Q4 2024 Essex Property Trust Inc Earnings Call
Good day, and welcome to Essex property Trust fourth quarter, 'twenty 'twenty four earnings call.
As a reminder, today's call conference.
The conference is being recorded statements made on this conference call regarding expected operating results and other future events are forward the farmer.
Forward looking statements that involve risks and uncertainties forward looking statements are made based on current expectations assumptions and beliefs as far as information available to the company at this time.
A number of factors could cause actual results to differ materially from those anticipated further information about these risks can be found in the company's filings with the FCC.
Mr. Claiming: It's now my pleasure to introduce your host Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you Mr. Claiming you may begin.
Mr. Claiming: Good morning, Thank you for joining ethics fourth quarter earnings call Barb Pak will follow with prepared remarks, and Wyland Burns is here for Q&A before we begin on behalf of the entire company I want to express our condolences to those affected by the tragic wildfires in Los Angeles, while our properties did not incur any loss.
Mr. Claiming: My gratitude goes to the Essex team for <unk>.
Mr. Claiming: We're actively helping those displaced as we adopted several policies to ease the transition into new housing within our Los Angeles portfolio.
Mr. Claiming: As for our earnings call today, I will cover our full year and fourth quarter 2024 results followed by our outlook for 2025, and an update on the investment market.
Mr. Claiming: We are pleased to achieve full year same property revenue growth of three 3% and core <unk> growth of three 8% both exceeding the high end of our original guidance.
Mr. Claiming: Our strong performance was the result of improving demand, including return to office and migration patterns combined with attractive affordability and delinquency resolution by our hardworking associates.
Mr. Claiming: With this backdrop, we experienced a typical seasonal what curve for the first time in several years. Additionally, we successfully shifted the company into a growth mode acquiring and consolidating 13 properties that's above market yields.
Mr. Claiming: As for the operation highlights fourth quarter results were generally consistent with expectations, we achieved one 6% blended lease rate growth and.
Mr. Claiming: Sessions average one week for the same store portfolio in the fourth quarter.
Mr. Claiming: On a more granular perspective, Orange County in Santa Clara County, led the portfolio with 2.7% blended rate growth well early in Alameda County land with 20 basis points of blended rate growth.
In January as demand picked up in line with our operating plan lifting occupancy by 40 basis points to 96, 3% and concessions improved to less than half a week on average.
Mr. Claiming: Turning to our 2025 outlook detailed on page S 16 consensus GDP and job growth is forecasted to moderate for the U S. Overall, but remain at a healthy level. The west coast is well positioned with improving economic fundamentals as job growth is forecasted to outperform the U S. After a law.
Mr. Claiming: Lagging in 'twenty 'twenty four jobs.
Mr. Claiming: Job growth in the technology sector is the key driver of this outlook as we anticipate job postings to convert into new hires in 2025, resulting in better overall growth.
Mr. Claiming: Steady demand combined with low level of supply deliveries. It always 50 basis points of total housing stock and attractive affordability relative to home ownership needs to our base case forecast, a 3% market rent growth.
Mr. Claiming: And San Jose are projected to lead the portfolio at approximately 4%.
Mr. Claiming: As far as the range of outcomes. The low end of our guidance is mainly attributed to policy uncertainty and timing of the delinquency recovery our optimism for the high end of our guidance is supported by solid fundamentals and based on past precedent that tech job postings still have runway to grow for the sake of database.
Mr. Claiming: <unk> cycle.
Mr. Claiming: It is notable that reason office expansion announcements demonstrate the intention.
Mr. Claiming: Majority of new hiring will be focused in headquarter locations, which favors the west coast economy, particularly the northern region.
Mr. Claiming: Over the long term, we see a path for the West coast apartment markets to continue to outperform the U S average, but better job growth and wealth creation driven by centers of innovation combined with limited level of supply growth.
Mr. Claiming: Lastly on the investment market in 2020 for the West coast experienced a meaningful uptick in volume, reaching a level close to the pre COVID-19 average.
Mr. Claiming: Although interest rates increased in the fourth quarter, there remains a deep pool of capital eager to acquire properties on the west coast and cap rates in the fourth quarter for high quality properties remain consistent.
Mr. Claiming: At around mid to high 4% range.
Mr. Claiming: In 2020 for Essex was opportunistic and its acquisition efforts successfully generating significant accretion by consolidated joint ventures, and acquiring several communities in close proximity to our property collections well, we can enhance the yield on day, one by operating these communities more efficiently.
Mr. Claiming: In 2025, we expect to be net acquirers again, while optimizing our cost of capital.
Mr. Claiming: Our focus remains on being patient and opportunistic to drive SFO and NAV per share growth for our shareholders.
Barb Pak: With that I'll turn the call over to Barb.
