Q3 2024 Essex Property Trust Inc Earnings Call
Ladies and gentlemen, good afternoon, and welcome to the Essex property Trust third quarter 'twenty 'twenty full earnings conference call.
Speaker Change: At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Angela Kleiman, President and CEO.
Speaker Change: Please go ahead ma'am.
Angela Kleiman: Good morning, Thank you for joining ethics third quarter earnings call. Our path will follow with prepared remarks, and Rylan Burns is here for Q&A.
Angela Kleiman: We are pleased to report our third guidance raise this year as a result of another healthy quarter with core <unk> per share exceeding the midpoint of our guidance range.
Angela Kleiman: Today, My comments will focus on our performance year to date preliminary considerations for 2025, and an update on the investment market.
Starting with highlights to date notable milestones. This year include record low turnover excellent progress resolving delinquency.
Angela Kleiman: Positive inflection points in several key demand drivers.
Angela Kleiman: These factors combined with muted level of new housing supply have enable ethics to deliver results exceeding the high end of our original 2024 expectations.
Angela Kleiman: Year to date, we have achieved solid results with market rents generally trending consistent with historical patterns.
As shown in the chart on page 13.
Angela Kleiman: 13 point too.
Angela Kleiman: In the third quarter rents peaked in July and remain resilient through August before moderating in September.
We expected the blended rate growth of two and half per cent for the quarter was tempered by a combination of seasonal moderation in rent, which started in September and difficult year over year comparison, especially since last year, our rents did not moderate until late October.
Angela Kleiman: As we enter the fourth quarter, our market remains stable, we shifted our operating strategy to focus on occupancy as we've done in prior years in anticipation of slower demand characteristic of normal seasonality.
Angela Kleiman: Moving to regional highlights.
Seattle has been a top performer this year delivering a strong three 8% blended rate growth in the third quarter, the east side, where we have proximally, 70% of our portfolio with our strongest markets with 4.7% blended growth where the rest of the year, we anticipate heavier supply delivery and that's more concessions.
Angela Kleiman: And this weekend.
Northern California has performed well achieving 2.3% blended rate growth in the third quarter looked like Santa Clara County were three 6%.
Angela Kleiman: Overall supply for this region remains very low, but we anticipate most of the deliveries for San Jose This year to occur in the fourth quarter. Therefore, we planned for higher concessions to address the short term impact.
Angela Kleiman: On to southern California.
Angela Kleiman: <unk> achieved two 1% blended lease rate growth in the third quarter lease rates in this region were tempered by headwinds related to delinquency recovery in Los Angeles, Excluding L. A this region produced three 5% blended rate growth for the third quarter Wow.
Angela Kleiman: While the exact timing is difficult to pinpoint we are cautiously optimistic about movies rates will begin to recover next year in L. A is volume.
Angela Kleiman: Units continue to subside.
Angela Kleiman: Heading into year end, we are well positioned to 96, 1% financial occupancy for October with year over year comps easing in November and December.
Angela Kleiman: Turning to our expectations for 2025, we've provided high level revenue drivers on page S. 16.2 of the supplemental we expect our earnings for next year to surpass what was achieved in 'twenty 'twenty four ranging from 80 to 100 basis points.
Angela Kleiman: Additionally, we anticipate a 40 to 60 basis points tailwind from delinquency improvements.
Angela Kleiman: Combined these two components should generate approximately 120 260 basis points.
Angela Kleiman: Same property revenue growth in 2025.
As for market rent growth supply and demand will ultimately be the key building blocks.
Fundamental backdrop remains stable and continues to gradually improve.
Angela Kleiman: On the supply side detailed on page S 16 of the supplemental we expect total supply growth of only 50 basis points in 2025.
Angela Kleiman: Is consistent with the low level of supply in 'twenty, 'twenty, four and well below our long term average of 1% or a market.
On the demand side, we've seen positive inflection points in several major demand drivers. This year job postings at the top 20 technology companies have been steadily recovering demonstrating a sentiment shift from retrenchment in 2020 three two positioning for future growth. Additionally, these same companies.
Angela Kleiman: Continued to increase their return to office requirements, which has resulted in increased demand to San Jose and Seattle region.
Angela Kleiman: Related to this is migration back to our markets, which has steadily improved and as rebalancing towards historical patterns given.
Angela Kleiman: Given the low supply environment and the ethics market, we are well positioned to achieve new lease rate growth with incremental demand.
Angela Kleiman: Lastly on the transaction market.
Angela Kleiman: Investor interest for multifamily properties on the West Coast has resulted in cap rates trading consistently in the mid 4% range with numerous transaction and no 4% within this competitive landscape. Our investment team has done a terrific job originating several opportunities at better than market yields are core.
Angela Kleiman: Turning over 1700 units to date totaling over 700 million at our pro rata share.
