going all the way back in time, it's just not uncommon in the fourth quarter to see new lease change goes negative even in a pretty good year with rate growth happening in the marketplace that new lease change goes negative and renewal.
Speaker Change: <unk> stay positive. So it is a really uncommon situation for our renewal growth to go flat or even think that it's going to be negative and like I said, we've just put so much into our processes. We have so much good information and insights to it we've got a high degree of confidence that being said, if there's a big dislocation in the market.
But even the deceleration that I mentioned before could be more robust than what we model.
Speaker Change: Great Great. Thanks, that's really helpful and I appreciate that color and I'll have kind of a building box earlier on the call too. So maybe on concession use it and I know you've talked about it a little bit on the call. Thus far maybe just if you don't mind some of your expansion markets.
Speaker Change: The level of concessions in terms of number of weeks that are being offered.
Speaker Change: Yeah. So I think I would just start by just saying that the concession use right now remains concentrated in the Seattle and San Francisco portfolio for us with about 70% of all the concessions being issued when when you drill into the expansion markets I mean, it's such a small.
Speaker Change: Percent of the of the absolute portfolio, but right now when you go across them all it's a <unk>.
Speaker Change: Running between like 30, and 45% of applications receiving about a more I'd say Dallas right. Now is the one market, where we're up closer to about six weeks' worth of concessions being issued.
Speaker Change: And like I said, we would expect that to kind of continue at that level in those expansion markets and.
Speaker Change: And we're watching what's going to be happening with the new lease ups and how competitive are they so that we know where we need to play. The fact that these markets are now like 96 or even some of them over 96% with that concession use that we did in the fourth quarter is really a good sign because the last thing you want to do is turn on concession.
Speaker Change: And do leasing and still land at an occupancy like where you started with that would not be a good situation. So we feel like the set up right. Now is defensive these occupancies are 2% to 3% above we expect to issue, 30% to 40% of our applications receiving concessions of a month to a month and a half and those maher.
<unk>.
Speaker Change: Okay, great. Thanks, so much for the time.
Speaker Change: Ooh.
Speaker Change: Our next question is going to come from.
England: England now. Thank you. Please go ahead.
England: Yeah.
England: Hey.
Speaker Change: Good I guess good morning out there for you guys Mark.
England: Mark I guess the first question for you I'm following up on Rich's question earlier about your potential interest in stepping in and.
England: Participating other parts of the capital stack.
Seems a bit of a departure from how you respond to the mezz investments in the past. So I guess first is that fair and why the change of heart I'm, assuming perhaps is reflective of the opportunities.
England: But second I'm, assuming or is it fair to assume that you'd be solely focused on the sunbelt and then third what level of return or premium to acquisition cap rates would you seek there. Thanks.
Speaker Change: Okay, I'm going to start with some of that and then now like me answer parts of it as well handle but on the Mezz investment side I think the part that Alec emphasized was the path to ownership. So what we've been more hesitant to participate in is to just create a book where we are consistently making.
Speaker Change: Mezzanine loans or preferred equity investments in deals, where it's improbable that we would end up being the owner.
Speaker Change: We're working with the lender and the owner and we get into the capital structure and there's a good chance we're going to end up with the deal that to US is very different that is stuff. We did do back in OA or O. Nine through 2010. So that is a familiar thing for me and Alec and a lot of folks on the team to do so that's how I would distinguish the two of them.
Speaker Change: I don't know if there was anything else in that question you wanted to answer Alec no no product.
Speaker Change: We will be opportunistic, though that's a history of our company and we'll keep looking for chances to buy great real estate I guess I will let you asked about acquiring assets in one form or another and our established coastal markets. We're certainly open to that we've got some development deals we're likely to start in some of those established markets that are in areas really hard to be.
Speaker Change: Bill.
The primary focus is to get into these expansion markets and add capital there.
Speaker Change: Gotcha Gotcha helpful, but a follow up what level of return or potentially would you or premium to acquisitions would you seek.
Speaker Change: For you to get involved in some.
Speaker Change: Some of these mezz or a path to ownership type of opportunities.
Speaker Change: Hey, Alex it's really impossible to peg that without knowing the specifics of the deal and the circumstances around it but obviously, we're very focused on getting compensated for any risk we would take beyond a typical transaction.