Barb Pak: Thanks, Angela today, I will discuss our fourth quarter result, he assumptions to our 2025 guidance followed by comments on the balance sheet.
Barb Pak: We're pleased with our fourth quarter results, which were slightly ahead of our expectations, primarily driven by higher income from our joint venture entities as it relates to same property operations. We also saw a continued reduction in delinquency during the quarter, which improved 60 basis points, a scheduled rent on a cash basis.
Barb Pak: For the here, we made substantial progress on the delinquency front, reducing our bad debt by over 50% from one year ago.
Barb Pak: As such we are pleased to be in a position to fully eliminate the remaining accounts receivable balance during the quarter, which resulted in same property revenue growth of two 6% on a year over year basis without this noncash adjustment revenue growth would have been three 2% for the quarter.
Barb Pak: Turning to our 2025 outlook same property revenues are forecasted to grow by 3% at the midpoint. The key drivers of this growth are outlined on page S 16, one of the supplemental.
Angeles: Continuing on with the Angeles comments stable economic conditions, low supply and expectations for increased hiring among key west coast industries reinsurance forecast for blended rent growth of 3%.
Angeles: In terms of the cadence, we expect blended rent in the first half to be below the full year mid point and improve in the second half of the year as hiring salary and translates into increased demand for housing.
Angeles: Our guidance assumes a 50 basis point improvement in delinquency as we continue to make progress returning to that long term run rate.
Angeles: Rounding out the remaining components, we anticipate 30 basis points combined contribution from higher occupancy and other income.
Angeles: Moving to operating expenses, we forecast $3 75 per cent same property expense growth at the midpoint a significant improvement from what we've experienced the past two years.
Angeles: Biggest factor driving this outcome is lower insurance expense.
Angeles: We renewed our property insurance in December and saw a small reduction in our premiums as compared to the prior year.
Regarding controllable expenses, we are forecasting growth of less than 3% as we continue to seek ways to enhance our operating efficiencies to offset wage pressures.
Angeles: Putting it all together same property NOI growth is expected to increase two 7% at the midpoint.
Angeles: As for core if I, so our midpoint of $15.81 equates to one 3% year over year growth.
Angeles: The modest increase is driven by two factors, which combined represent around 2% headwind to growth.
Angeles: The first relates to higher interest expense, primarily driven by the refinancing of 500 million in unsecured bonds.
Angeles: Our guidance assumes we refinance this debt in the first half of the year and given the current interest rate environment. The all in rate is expected to be meaningfully higher than the three 5% rate on the maturing bond.
Angeles: The second factor is lower structure finance income as a result of redemptions in 2024 and those expected in 2025.
Our guidance assumes $150 million in redemptions at the midpoint of which approximately 50% is expected to occur by midyear.
Angeles: As previously communicated we expect to reinvest the proceeds into new acquisitions, which will offset a portion of this income and result in better nev and core fulfill growth for our shareholders over the long term.
Angeles: In total the structure finance book is expected to represent around 4% of our core for flow in 2025, consistent with our target range of 3% to 5%.
Angeles: Turning to investments the midpoint of our guidance assumes we acquire 1 billion of new apartment communities as first funding it will be dependent on market conditions, and our cost of capital utilizing the most attractive equity capital source available at the time and executed on a leverage neutral basis.
Angeles: With our track record of disciplined capital allocation.
Angeles: Including with the balance sheet.
Angeles: Allocating credit metrics remained strong 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 if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Please ask one question and one follow up question.
Our first question is from Nick usually so with Scotiabank. Please proceed.
Angeles: Thanks, Hi al.
Speaker Change: I believe you said that the low end of guidance assume some sort of potential regulatory impact and I'm, assuming that's in you know and and.
Speaker Change: L. A I just wanted to be clear on that and also if you could provide.
Speaker Change: You know what is the same store revenue growth range that you know what's assumed in guidance for for L. A specifically.
Speaker Change: Hey, good morning, and thanks for your question, Yes, I Yeah legislation is a unknown factor at this point then it's a little too early to predict the outcome and so as it relates our guidance, we didn't factor that component.
Speaker Change: Into our guidance, but that's why we have a range. So I downside is contemplated is if something gets it after that so.
Speaker Change: Yeah, that's that's more extreme in nature, but we are aware of is currently.
Speaker Change: There's a picture moratoriums being considered in L. A and a rent free proposal.
Speaker Change: And in.
Speaker Change: As far as the eviction moratorium is being it is concerned what we are hoping for is a more sensible approach.
Speaker Change: Unlike what was enacted during COVID-19 and that the legislature is understand the eviction moratorium as punitive only to housing providers and a bad policy for L. A because it deters investments in L. A and housing production in an area that already has an extreme shortage of housing because we all know that the best path.
Speaker Change: As to affordable housing is more just to produce more at home.