Angela Kleiman: We continue to execute transactions with attractive returns relative to our cost of capital and we are confident in our ability to generate opportunities to drive an EV and <unk> per share accretion for our shareholders. Finally, I'll conclude with a brief comment on California proposition 33. It is no surprise to anyone to access it.
Angela Kleiman: Duration dramatically restrict housing production in California, leading to high cost of housing.
Angela Kleiman: As such we have joined Governor Newsome endorsing a no vote on proposition 33, we all know that building more housing is the only solution to the states housing shortage.
Speaker Change: That I will turn the call over to Barb.
Thanks, Angela I'll begin by briefly discussing our third quarter results followed by comments on the remainder of 'twenty 'twenty, four and conclude with investments and the balance sheet.
Barb: I'm pleased to report third quarter core <unk> per share of $3.91, a fourth time beat to the midpoint of our guidance range. The outperformance was primarily driven by higher same property revenues.
Speaker Change: For the full year, we are raising the midpoint of course also for a third consecutive quarter by six cents to $15.56 per share, which represents three 5% year over year growth I cant contribute to the full year increase relates to same property revenue growth, which has outperformed our expectations as such we.
Speaker Change: We're raising our midpoint by 25 basis point to 3.25% growth for the year.
Speaker Change: The increase was driven by lower delinquency and higher other income with no change to our expense outlook. We expect same property NOI growth of 2.6%, a 30 basis points increase at the midpoint.
Speaker Change: Turning to investments year to date, we've acquired approximately 700 million in multifamily properties at pro rata share, which has been funded on a leverage neutral basis with 200 million of dispositions $450 million of proceeds from structured finance redemptions and free cash flow and 25, nine and O P units as it relates to our.
Speaker Change: Structured finance book, we have received 106 million in cash redemptions through October and anticipate an additional 49 for the balance of the year.
We've reinvested these funds into new acquisitions, which offer the most attractive risk adjusted returns today, given the growth potential in our markets. While the strategic reallocation resulted in short term <unk> dilution growing the company via apartment acquisition improves the quality of our cash flow and our long term growth profile of our portfolio.
Speaker Change: This in turn drives better N a D and core <unk> growth for our shareholders.
Speaker Change: Looking to 2025, we expect between $100 million to $150 million of reductions with up to 50% expected by the end of the first quarter.
Speaker Change: Barring a change in the investment landscape, we are most likely to redeploy these proceeds into acquisitions, resulting in a continued reduction of the structure finance book and better alignment with our target range for this business at three to five per cent of core F. F L.
Finally, a few comments on the balance sheet over the last several years, we have opportunistically refinance our debt maturities early when we see an attractive issuance window. We continued that trend this quarter as we issued $200 million in 10 year unsecured bonds and then the effective rate of five 1%.
Speaker Change: With a manageable debt maturity schedule next year, we have ample flexibility to be opportunistic.
Overall, our balance sheet remains in a strong position with low leverage as defined by net debt to EBITDA at five five times. In addition, with over 1 billion in liquidity and ample sources of available capital. The company is well positioned I will now turn the call back to the operator for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, you will now be conducting a question and answer session.
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Speaker Change: Ladies and gentlemen.
You to restrict to one question and one follow up question, Bob Potter spin.
Speaker Change: One moment, please while we poll for questions.
The first question comes from the line of Nick you're local from Scotia Bank. Please go ahead.
Hey, Good morning. This is Daniel Chicago all of its neck.
Speaker Change: Asking question on bad debt with a 50 basis points of improvement in 2025.
What gives you the confidence Elliott Alameda counties will normalize them like your other markets and just to confirm your comments Angela from your prepared remarks that assumption would imply maybe broader supply demand fundamentals should improve in those markets as well.
Hey, Danielle Thanks for your question with respect to L. A L. M. It a couple of things are happening underground that gives us.
Speaker Change: And also some confidence that things are improving so for example, delinquency in terms of just the volume that start there has really improved in fact, you know are a year and last year in December our delinquency as percentage rents for L. A it was.
Speaker Change: Almost 5% today, it's a 1.6 so that is significant progress and we've seen a direct correlation with the courts continue to move through the eviction and and that's been you know a key to continuing that trend.
But as far as just general economic viability for L. A yeah, a couple of things that actually has given us a positive size. So for example.
We have of course, the World Cup coming and the Olympics and so what we are anticipating is that there'll be benefit from economic investments both domestically and internationally to this region, but further just this week governor Newsome proposed to double Californias film and <unk>.
All of US in tax credit program from current 330 million to about $750 million. So these are all great signs that we're seeing that time that gives us that level of optimism if you will.
Great. Thank you just as a follow up you mentioned signs of him I think he mentioned signs of improving job backdrops I'm not something we necessarily heard from office landlord. So maybe you could expand a bit more where and in what you're seeing specifically related to that.
Speaker Change: Sure no happy to so we track the openings at the top 20 Tech companies.