Alexander Goldfarb: Okay Fair enough one more on the expense side I was hoping for a bit more detail on the on the key components appreciate the overall.
Alexander Goldfarb: High level thoughts you provided there earlier, but maybe some specifics on the key components like what Youre embedding in your guide for specifically taxes insurance arm of them and also for the ongoing <unk> initiatives I think last year, you outlined 10 million or so of savings do that I'm just curious what level, perhaps you could see from Tech initiative savings this year. Thanks.
Alexander Goldfarb: Yeah, Hey, Handel, it's Bob I'll start with some detail on the expenses and then maybe pass it to Michael on the initiatives I will caveat on the initiative side.
Most of our initiatives as Michael mentioned, our more revenue focused this year than expense focus, but he can he can touch on initiatives, if I don't cover or something.
Bob: So on specifics related to some of the categories. We are expecting as I kind of mentioned utilities.
And real estate tax to grow higher than what they did in 2023.
That implies or means that at the midpoint, we'd have real estate taxes around call. It a 3% and utilities more around the 6% growth rate relative to what were lower growth rates in 'twenty three on the other side of the equation on the big categories, you have R&M, which.
Bob: Experienced a lot of inflationary pressure in 2023, we expect that to normalize or so we expect our R&M to grow something more like 4% that is where we are realizing some of the opportunities and.
Work that we've done on the initiative front to reduce our dependency on contract Labor and places where there is wage pressure. So that's helping us get to that 4% anticipated growth.
Bob: And payroll, we think we're not anticipating as much challenges on the medical benefit side and we're just yielding some of the some of the payroll optimization. We did was backend loaded in 'twenty three so we'll realize more of that benefit in 2024.
Speaker Change: Does that help you on the color side is there any categories I missed.
Speaker Change: No that's helpful.
Speaker Change: But in relation to I believe it was 10 million that you outlined last year from a tech driven efficiencies first.
Speaker Change: Accurate and second do you have a comparable figure expectation for this year.
Speaker Change: Yeah, Hey, it's Michael So let me just start by saying you know that really the entire company has been focused around these innovation initiatives for the last several years and we now have created this foundation that really is going to deliver long term value creation of the portfolio for many years to come with the materials that we put.
Speaker Change: In that November Investor presentation highlights. This techno technology evolution of this platform really has been focused on creating the mobility and efficiency in the operating model. While this seamless experience to our customer improves all in we've identified about $60 million and NOI improvements with about.
Speaker Change: 35 million of that already achieved over the past several years. The early stages of this was clearly more expense focus and that shows up in our numbers. When you looked at the low low expense growth and that's mostly in the payroll and some of the R&M accounts over the last couple of years going forward, we we've identified and we.
Speaker Change: We expect about another $25 million in 2023, we delivered about $10 million and NOI improvement and about two thirds of that was on the expense categories, primarily in the payroll accounts.
Speaker Change: A couple of million dollars of that was in the revenue front specific to 2024, we've layered in another $10 million included in guidance with about seven and a half million in other income accounts and this is realized growth as the annualized number from all of these initiatives is greater because some of these are back half load.
Now I only get about half of the benefit this year. So overall I guess I would just say is this operating foundation is almost in place and you really should expect that the future years are going to continue to have more revenue enhancement opportunities, but the reality is I mean, we're never really done with this pursuit of operational excellence, it's something.
That's wired into the DNA of our company and I'm sure as this year goes on we're going to identify new things for future years as well.
Speaker Change: Very helpful. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question is going to come from Rob Stevenson from Janney. Please go ahead.
Rob Stevenson: Good morning, guys. Alex can you talk about how robust the market is for dispositions and quality of life areas like urban Seattle, San Francisco or markets with ongoing bad debt issues like L. A are things trading and where are they pricing versus a few years ago. If they are.
Rob Stevenson: Yes, Thanks, Robert it's Alex.
Alexander Goldfarb: Almost no activity in the markets you list. It listed I mean, where we test from time to time, not saying, we wouldn't sell something but right now I don't I couldn't tell you what market cap rates are because there just haven't been afraid. So it is really frozen there. So frankly, we've concentrated our efforts elsewhere.
And I mean is that just a hold hold on for a couple of years hope that the cities get their act together or is there something else just simply buy lower priced capital that will allow that to sort of come back or are they are you anticipating some sort of level of permanent impairment on some of those markets and submarkets.