Speaker Change: And so that conversation is ongoing and we are working closely with you know our organizations, who get better visibility on that at some point.
Speaker Change: As far as their run freezes are concerned governor Newsome declared a state of emergency related to the fires that triggers the existing California law to limit rent increases to 10% above pre emergency levels.
Speaker Change: Since there is already an anti clogging protection in place, which we also support we're hoping that nothing more extreme will be passed.
Speaker Change: And so once again, that's the reason for the downside scenario and that's what it's related.
Speaker Change: Related to the impact to the lower end of the range.
Speaker Change: Okay. Thanks. That's helpful is is it possible to get just a specific you know four four L. A in terms of what's assumed for the you know the same store revenue growth this year.
Speaker Change: Yeah, it's far so for L. A we have assumed that it will improve from where we are in 2024 as you can see in our supplemental we were at two 3% L. A was very challenged in 'twenty, four with low occupancy and negative rent growth and we think that occupy.
Speaker Change: To improve to a stabilized level of 96 and that rent growth is you know modest at about 2%. So that's what's baked and no impact from the wildfires has been forecasted in our numbers. It was just we had assumed the market starts to recover from some of the eviction noise that occurred in 2024.
Speaker Change: Okay. Appreciate it thanks.
Speaker Change: Our next question is from Eric Wolfe with Citibank. Please proceed.
Speaker Change: Hey, Thanks as part of your guidance you gave an expectation for 3.5% renewal rate growth through this year I'm just trying to understand why it wouldn't be a bit higher given the low turnover you've been seeing and I think you did about 4% last year with weaker market rent growth or just trying to understand how you came up with that estimate and why would be lower.
Speaker Change: Last year.
Hey, Eric It's Angela here, that's a good question and our approach generally has been to essentially be market appropriate with our renewal rates.
Speaker Change: And what that means or over time, where you would expect the renewal rate and market rents to converge.
Speaker Change: Now it could be lumpy and year over year, depending on lease terms, the concessionary environment and timing of the renewal side, which is why you saw and you know we experienced a 4% renewal in 2024, even though the market rent growth was quite a bit lower.
Speaker Change: But nothing that is that you know our focus has been and will continue to be on maximizing revenues rather than individual rate and these are renewal rates.
Speaker Change: It can be lumpy from year to year.
Speaker Change: Got it and then you you mentioned that.
Speaker Change: Do you expect the second half to be better from a blended spread perspective I don't know if you want to give sort of what you expect for the first half and second half, but sort of what gives you that conviction that you'll see that increased hiring trends. Obviously you can win listings, but just curious what gives you the confidence that you'll see that incremental demand in the back half of the year.
Speaker Change: Yeah, it's really a function of two factors, it's both demand and supply and so as far as the cadence we're anticipating that the first first half to be in the high twos, So say around $2 75 in the second half to be above our mid point you know in the low threes say.
Speaker Change: Three three around there.
Speaker Change: And from a supply perspective, I think that's more straightforward so I'll cover that first.
Speaker Change: We are anticipating that the first half deliveries to be heavier.
Speaker Change: So when we look at our supply cadence about 60% or so if the supply is coming in the first half so that of course will impact them.
Speaker Change: You know our our our pricing.
Speaker Change: Power and as far as the job growth.
Speaker Change: We assume that to happen in the second half because what we're seeing is the job.
Speaker Change: Postings that have been gradually increasing hadn't been study, but it takes time to actually higher and we also seen day out to them.
Speaker Change: Especially in the Bay area.
Speaker Change: A meaningful number of tech companies have taken on office expansion and just from the Liza side and if you just take the actual square footage that would imply somewhere around 5000, new head counts well, that's not all going to happen at the same time and certainly it's not possible for it to have all happened you know where the most of them to happen.
Speaker Change: First quarter, because once again it takes time too.
Speaker Change: The crew and interview and put people in place and so that is why we're assuming the second half and of course, our condition is coming from the leading indicators such as job openings and of course, the office leasing activities.
Great. Thank you.
Austin Schmidt: Our next question is from Austin, where Schmidt with Keybanc capital markets. Please proceed.
Speaker Change: Yeah, great. Thank you.
Austin Schmidt: I know you mentioned.
Speaker Change: <unk> will be lower than the second half for the reasons you just cited but I guess digging into the 2.5% new lease rate growth assumed at the midpoint of same store revenue growth guidance I guess should we expect kind of another year of a gradual ramp into the peak leasing season, and then kind of the shoulder periods being a little softer and then also curious.
Austin Schmidt: Rent growth assumption.
Austin Schmidt: If any.
Austin Schmidt: Much benefit from kind of a.
Austin Schmidt: I guess, a more normal year, where you don't have long term.