Speaker Change: And and that is you know it's it's just the closest thing to apples to apples that we can see and they are really the drivers of the overall health of the technology sector and so when you follow that and we use a third party independent report and we have seen that for the first time.
Speaker Change: Most two years the job openings have reached pre COVID-19 averages and it's a good start because you know openings is a indication of that these companies will be positioning to higher in the future. The one thing that you all keep you at that time.
Speaker Change: Keep in mind is that this is a lumpy.
Trend and and it's not an immediate impact, but obviously things are going the right direction here.
Speaker Change: Thank you. The next question is from the line of Eric Wolfe from Citi. Please go ahead.
Thanks, It's a Nick Joseph here with Eric.
Nick Joseph: Appreciate the 25 building blocks I guess my question is just around pricing strategy going forward I mean, you've laid out kind of the improving bad debt situations, particularly in southern California, a continued low supply. So you know what.
Speaker Change: Half a percentage point next year.
Speaker Change: How are you thinking about the ability to actually push a push on the new lease side and how our renewals going out over the next 30 to 60 days.
Hey, Nick that's a great question Angela here on the interests of our operating strategy, we have shifted to a occupancy force.
Speaker Change: Our strategy in the fourth quarter and that is typical to address the seasonal slow demand that's characteristic of our business that's not anything unusual.
What we are expecting is the deceleration that we have seen in September and October.
Which we of course are faster into our guidance to the headwinds that caused us to start to abate.
And so yeah for example.
In October last year, just to give you one data point.
Speaker Change: Our concessions was only half a week.
And this year, it's about a week well that doesn't seem like a big number you know half a week.
Speaker Change: This represents 1% of Brent So you can see that the year over year impact on the financials.
But as far as the renewals concerned we're sending renewals out in the mid force so strong number from our our.
Consistent with our plan.
Speaker Change: And early indication is that we're landing around in the high threes. Once again also well within the range you know typically the negotiations range from zero to 100 basis points and this is kind of in the middle of that so these are all good indications for the rest of the year and our ability for pricing power in yeah.
And next year to come.
Speaker Change: Thanks, that's very helpful. And then just on I guess, the potential repeal of Costa Hawkins understand all the arguments you know.
Speaker Change: Oh, Oh Oh.
Speaker Change: Policy side, but if it were.
Speaker Change: That's right so if the repeal occurred.
How do you think about what could happen kind of over the following few months and you know what is your exposure to municipalities at some form of rent control currently.
Speaker Change: Yeah that is a really good question and you know we.
Speaker Change: We kind of battle internally on how to think about this risk.
Let me just start with a couple of data points that I think may be useful in an assumption like this because it is a very difficult hypothetical question to answer and the reason that's the case is because right now.
Speaker Change: Every city in California can enact rent control on buildings or they're a 1995.
We have about 483 cities in California.
Speaker Change: And believe it or not only about 8% of these cities have inactive rent control and.
Speaker Change: With a lot of these cities, where the rent control is actually quite moderate.
Speaker Change: So as far as prop 33 is concerned.
Speaker Change: Three mayors have actually came out and announced that they were against proposition thirty-three and some of these mayors are the same ones that I'd have enact rent control like San Jose for example.
Speaker Change: C N. Diana so it's you know for us to try to interpolate something.
Speaker Change: That is so unlikely.
It's just it's too difficult to predict.
Speaker Change: But more importantly on the campaign itself. What we're seeing is that this is following the same pattern as the 2018 in the 'twenty 'twenty.
A pattern and both times they were defeated by a landslide and so.
Speaker Change: And I understand that you know, there's an overhang on our stock just because it is an unknown, but what we're seeing is that.
The public and the legislators they understand.
The impact of something that's onerous and in fact this is evidenced by the most expensive cities in California are the ones with the most onerous rent control like San Francisco, and Santa Monica and the ones with the highest rents.
Speaker Change: So the net net is that the campaign continues to gain momentum and we are confident this will be defeated.
Speaker Change: Thank you.
The next question is from the line of Handel St. Juste from Mizuho Securities. Please go ahead.
Speaker Change: Hey.
Good morning, guys. So a couple of questions for me I think in your prepared remarks, Andrew you mentioned that rents last year did not moderate until October. So you had tough comps this year in September.
October but it looks like the comps are getting easier ahead. So I guess I'm curious one what you're sending out for.
Speaker Change: For.
Speaker Change: Renewals here today and any color on October new lease rates.
Speaker Change: But more broadly is there a scenario, where we can see a reacceleration in blends on these easy comps just curious what's kind of embedded in your near term outlook here.
And al Good morning. Thanks for your question. So we are sending new renewals out in the mid fours and so far the early indication on those with signed leases are landing of the three in the high threes. So say, it's 3938 on an average. So these are definitely you know good.
Speaker Change: Trends and positive indication as far as the possibility of a reacceleration, it's certainly possible.
Speaker Change: Because you know as I mentioned rents continue to increase through October last year.