No I think all of the things that you mentioned are likely to happen, there's a tremendous amount of capital on the sidelines. These cities are still great cities. The cities themselves are doing it a lot.
Alexander Goldfarb: Particularly in San Francisco, and Seattle to improve the quality of life I mean, they're there, they're making some really serious head ways and as Mark talked about we expect them to recover as the jobs.
Alexander Goldfarb: Cover, but even absent that we're at 96% occupancy, it's just investor sentiments really negative right now.
Alexander Goldfarb: And we.
Alexander Goldfarb: We think that there are better opportunities elsewhere, and we're frankly, a buyer of what it sounds like people would transact right now.
Alexander Goldfarb: Rob just to add to that I mean, these markets, Seattle and San Francisco, particularly though you could think about downtown L. A to <unk>.
Alexander Goldfarb: Our four drivers for us it's like we talked about New York when everyone was down on New York City, and we were positive on its still that recovery has been vibrant I think it's the same pattern here, it's not a matter of if it's a matter of when and I think these markets will recover greatly on the rental side over the next few.
Alexander Goldfarb: Years, when we have shied away from on this call as <unk>.
Alexander Goldfarb: <unk> enthusiasm too early in the year, when you're not really into the leasing season, yet in markets that do have volatility associated with them. So I don't feel any sense of permanent impairment in these markets at all.
Alexander Goldfarb: Think that youre going to have great rental growth you're going to have a recovery that's pretty strong in these markets and you are likely but not certain to follow a pattern like in New York, where again the investment sales market as deals in New York and they are trading really well and so I'm not sure why in a few years, San Francisco and Seattle wouldn't trade very well as.
Well.
Alexander Goldfarb: But it's just going to take some time and again, our hesitancy here is really around the timeline for this not the occurrence of it and I think it's a catalyst for our investors I think having a portion of the portfolio and unrecovered markets with rents lower than they were in 19 and it comes a lot higher is a huge potential.
Alexander Goldfarb: So kindling wood to our earnings in future years.
Speaker Change: Okay. That's helpful. And then lastly for me Bob what's the six cent difference between NAREIT and normalized <unk> guidance is that one or two large items that youre expecting or a bunch of small ones given what you know today.
Bob: Yeah, Theres, one larger contributor, which I'll talk about which is advocacy costs. So we are forecasting higher levels of advocacy costs in 2024, given that it's an election year and some of the balance sheet.
Bob: Cheap.
Bob: Ballot initiatives sorry that.
Bob: We are facing which is not atypical and adds another election years and then the remaining pieces are typical forecast for pursuit costs and other items.
Bob: Is that as you can see in California or is there other markets as well or is that entire spend out there. It is it's predominantly California.
Speaker Change: Okay and is there anything I guess related to that that you're especially worried about the cycle I mean, I know that a lot of this stuff keeps being put on every other ballot or every ballot, but I mean is there anything thats looking like this year or 24 is the chance that it really passes it would wind up being a negative for you guys.
Speaker Change: Rob, It's Mark I mean, theres negatives and positives in the regulatory area. The ballot measure has by far the biggest point of focus for the industry and just to remind everyone. This is ben on the ballot twice before the citizens of California rejected it by 20 percentage points. Each time the industry is well organized we're going to make the same good arguments.
Speaker Change: Supply being the solution.
Speaker Change: More rental voucher funding being the solution and to be honest, the governor Newsome and the legislature have done a lot of supply things with the accessory dwelling unit legislation with some of the zoning reforms and so to be honest when I turned to the positive on the regulatory side people hear us a year the industry's point about supply about zoning.
Reform Governor to Santos, obviously, couldnt be more different than governor newsome.
Speaker Change: He has done some great things in Florida as it relates to housing policy as well and zoning reform to allow more affordable housing to be built governor local in New York was trying the same thing and got a lot of resistance, but we hope that is still in play So California is to answer your question the focal point of us and the industry at large this year.
Speaker Change: Markets like New York and <unk>.
Speaker Change: Massachusetts in Colorado, there's always dialogue going on in those markets, but we are well organized to have that conversation and I think policymakers by and large understand that supplies. The answer not rental regulation. That's what I think is the positive here you hear about that a lot more in our conversations and the reaction to rent control is.