Austin Schmidt: Long term delinquent units coming back to market just wondering if there's any kind of concession burn off benefit in that number.
Speaker Change: Hey, Austin, though that's a good question, we do expect the leasing curve to continue to normalize.
Austin Schmidt: So in 'twenty 'twenty four.
Speaker Change: The first time in several years, where he felt it was normal leasing.
Speaker Change: Leasing here and so what we're expecting in 2020 five that it will continue we haven't really seen anything else in the economy that would provide a meaningful disruption to.
Speaker Change: To that and as far as you know our market rent is concerned.
Speaker Change: What happened last year is if you look at our actual market rent it was slightly lower than our forecast, but that's really driven by L. A and L. O meter delinquency that created a lot of noise and so once you factor that in you know we are assuming that that is now behind us and them.
Speaker Change: Market rent curve is much more steady.
Speaker Change: That's helpful. And then just touching on the bridge from the fourth quarter result to the first quarter guidance.
Speaker Change: If you remove kind of a four cent.
Speaker Change: Noncash charge.
Speaker Change: In the fourth quarter, you did $3 96 of core F F.
Speaker Change: Our guidance assumes that dips.
Speaker Change: You do have some reacceleration in the blended rate growth you cited January occupancy pick up.
Speaker Change: Versus where you were in the fourth quarter. So I guess you know.
Speaker Change: What's kind of driving that sequential decrease in F. <unk>.
Speaker Change: If theres any items to highlight there. Thank you.
Speaker Change: Yeah. Austin. This is barb so theres really two factors, it's really timing on opex, so sequentially between the fourth quarter and the first quarter, we're seeing a little bit more in Opex spend and then the other big drivers was higher interest expense.
Speaker Change: We have a higher line balance and various other assumptions in the guidance. So that's that's really the two key drivers on the sequential change in Coffeyville.
Speaker Change: Our next question is from Steve Chocolate with Evercore ISI. Please proceed.
Steve Chocolate: Yeah. Thanks.
Steve Chocolate: I guess I just wanted to come back to that kind of blended number and really more of the spread between new and renewal I guess many of your peers just have a much wider I guess delta between the new and the renewal and I'm just wondering if there's something going on this year as it relates to the comps.
Steve Chocolate: And you know whether some of these renewables are turning into new leases or lack of renewals and there's more pricing power. There I just was a little surprised at the narrowed this between those two.
Angela Kleiman: Hey, Steve It's Angela here I know that's a good question because I think what.
Speaker Change: He is causing the variation from one company to another it was really more related to the operating strategy and you know for us what we have been focusing on is bringing in.
Speaker Change: Our renewal rate is close to market as possible and you know we're sending these ahead of time and there was some negotiating so it's not going to be exact.
Speaker Change: And because ultimately.
Speaker Change: If we were.
Speaker Change: Price or renewals appropriately done and run at the optimal occupancy then the new lease rates will benefit and so ultimately they'll all relates to how we can maximize revenues and so what that means is you know for ethics.
Speaker Change: The renewal and new lease spread well really that range or the spread is really subject to market conditions and in an environment, where market rent growth is accelerating that spread would be much wider but in an environment, where theres been prolonged moderate growth.
Speaker Change: That spread is going to be near or and of course, there are other factors like concessions and timing of lease assigned.
Speaker Change: Which you know makes it I understand hard for it for for all of us to pinpoint exactly what the spread would be but.
Speaker Change: That's but.
Speaker Change: How we're running the companies is probably driving the spread difference.
Speaker Change: Okay.
Speaker Change: Okay. Thanks, and then just a follow up again other income for you guys is only growing 10 basis points I know for some of your peers that are doing more of this connectivity and Wi Fi that that number is more like 50, 60 70 basis points. So is there something kind of holding you guys back on that other income are you doing something differently or have you made.
Speaker Change: We not taken the same steps that they have to kind of roll this out and that's coming for you just trying to understand that 10 basis points.
Speaker Change: Yeah, Hi, Steve. So this is barb. So you know there's a couple of factors are at play here. So in two.
Speaker Change: 2024.
Speaker Change: We had some outside what we would consider outside of lease cancellation fees and we talked about that on our last call and that we think moderates in 'twenty five to kind of a more normalized level. So that's muting growth a little bit on the other income side and then the second factor is in 'twenty three we rolled out.
Some initiatives that we've got the full benefit in 'twenty four and right now we're piloting a few things we're not sure we're going to roll them out we need time to that to make sure it's really going to pay off and if we roll them out like little benefit 'twenty six and so we're kind of in that piloting phase right now.
Speaker Change: Different initiatives, so that's what's leading to that 10 basis points of growth this year.
Speaker Change: Great. Thank you.
Speaker Change: Our next question is from Jeff Spector with Bank of America. Please proceed.