So that's one factor renewals remained strong and if nothing else. We just don't have the same headwind in November and December of this year as we did last year and so that is a possibility.
Speaker Change: Okay.
And then you also mentioned again this quarter seeing positive in migration more employers enforcing with turned office mandates and out a tech job growth for the first time in years as being back to pre COVID-19 levels. So I guess I'm curious if you're seeing any of that translate into better demand applications things, which could for both kind of more.
Demand or pricing power rent growth.
Enter into early into next year. Thanks.
Yeah, No. That's a good question couple of things on the in migration front.
We are seeing that this year has benefited our numbers and especially if you look at the job growth environment. It's generally not robust you know for the U S and the West Coast, It's it's stable and it's moving along and so for us to be able to outperform its demand coming from elsewhere relative to.
Our original forecast and so in terms of predicting how that is going to impact next year, it's too early to tell.
Really for two reasons one is that we do believe most of the return to office benefit were captured this year.
Speaker Change: I'll give you a point of one data point, which is our in migration.
Our in migration as a percentage of our total leases mm, it's not yet to pre COVID-19 level, but it's pretty darn close. So that's one good indication. So maybe you can say we've captured 70, 75% of the return to office. So there's some left for next year, but it's not want to be.
As robust as this year, but what was really drives demand and for housing next year is going to be all about job growth.
Fortunately for us with low demand our base case, you know it is very low risk, having set that will need better indication on a macro level, where the consensus our job forecast is going to land and what that will mean for the west coast. Because we are still all somewhat interrelated.
Speaker Change: To the entire economy.
Speaker Change: Thank you.
The next question is from the line of Steve Sockwell from Evercore ISI. Please go ahead.
Steve Sockwell: Yeah. Thanks, good morning out there could you provide a little bit of color on a cap rate pricing on the sort of different acquisitions that you did as.
As well as the dispositions.
Speaker Change: Hey, Steve or island here.
Speaker Change: Yes, we were pleased to Bayou two of our joint venture partners in the third quarter and these were our long running negotiations in both cases, we had debt maturing, which necessitated a conversation and we believe we were able to buy those at very attractive basis, probably 20% to 25% discounts to replacement cost today at yields.
In the high fours.
So we think better than market pricing.
Steve Sockwell: In one instance, we were able to also negotiate and O P unit transaction at.
A three or five strike price, which was when we negotiate it or you know it was stock was around $2 70, so that was unnecessary requirement for us to make that deal pencil on an accretive basis.
Steve Sockwell: Subsequent to quarter end the portfolio transaction that was noted in the release. This is similar to the portfolio that we did earlier in the year where market cap rates are in the low fives. Given this is a slightly older portfolio, but one that we've owned for.
Steve Sockwell: Many many years, we've invested in and we know very well and with our basis as we were already majority owners as kind of a cap rate to Essex.
Steve Sockwell: To a six.
Steve Sockwell: The disposition subsequent to quarter end are in San Mateo. This was a 76 year old asset and it is approximately a five cap to a six inclusive of capital and the thinking there is that we are seeing better risk adjusted opportunities elsewhere, and we're able to redeploy that capital into.
Steve Sockwell: Our higher returning investments.
Okay, Thanks, and I realize development, maybe still a bit of a dirty word, but you know how are you guys thinking about future developments and you know where where would developments perhaps pencil today on current costs and in place rents I'm trying to just figure out how far away are you.
Steve Sockwell: Do you think you might be from being able to start some new projects.
Steve Sockwell: Yeah.
Speaker Change: Good question and something we've been really focused on here over the past year. So as you know we haven't started a new development for almost five years that the risk adjusted returns just really didn't make sense. What we've seen more recently is that I think others are recognizing the challenging return environment and we've seen capital pull back so permits or start.
Steve Sockwell: To come down hard costs are starting to come down. So if you can secure land at an attractive basis and device design and inefficient building I'd say, we're getting closer so we have a history of.
Steve Sockwell: Being a car.
Contracyclical cyclical a developer and I think that with others pulling back we are sharpening our pencils and.
We'll have more to come here in the next several quarters.
Speaker Change: Thank you.
The next question is from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Steve Sockwell: Hey.
Speaker Change: Out there.
Alexander Goldfarb: Two questions first Angela you mentioned some comments around supply in on the east side of Seattle and I think you also mentioned, maybe the San Jose, but just big picture collectively can you just sort of outline the supply picture that youre looking at you know how much of the portfolio you think it impacts and if it's just sort of.
In the next six months or if you think it's something that extends longer and impacts more of 25.
Yeah, Hey, Alex Good question, there on the support supply landscape.
We do see that the San Jose impact should only really be more concentrated in the fourth quarter, maybe a little bit leads over in the first quarter because it all really depends on.
How did the delivery it curse. So for example, if they're all come at once or if they kind of go pro rata over the next several months they'll have a different impact, but having said that you know San Jose as far as the <unk> or the total stock is still very low we're talking about for the full year.