Speaker Change: Something that we talked through in <unk>.
Speaker Change: You'll get a lot of people, calling the other direction after they've heard the arguments.
Speaker Change: Okay. That's helpful. Thanks, guys I appreciate the time.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: And our next question is from Anthony Powell. Please go ahead.
Anthony Franklin Powell: Hi, Good morning, a question on new and.
Anthony Franklin Powell: Renewal lease spreads and the leases I'm curious, what's the absolute I guess rent.
With regards to Japan in terms of both gross and net effective I'm trying to understand better about what.
Anthony Franklin Powell: Actual numbers rfps to our customers.
Anthony Franklin Powell: Hey, Anthony This is Michael can you can you ask that again I'm not sure I'm following the absolute worst part of the equation.
Michael Goldsmith: So in terms of this new new and renewal leases I'm absolute rent is there a big difference there are students who are customers paying.
Lower or higher in renewing or new.
Michael Goldsmith: New leases I'm trying to get a sense of the absolute pricing difference between the two groups of customers.
Speaker Change: Yeah, I think when you look at it on the new lease side because of the concessions that we're offering and some of them I think it lowers like the net effective rate when you look at the the absolute average of all the leases that we wrote versus the renewals.
Speaker Change: And one thing to keep in mind to Anthony is when you're looking at the spreads. So if you're starting with market rate rents right and looking at market and that's kind of your your pricing trend or whatever.
Speaker Change: Spreads can vary materially depending on who is in the mix of moving in and moving out. So if I have lived in a unit for one year and got a big confession is Michael use an example, and expansion market and I happened to be the one renewing then that spread can be very different than the absolute.
Speaker Change: So just keep in mind keep that in mind as you look at any of these spreads and then particularly keeping in mind as you think about seasonal periods.
Speaker Change: Like the first quarter and the fourth quarter, where transaction activity is really low you can have even more volatility in the number.
Speaker Change: Alright, Thank you and maybe one more on transaction activity do you like to see.
Speaker Change: Jamie portfolio deals later this year or do you expect your deal activity can be more single asset.
Speaker Change: Had been recently.
Anthony It's Alex I don't know if I expect to I, certainly hope to and I think we probably will but but it remains to be seen but there are some things out there that we've heard about that might be interesting and we will certainly be very actively pursuing them.
Yeah.
Speaker Change: Thank you.
Speaker Change: Thank you.
And our next question is going to come from Linda Tsai from Jefferies. Please go ahead.
Linda Tsai: Hi, Thank you just one question in your prepared comments, you highlighted seeing stability and pullback in Seattle and San Francisco could you discuss that dynamic more.
Volatility associated with job loss and returned to work mandates or maybe just provide some examples of what drives this push and pull.
Linda Tsai: Yeah, Hey, Linda this is Michael So I think clearly job growth is one of the catalysts that does that so migration patterns also influence that so where you see a lot more of your move ins coming to from within the MSA. That's usually deal seekers. Those are people that are responding to see in the concessions in either breaking their lease where they were.
Linda Tsai: Our move into it. So it just you just haven't seen like the sustained momentum that you would expect based on seasonal trends I think last year you saw some of those layoff announcements you saw a lot of ambiguity around return to office, where people were just waiting to see what their employer was going to do before they decided to.
Linda Tsai: Any kind of relocation decisions to get nearer into where their offices, where I still think some of that exist in the marketplace today, but what we did see and what we see right now is that the setup and both of those markets has positioned us with good occupancy we are starting to pull back concession to the marketplace.
Linda Tsai: Still have concessions in them and we'll just watch and see that build as we get in towards March and April to see what pricing power really looks like.
Linda Tsai: But theres a lot of factors that are going into why our market all of or some kind of stalls out and whether or not they chose you sustain momentum more in line with seasonal trends.
Speaker Change: Thank you.
Speaker Change: I have no further questions left in the queue I'll turn it back over to Marc Piro for closing comment.
Marc Piro: Thank you all for hanging in there on this long call. We appreciate your interest and your time today good day.
Everyone else has left to come.
Speaker Change: It looks like no one else is going to join this call.
Speaker Change: Goodbye.
And this concludes today's call.
Speaker Change: Thank you for your participation you may now disconnect.
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