Jeff Spector: Great. Thank you.
Speaker Change: First question Angela in your opening remarks, you mentioned the company's in growth mode.
I know you've been talking about that the past year, but really can you just dive into that a little bit more the impetus and in terms of acquisitions. You mentioned cap rates are in the mid to high fours again.
Speaker Change: You know how do you plan to.
Speaker Change: Acquire as I guess again, if you could just talk about that as.
Speaker Change: As well as maybe IRR expectations. Thank you.
Speaker Change: Okay.
Speaker Change: Hey, Jeff No. Good question on the you know I'll just cover some high level, our strategy and then turn it over to Ireland as far as.
Speaker Change: Generating accretion of course in an environment, where our stock price isn't as attractive you've seen us do.
Speaker Change: So in other ways, we sell it we can sell assets, obviously that offsets the growth.
But.
Speaker Change: The growth of the company, but in terms of the growth of the portfolio. It actually will benefit that and it would generate accretion because if you see what we've done is we acquired a pretty heavily in 'twenty 'twenty four and the northern region, where we were expecting and have seen outperformance relative to the <unk>.
Speaker Change: Rest of the portfolio.
Speaker Change: At the same time, we sold a 250 million 1970 built property.
Speaker Change: I tried to value. So ultimately youll continue to see us transact in a way that's going to be accretive and as you're aware we have multiple funding sources. In addition to dispositions. We of course have some cash on hand from operations and joint venture opportunities bilingual.
Speaker Change: Talk about Retrans and another stuff, Yeah, Hi, Joseph Robin here, you know I think market participants as we mentioned are buying cap rates in the mid to high fours for well located high quality properties. I think you know the marginal buyer today as underwriting are around eight unlevered IRR expectation and we are obviously trying to.
Speaker Change: Do better than that.
Speaker Change: Thank you and then my follow up is you mentioned that there was a pick up in January can you talk about that in historical context was it a normal pick up that you see in January wasn't stronger than normal weaker than normal.
Speaker Change: Oh, yes, yes.
Speaker Change: This is consistent with our expectations and so it's typical you know the occupancy pick up in January was.
Speaker Change: All in Northern California, which was what we had expected because of that strength is it's finally, starting and when we look at just generally from a.
Speaker Change: New lease rates. It also gradually improved as well and so on all fronts generally is playing out.
Speaker Change: Exactly as what we had planned.
Speaker Change: Thank you.
Speaker Change: Our next question is from Jamie Feldman with Wells Fargo. Please proceed.
Jamie Feldman: Great. Thanks for taking the question. So your portfolio tilts more heavily suburban which has performed better since COVID-19 given some of the challenges we've seen in urban Submarkets. We're wondering if you expect the same theme of suburban outperforming urban in 'twenty, five and maybe to put a finer point on it can you talk through your views.
Jamie Feldman: On rent growth.
Or in your urban versus suburban portfolios.
Jamie Feldman: Yeah.
Jamie Feldman: Hi, Jamie it's that's a good question and in a thoughtful one as far as our portfolio allocation is concerned we have favor the suburban location for a specific reason.
Jamie Feldman: Yes from time to time you know.
Jamie Feldman: Particular area my outperformed for a short term, but our suburban portfolio is where all the major companies are located so unlike the east coast or even the Midwest.
Speaker Change: Apple in Cupertino, Google isn't.
Jamie Feldman: My own view.
And my husband Menlo Park, and so you know these major hubs are not in your in the downtown and so that is a key reason why we have favored the suburban locations.
Jamie Feldman: But in addition to that the downtown.
Jamie Feldman: I'll have more challenging in terms of the quality of life, there's the homeless issues still needs to be addressed and and you know I think crimes hopefully is getting better.
Jamie Feldman: And so I do think that yes, it's a certain the urban centers should rebound, but we do not expect for those areas to outperform the suburban them because they just have not done so over the long term.
Speaker Change: So can you quantify I know you've talked a lot about.
Speaker Change: Your rent growth in the first half versus second half I mean, how would you <unk>.
Speaker Change: Compare your urban rent growth versus your suburban and your 25 outlook.
Speaker Change: Oh I don't have that find out all the detail in front of me. We do we are expecting the suburban to continue to outperform the urban but it's going to vary differently. So for example, downtown la is going to be very different than downtown San Francisco, because somehow L. A has more supply.
Speaker Change: And so I don't have that exact spread.
Speaker Change: Okay.
Speaker Change: And then maybe for my follow up.
Speaker Change: I mean, I think you had commented that you've seen some office leasing in the Bay area. Some expected rent growth in the Bay area chapter isn't there yet, but we've seen a major hiccup today I industry with deep seek I'm. Just curious did you guys change your outlook at all for demand on that it seems like the AI business there'll be in cost cutting mode.