Alexander Goldfarb: 400 units, that's supposed to be delivered unfortunately.
Speaker Change: <unk>.
Speaker Change: 1100 of that is happening in the fourth quarter, but.
It's still very low and this is why we expect that absorptions will occur quickly and well, yes, there'll be some concessions involved it's not going to be a.
It's challenging as what we've seen for example in downtown L. A R O Quinn, it's very different Beast and it should.
We should get past it you know within say three months or four months or something along those lines.
Steve Sockwell: Seattle is a little bit more in terms of the supply overall I mean generally it has been a higher supply delivery market with say a little bit above 1% of total supply and so.
Having a shift from the east side, we believed that impact started it will start in the fourth quarter.
Steve Sockwell: And.
And probably continue in the first quarter, what has helped Seattle in the past and what we continue to see the benefit is that Seattle has also generated the highest level of demand in our markets so well.
Steve Sockwell: With a with a higher level of job growth, we have a we expect that the demand or the supply will be.
Absorbed them timely.
And so well there'll be a temporary concession environment, it's not it shouldn't be prolonged because that's how it's been every year with Seattle.
Speaker Change: And then Barb a question for you on the recycling as you guys are whittled down the deep <unk>.
Speaker Change: Preferred in that book and recycle Linda into assets sort of in aggregate, especially as we think about 25 is there some sort of.
Speaker Change: Our pennies or some sort of way that we can think about the dilution impact is it 510 cents is it more than that just trying to get a sense of you know how.
How we should think about the redeployment from the preferred in that book into income producing assets.
Yeah, Hi, Alex Yeah. That's a good question I think what you. What you can do is you know, we're losing a 10% on the preferred and were redeploying out around a five and so that's that's kind of the impact that you're seeing from an episode perspective, but you know what I did talk about on the call as you know, we're targeting 3% to 5%.
Our core <unk> per share in 2024, we were at about five 5% so structure financings at about 5.5% of our 2024 core if I. So we do expect that will moderate to the low 4% range next year as you know a lot of our redemptions issue or back end loaded and then we have some.
And loaded redemptions next year and so we do expect it to moderate throughout next year, but we should have higher NOI as well as we are redeploying that money back into acquisitions.
Speaker Change: Thank you.
The next question is from the line of Adam Kramer from Morgan Stanley. Please go ahead.
Hey, Thanks for the time just wanted to ask about the kind of advocacy expense lobbying expense that was disclosed this quarter, maybe just quantify kind of what it was this quarter and maybe what it's been year to date as well.
Speaker Change: Then if theres more to come here.
Speaker Change: <unk> still give any kind of the timing of the election versus the timing of the quarter end.
Hi, Adam it's barb so in the third quarter, we spent $10 million year to date, we're at 16 million and for the full year, our guidance assumes a little over $30 million.
Speaker Change: On the advocacy front.
Got it and are you able to split out whether that is kind of prop 33 versus <unk> 34 versus maybe I don't know the other legislative.
Speaker Change: Lobbying efforts.
No. It's all related to mostly prop 33, and 34, but we don't have that but I don't have that breakout in front of me.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Jamie Feldman from Wells Fargo. Please go ahead.
Great. Thank you. So I think you renew your insurance policy in December can you.
Give us your initial thoughts on how that's looking and maybe just frame what youre seeing and hearing in the commercial property insurance market overall.
Hi, Jamie as far we have a good memory, we are in the midst of Irish insurance renewal right now and it's a little too early to you now know how it's going to play out, but what we have seen in the industry. This year is a moderation in insurance premium increases so just to give some history of the last two.
Speaker Change: Two years, we've seen our premium increased 20% to 30% annually.
We do expect that it will moderate from there next year, but the level is a little difficult to discern at this point I will obviously have more color on our fourth quarter call.
Okay, and I know you're not obviously.
In Florida, but are you hearing like that spills over everywhere in the country.
Or are you you think you'll be relatively isolated from the impact.
You know that's a good question, it's something that is playing out as we speak and then November and Newell's Didnt see too big of an impact that we heard but obviously, we're going after both hurricanes hit so a little tricky to answer that question right. Now then we're in the midst of those discussions at this point.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Josh <unk> from Bank of America. Please go ahead.
Yeah, Hey, everyone and thanks for the time I was looking at exhibit or I guess page S 16, one in the sub.
Speaker Change: Mental.
Could you just kind of go over that earn in.
It excludes concession impact or just kind of wanted to clarify what that means and maybe how we should think about it versus our.
Our bottles out here.
Yeah, Josh this is barb so the earn and it's consistent with how we calculate it last year. It's really just taking the leases that we signed through October and <unk> and then our projections for November December and what does that kind of carry forward next year, assuming no market rent growth next year and it doesn't.
Include concessions because concessions are below the line I mean, this is just that that gross rent not including any concessions I don't think it's too dissimilar from how the industry calculates this number but 90 basis points as our projection at this point based on the leases signed.
Okay. So to answer your question or yeah, no no I appreciate that part that that makes sense and then maybe just why have you just kind of thinking about like the capital recycling.
Guys. Thank you lean into maybe taking out or consolidating additional JV is versus just outright open market purchases of income producing assets.
Or is it just kind of opportunity set driven.
Hey, Josh you know the the joint venture business has really been a an efficient source of capital and so it has and will continue to benefit the company through various points of the cycle. We have great partners, who want exposure to west coast housing and they like investing alongside a company like Essex that's financially.
And can provide a best in class operating platform.
Speaker Change: In 2024 from ethics perspective, we saw an opportunity to purchase communities that we knew well we'd invested in for many years and most importantly was increase to shareholders going forward. We still have 7700 units that are owned in joint venture partnerships and it's gonna be a function of our discussion with partners our cost of capital and the.
<unk> opportunity set in the market. So we are open and eagerly looking at all avenues to grow.
Thank you.
The next question is from the line of John Kim from BMO Capital markets. Please go ahead.
Thank you.
I wanted to ask about the spread that you have between renewal and new leases. This quarter. It was 330 basis points.
Speaker Change: Over the last two years, it's been 350.
A lot of your peers are at 600 basis points or more in some cases. So it seems like your renewals a little bit more sensitive to market rents than maybe some others.
And I'm wondering why that's the case.
Hey, John It's Angela here I don't know if are we.
Speaker Change: Renewals and market rent.
<unk> is really what's driving the spread I think it's more of the operating strategy, that's driving just the spread.
And so you know what we focus on is maximizing revenues and so we try to send renewals out where we anticipate what the market is going to be a month or two from today and negotiate as neat it along the way.
Speaker Change:
And of course that strategy is influenced by weather were focusing on occupancy and what else is happening you know the supply landscape the job landscape and so we tried to factor all of that with them.
Speaker Change: Are you know maximizing total revenue in mind, what we have seen is some of our peers are more focus on say.
Speaker Change: Getting a higher lease new lease rate and some are more focused on just getting higher renewal rates for example, and when you focus on one of course theres going to it's going to impact the others and if it's not a rate impact it's going to be an occupancy and Pat so ultimately.
Speaker Change: It's I'm, probably giving you more color than what you're asking for but ultimately I do think that we all have different levers that we are calling and and our business objective is focused on maximizing revenue not a specific rate per se.
Sure, but I mean in the case of some companies they move out to buy a home is at all time lows I'm wondering what that ratio is for you right now, but because it is at all time lows. They are able to push renewals maybe harder than.
Speaker Change: And one would expect versus the new leases I'm. So I'm wondering because home prices so high in your markets.
Does that present potential upside for you going forward as far as.
I know I'm, pushing the needle a little bit more on renewals.
Yeah, John that's a that's a good question for us the move out to buy homes has not been a meaningful factor in our pricing strategy, whether it's now or you know in prior cycles, primarily because it's a smaller percentage. So for example pre COVID-19.
During say more even when interest rates were very low or move out to buy homes is somewhere around 10% ish range.
So it's already very low and you know the.
The cost to own a home is back then almost two times I think it was one eight times more expensive to buy a home than to to rent today. They move out ratio is about 5%. So it's about half having said that we're talking about you know.
Speaker Change: Ah three almost 2.8, so almost 3% or three times more expensive to own and to rent so that incremental increase on that cost of ownership really isn't going to move the needle on our pricing strategy because it's already so expensive.
Speaker Change: Thank you.
The next question is from the line of Linda Tsai from Jefferies. Please go ahead.
Hi, maybe just related to some of the topics you've covered earlier I'm just with the comparisons getting a little easier from here would you expect new rates, our new lease rates inflect more positively for the last two months.
Hey, Linda it's Angela here, that's what we are anticipating and so you know our new rates are obviously went negative in in October and they started in September but with the easier year over year comp, we do expect a inflection point where it.
Either becomes neutral or turns positive.
Thank you and a quick question for Barb could you provide some color on your refinancing plans for the upcoming 2025 maturities and maybe what kind of impact that would have on earnings for next year.
Yeah, Linda that's a great question I mean, we're constantly monitoring the market and you know most of the maturities that are due next year is 500 million in unsecured bonds. So we'll be looking at the bond market to.
Speaker Change: To refinance that in the near in the near term.
Speaker Change: I think it depends on you know the tenor and where the treasuries at when we issued the 10 year paper in August we were at $5. One today. That's the we're probably 30 basis points why does that today.
Speaker Change: And so there will be an earnings impact because we're rolling off of three 5% coupon bond.
And going up into the low fives.
But in terms of you know opportunities to refinance it will.
Speaker Change: We're continuing them onto the market to see if there's a window, that's a more attractive opportunity.
Speaker Change: Thank you.