Speaker Change: It was just.
Speaker Change: Did that impact your outlook, how are you guys baking that into your expectations for a pickup in the back half of the year.
Speaker Change: Yeah.
Speaker Change: We don't expect Hep C to materially impact the business.
Speaker Change: Now first of all.
Speaker Change: When you look at the the all the leases are husbands side.
Speaker Change: It's not a it's not dominated by by AI.
Speaker Change: As you know companies like Snowflake, that's a data company, we have some fintech with some software company. So it's pretty well diverse but that said as far as keep seek is concerned we do think that ultimately more competition will spur more innovation and investments in this sector and deep sea.
Speaker Change: Yeah. There was a disconnect between what they provide and what they end user's need and you still need these companies to come in and create products and tools on top of it for the end users and so that business will remain robust as far as what we can see.
Speaker Change: Okay. Thanks for your thoughts.
Speaker Change: Yeah.
Speaker Change: Our next question is from Brad Heffern with RBC capital markets. Please proceed.
Speaker Change: Yeah. Thanks morning, everyone, obviously, a lot of political uncertainty right now, but can you talk about how you're thinking about the potential impact of shifts in immigration policy.
Speaker Change: And it would also be great. If you could talk about how much of your demand comes from H, one b pieces. Thanks.
Speaker Change: I know it's a.
Speaker Change: The administration question is an interesting one because.
Speaker Change: He.
Speaker Change: Can change from hour to hour from what we can see but as far as the immigration part of Unfortunately, that's been pretty steady in terms of how the administration has communicated their stance their focus has been on illegal in integration and so we don't expect that will have a meaningful impact on our portfolio.
Speaker Change: Especially since we haven't chronic shortage of housing at a level greater than the national average and anecdotally I think we've all heard of common such as we want the best and the brightest.
Speaker Change: So from what we gather the administration was actually pro H, one b visa and wants to provide a path for foreign college students to stay in the country.
Speaker Change: As far as our business is concerned in the past we do have.
Speaker Change: A small portion of tenants from H, one b visa they tend to be more transient and they tend to double up more and so once again when they exited early on during the Obama administration, we didn't see any impact to our portfolio.
Speaker Change: Okay got it thanks for that and then maybe for Bob I'm looking at the 20 to 25 of course, that's all work on F 16 dot too.
Speaker Change: You have a larger growth contribution from the non same property NOI than you have from same property can you just go through that I think potentially maybe the non same properties being offset some by the interest bar, but just wondering why it's so large.
Speaker Change: Yeah.
Speaker Change: The key takeaway there is the acquisitions that we did this year and that you know we consolidated several JV properties and then we.
Speaker Change: Bought out other so it's really that is the contribution it is the big component of it and so there's a lot of movement within the financials from consolidated two unconsolidated and consolidated and that's what's driving that.
Speaker Change: Okay. Thank you and I'm happy to go offline with you on more details if you need anything else.
Our next question is from Adam Kramer with Morgan Stanley. Please proceed.
Adam Kramer: Great. Thanks, guys.
Adam Kramer: I want to ask about it and I think I answered you mentioned a pickup in January.
Adam Kramer: Although maybe not maybe not so much in the La region I guess I'm. Just wondering first you know obviously given these unfortunate wildfires.
Adam Kramer: Thoughts and thoughts with everyone there.
Adam Kramer: Yeah, maybe just if there's been any kind of contribution to the portfolio be it on the rate side or maybe more likely in the occupancy seaside in January it seems like based on your earlier comments thats not been the case, but just wondering there.
Adam Kramer: Yeah.
Adam Kramer: We have not seen any increase in lead volume.
Adam Kramer: It's not from the fires I mean, we've.
Adam Kramer: We've seen inquiries, but the actual activities have not translated.
Adam Kramer: It's really because what we heard was that the fire victims are waiting for clarity from the insurance providers before making housing decisions. So it's gonna. It's just it's going to take a lot more time to work that through the system before it has any impact.
Adam Kramer:
Adam Kramer: And.
Adam Kramer: Secondarily in terms of the tenants that maybe looking for new housing.
Speaker Change: The impact of women.
Speaker Change: The single family home and they're going to need.
Larger units multiple bedrooms, and so once again I, just don't see that as a huge impact.
Speaker Change: Near term.
Speaker Change: Got it.
Speaker Change: It's helpful Angela and then.
Speaker Change: Just I just want to ask about kind of the same store expense growth guide, maybe just taking the midpoint of it if you could maybe just walk through the some of the key drivers there taxes utilities.
Speaker Change:
Speaker Change: Operating expenses, just the kind of contribution to that overall.
Speaker Change: <unk> gross guide.
Speaker Change: Yeah. This is barb so as I mentioned in my in my prepared comments insurance is kind of the biggest driver of our reduction in same store expense growth. This year from 49 to 3.75, So insurance, we expect to be down 2% based on our December renewal that.