The next question is from the line of John Pawlowski from Green Street. Please go ahead.
Hey, Thanks for the time I wanted to drill into the return to office things some more and use Seattle as a case study. So can you share any specific metrics to help us understand how the leasing conditions have improved since Amazon and a few others have announced stricter returned to office policies and now ostensibly housing choices need.
Speaker Change: To change ahead of those mandates becoming effective so love to hear how are their foot traffic or leasing spreads have shifted in recent weeks and months.
Hey, John that's a good question so in Seattle, what we have seen is our demand increase or in fact spike when Amazon and some of these other companies first announced the return to office and I think back then it was three days.
And so we saw that direct correlation and usually it was with him say.
30% to 45 days.
Of that announcement.
And as far as where fast.
Fast forward to today.
With the announcement of Amazon going full time in January.
Speaker Change: The question here is going to be.
When do they start enforcing it because that's when we will see the benefit so.
When Amazon first announced their return to office. They also said they were enforcing it right away.
And this time, we're waiting to see how if that is going to hold true as well.
Speaker Change: Okay.
And then last one for me Angela bar, but I want to talk about the exclusion of the advocacy costs from from core F. O I just get frustrated when a lot of money. It gets excluded from some of these metrics. So as these regulatory efforts become more recurring in nature. They are episodic, but they're definitely not one time, how do you guys just deliberate.
Internally has it become more recurring still excluding meaningful expenses from core episode.
Speaker Change: Yeah, John that's a good question I mean, I you know I, we don't see them as recurring every year and in this case, we haven't had any cost since 2020 on this front. So it's been four years and and so we do have a a plan in terms of how what we define as.
Nonrecurring costs and this is one of them.
Speaker Change: I think it's pretty standard in the industry, but it's something that we do revisit regularly and we've been transparent about how much we're spending and so we're not trying to hide from it but we don't see it reoccurring every year.
Thank you.
The next question is from the line of Julien Lewin from Goldman Sachs. Please go ahead.
Julien Lewin: Yeah. Thank you for the question Reiland, maybe digging into your comments on the JV acquisition front I guess, how many of those 7000 plus remaining JV units would you ultimately be interested in consolidating if you had the opportunity and do most of those have sort of significant prop 13 benefits that help you.
Your yield is a buyer sort of come in closer to that 6% buyer cap rate you've been getting.
Speaker Change: Yeah.
Speaker Change: Hi, Julien.
Julien Lewin: We've made these investments to begin with would suggest that we would like to own all of them. If we had the opportunity, but and several of them are structured in such a way that we would have a a prop 13 benefit but that being said.
We have great partnerships and our strategy. Our plan is not to consolidate all of them. We will continue to evaluate opportunities as joint venture maturities.
Come forward or as debt maturities come forward. So it represents an opportunity, but we were committed to this business and we're committed to our partners that want to be in this business with us so.
Just you know manage expectations about how much how many of those could be consolidated in the near term.
Okay, Great that's helpful and it sounds like a lot of these are older assets I guess does that bring any sort of value add readout of opportunities to sort of accretively upgrade these assets at attractive yields maybe putting in capital that would have been difficult to secure from partners, but that maybe now is a little more straightforward.
Word for you to do on your own.
It's a fair question I would say the weather was one asset that was part of the initial portfolio earlier this year, where we had a significant development opportunity that we continue to explore typically these are business cases that we discuss with partners and more often than not again, we have got.
Great partnerships that see the value that we can create that those are rarely you know gating issues from our partners' capital. However, as you can imagine it is a little bit more efficient when we're doing it internally on a consolidated basis. So.
These these are these are assets that we've owned for a long time, we invest in our assets. So we are we know what we're stepping into and in some cases, there is some value add opportunity, but nothing significant to highlight from the most recent acquisitions.
Thank you the.
The next question is from the line of Alex Kim from Zelman and Associates. Please go ahead.
Speaker Change: Yeah.
Hey, Thanks for taking my questions today I wanted to ask about your blended rent growth outlook I noticed that you referenced remaining on plan for your full year outlook of around 2.5% could you talk through some of your expectations in November and December that allow you to remain on track.
I guess, especially with the seasonal moderation that occurs in the upcoming months.
Sure thing Alex in terms of.
What we're looking at for a November December I'll, just give you. One example that hopefully Canada yeah.
Speaker Change: Give you the appropriate color so.
And last year in October.
We were giving out.
Half a week of concessions in San Mateo.
Speaker Change: And.
Speaker Change: Yeah.
By November and December concessions went up to $3 two weeks.
Speaker Change: So currently.
Speaker Change: Currently sitting at two we don't see that increasing dramatically because last year, we had supply in San Mateo for example, and you know some some other.
Fluency and so just from the fact that there is going to be.
Speaker Change: Yeah, no headwind on the concessions.
That in itself is a beneficial pick up the second chapter is of course with L. A are working through the evictions in a meaningful way that overhang on new leases.