Speaker Change: That's a big reduction from what we saw last year and then as it relates to real estate taxes, we do think that they're up a little bit from where they were in 2024.
Speaker Change: Given Seattle is a wildcard we do think Seattle may come in high again in double digit range. This year and then utilities has also been the wildcard we have seen our outsized pressure there and above inflationary increases we think it still is elevated in terms of increases in 2024, maybe a little bit.
Speaker Change: More moderate than what we saw in 'twenty.
Speaker Change: A little more moderate 25, or so 24, but overall.
Speaker Change: Real estate taxes utilities five linked to about the same number next year in total so core.
Speaker Change: The non controllable piece will be up about four 5%. We think and then the controllable piece will be up just under 3% is how we kind of get two or 3.75% blended number.
Speaker Change: Great. Thank you Barbara.
Speaker Change: Yeah.
Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed.
Alexander Goldfarb: Hey, good morning out there and rylan congrats on selling a 76 year old asset at a pretty pretty surprising price so well done.
Speaker Change: Just wanted.
Speaker Change: I wanted to follow up on Jamie Feldman question on the urban markets and suburban.
You know the.
Speaker Change: The big narrative and you guys have talked about it that tech is trying to make a push to cut back return to office and people you know the <unk> job openings and people coming back to San Francisco, Seattle, But you also made a comment about the urban area is still dealing with crime homeless and yet we hear positive things out of the changing political.
Speaker Change: <unk> landscape with as a result of elections in both markets. So yeah, when you cut through it.
How do we interpret a rebound of those two markets versus the comments that there is still.
Speaker Change: Work to be done obviously, I know stuff takes a while but is are the positive changes being like is that real time or that's the hope but right now it's not much really has changed on the ground as far as quality of life and Thats why you still prefer the <unk>.
Speaker Change: Suburbs versus the urban.
Alex: Hey, Alex Great question, It's it's really two things one is that when it comes to talk in public policy I think that the head in the right direction and we are hopeful that they can get it but you know I think we've all experienced this especially you went through this in New York.
Alex: Once you have a political plan then you have to set policy and you have to find funding and you have to implement it and these things just it's just it's not even a short term it's multiyear.
Alex: Program and so that's one of the reasons why you know our view is we are hopeful, but we believe it's going to take some time as far as the rebound in jobs.
Alex: N B, you know and the expansion that's taking place by these tech companies.
Speaker Change: I'll share with you what we've seen the leasing activities have all been in the suburbs.
Speaker Change: Snowflake is in Menlo Park, Robin Hood isn't Menlo Park.
Speaker Change:
Speaker Change: AI and you know we have a couple of small companies that's in South San Francisco, which is great, but it's another AI companies in mountain view I mean, it's predominantly in there. They are in the suburbs, maybe one or two small companies and in close to the CBD San Francisco Golf Club.
Speaker Change: Two it and so and that's pretty consistent with historical patterns.
Speaker Change: Okay and then the second question is just on the regulatory front.
Speaker Change: There's also the governor's actions with CCAR and the coastal commission, which I imagine both of those entities are very protective of their powers.
Speaker Change: Part of this larger conversation about rebuilding L. A and accelerating the process is there any discussion about.
Speaker Change: Dialing back the ultimate powers that both these entities have to improve construction or is the view that this is a one time.
Speaker Change: Yeah.
Speaker Change: Deviation of those of those rigorous sort of permission slips if you will and that one L. A has rebuilt those those entities go back in full force.
Speaker Change: Well, Alex I wish I had that Crystal ball I think you know what we're what we're seeing right. Now is there is an interest and also the need to focus on a.
Speaker Change: A massive rebuilding effort that needs to take place.
Speaker Change: <unk> said that how to go about it is complicated as you mentioned there are multiple agencies in play here.
Speaker Change: And I think you know what I think is people want to do the right thing, but everyone has their own process and so I think it's going to take a little bit more time to play out and on as far as the approval process and are in the rebuilding process.
Speaker Change: The you know what.
Speaker Change: What we can hope for is that.
Speaker Change: That the legislatures are going to try to be more efficient, but keep in mind, you know L. A is a very large and densely populated area.
Speaker Change: And the economy is huge.
Speaker Change: And well the.
Speaker Change: Yeah, they're they're home loss are the jobs remain intact and it's still in the L. A area.
Speaker Change: The County is the largest county in the U S with close to a trillion in GDP and so we are optimistic that L. A will figure itself out and that you know they will benefit from the catalyst of growth with infrastructure and investments coming for the World Cup and the Olympics.
Speaker Change: And film industry tax credit.
Speaker Change: By the way, it's the fourth quarter is the first time, we saw jobs in the film industry.