Speaker Change: We'll continue to abate so that'll be another beneficial faster and then of course, the third piece is lease rates.
Speaker Change: New lease rates in October.
Speaker Change: Tober in November last year.
Speaker Change: It was.
It went down to about say average.
Speaker Change: Negative two 5% and so once again this year in October we're sitting here at about one and a half we have.
Plenty of room, and certainly not a new lease rate a headwind on that front. So on multiple fronts, we actually have either a tailwind or headwind and which is why we have talked about a potential reacceleration on the new lease rates and of course, the last component is our renewals have perform.
Stronger than our original forecast and so on a blended basis, we we see a path to achieving our plan.
Speaker Change: Got it thanks Sidney.
Speaker Change: Commentary there and then just a follow up wanted.
I wanted to ask about bad debt and some of your assumptions for delinquencies not for 25 Bucks for this upcoming fourth quarter and as well as.
Speaker Change: Any other specifics you can provide for like the other income piece that helped drive the upward revenue guidance revision.
Speaker Change: Yeah.
Yeah in terms of bad debt.
Year to date through October we're sitting right around 1%, we think will be right around 1%, maybe slightly under for the full year with the fourth quarter being not too dissimilar.
In terms of the other income drivers for the quarter in the third quarter, we did have higher lease break fees related to corporate tenants, which hit the other income line, but it's not going to reoccur in the fourth quarter, which is causing.
Some sequential decline that you're seeing in the numbers fourth quarter relative to the third quarter.
Thank you.
The next question comes from the line of Amy <unk> from UBS. Please go ahead.
Hi, Thanks.
Up to a previous question and sorry, if this is coming a little too close to asking for guidance.
I would like to discuss how we should be thinking about the impact of concession burn off in 'twenty five mm it seems like San Jose and Seattle could see some tailwind in the second half of the year, but I'm wondering if there's a way that we can think.
Think about quantifying some of this impact.
Yeah, Amy that's a good question, what we're seeing is that the concessionary level well. It may vary in our Submarkets is essentially moving from one area to another when it comes to supply.
Speaker Change: And so you know the law.
Last year was heavier in downtown Seattle. This year I mean, this year I should say 2024, it's not over yet and it's a little heavier in downtown Seattle next year.
Speaker Change: It's gonna be a little heavier in east side, and so it's going to shift, but yeah from one to the other.
And therefore overall, we really don't expect the concessionary environment for the full year two vary all that much from one year to the other.
Great. Thanks.
Speaker Change:
Speaker Change: And just a quick one on the transaction environment do you think that the current transaction levels are kind of back to a pre COVID-19 norm or are we still trending lower in terms of absolute volume.
Yes, Amy transaction volumes year to date in California, and Washington, and it actually is approximately for the national average or around two.
Two thirds of what we would call it pre Covid average say 15 to 19, it's still well below approximately a third of what we saw in 'twenty, one and 'twenty two 'twenty. Two so we've had an uptick versus last year, which there was very limited volume at its picked up that include some of the large portfolio transactions that I'm sure you're aware of but were still below.
The level of volumes that we've seen in previous years. So there's a good chance of capital markets continue to trend favorably that we'll see an uptick in transaction volume next year.
Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Ladies and gentlemen, we take the last question from the line of corn up peaks from Deutsche Bank. Please go ahead.
Speaker Change: Great. Thank you maybe sticking on the acquisition opportunity front maybe.
Speaker Change: Maybe if you could talk a little bit about what kind of regional differences you're seeing in your markets maybe in regards to available stocks of sale or movements in cap rate pricing.
Speaker Change: Yeah. It's a fair question, we're not seeing a wide differentiation in terms of cap rates for core product well located newer product in all of our submarkets continue to be well bid.
I think youre seeing some the most aggressive pricing is along the peninsula, where I think people are more likely to be underwriting a above average rent growth for the next several of years. So.
But the spread difference in terms of cap rates for high quality product is de Minimis, we've seen limited transaction volume in the downtown centers, and particularly L. A to start the year that has picked up we've seen several transactions.
Speaker Change: In downtown L. A this year, so they feel like relatively healthy markets.
But again as I mentioned earlier not to the level of volumes, we've seen in previous years.
Great. Thanks, and then.
It could it could be a tougher comp kind of driving this a little bit but if we were to look at the higher expenses in the northern California portfolio.
Speaker Change: The drivers behind that.
Speaker Change: Yeah. It is somewhat comp related there is you know expenses are lumpy quarter to quarter and does it depend on what happened a year ago, Let's say utility expenses were a little higher there than in some of the other regions and that represents 20% of our opex. So that can have sometimes are a meaningful impact.
So nothing to be alarmed about nothing that's really outside the norm. It's just really does depend on the comp from the prior year.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen that concludes the question answer session.
And it also concludes the conference off ethic property Trust. Thank you for your participation you may now disconnect your lines.
Speaker Change: Goodbye.
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