Speaker Change: Improved for the first time in several years. So these things do give us hope about L. A.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Our next question is from Handel St Juste with Mizuho Securities. Please proceed.
Speaker Change: Please check and see if your line is muted.
Speaker Change: Okay.
Speaker Change: Good morning.
Speaker Change: So I guess.
Speaker Change: Yeah.
Speaker Change: Yes, I'm here.
Speaker Change: So I guess my first question is on the development starts here. Your first starts are in about five six years. So can you explain a bit more about the opportunities that you're seeing here in development the markets, you're a bit more focused on and how we should be thinking about how you're thinking about yields IRS and potentially your appetite for where you might want to grow the development book too.
Yeah.
Reiland: And I'll Reiland here so.
Reiland: As you mentioned, we Havent started the development of over five years, because the risk reward really just didn't make sense as you're all aware it is very challenging to develop on.
Reiland: West Coast and what we're trying to do at a high level, we're seeking with our limited capital the highest risk adjusted returns. So we feel like we have an opportunity. Today. This is an a location adjacent to oyster 0.1 of the largest biotech hubs in the world our land at a very low basis, our costs are down in the high single digits from 2020.
Reiland: Too and the rents have started to show some momentum in 24. So we are looking for a least a 20% spread to where we think we can buy and we think we have that today on trended rents. This project is projected to.
Reiland: Achieve a mid to high 5% cap rate and that's what a fully negotiated GMP and a healthy contingency buffer and we think this project will stabilize in the high six range.
Speaker Change: That's a that's helpful. I appreciate that color and I wanted to follow back up on a comment I think he made about concessions you mentioned seeing some declines there recently, but I don't think.
Speaker Change: 2025 guide reflects any improvement in compression this year versus last year. So maybe you could give us a sense of where concessions in the portfolio are today and weather.
Speaker Change: It's fair to think this could be a source of upside with the demand improvement you're seeing in Seattle.
Speaker Change: And in San Francisco.
Speaker Change: Where markets I think you've had a bit more concessions I believe.
Speaker Change: Yeah, Hey, and L. A that's a good question on concessions today the portfolio is sitting at less than half a week and that's an improvement from December of a little over a week, but having said that she normally you know you would see concessions picked up if we have some.
Speaker Change: <unk> deliveries in the slow season, like December and which we did we saw.
Speaker Change: We saw it in our San Jose and of course, Seattle, and Fortunately San Jose, It's a smaller market in terms of the the number of deliveries and so it quickly abated.
Speaker Change: Seattle, the supply deliveries comparable to last year.
Speaker Change: And so we don't expect a meaningful change in terms of the concession environment.
Speaker Change: And in fact, some of the supply actually is moving to the east side, where we have the bulk of our portfolio and so even though I think northern California will be us better. If there is an offset with Seattle at the end of the day. So net net our concessionary position from year to year is going to be about the same.
Speaker Change: <unk>.
Our next question is from John Kim with BMO capital markets. Please proceed.
John Kim: Good morning.
John Kim: So your cash delinquency improved sequentially, but it looks like your gross delinquency went up I'm not sure if the reported and growth is the same number.
But I was wondering if you can comment on that and then when you talk about the 50 basis point improvement for the year does that include the impact of the accounting change.
John Kim: Yeah.
Speaker Change: Hi, John Yeah, it's far so the reported this quarter does factor in the.
The noncash charge for eliminating the accounts receivable balance of that impacted the numbers this quarter and it did show a slightly higher number than what we have been reporting cash on the other hand did improve from Q3 to Q4 and so we're seeing that consistent pattern that we've talked about over the long.
Speaker Change: Last couple of years, and then as it relates to the impact of 25, we have assumed 50 basis point impact to our guidance for delinquency of which 20 basis points is related to the accounting charge in Q4, and we expect a 30 basis points improvement on a cash base.
Speaker Change: So for cash for 2025, we expect delinquency to be around 60 basis points, which is where we were in the fourth quarter.
Speaker Change: And remind us where it was pre COVID-19.
Speaker Change: Pre COVID-19 it was around 40 basis points and we do expect for 2025 that the first half will be slightly above the 60, and then by the back half of the year will be at that 40 basis points level, so back to pre COVID-19 levels.
Barb Pak: And barb on the debt maturities that you have this year can you update us on where you could raise 10 year unsecured notes today and what's incorporated in your guidance for the year.
Speaker Change: Yeah. So in terms of where the 10 year unsecured bond market is for US today, we are in the mid fives.
Speaker Change: And an unsecured debt is slightly cheaper than secured debt agencies for a five year papers around the mid fives as well so you know.
Speaker Change: We do like the 10 year unsecured bond market.
Speaker Change: But when we go to look to refinance our debt we will look at all options to see what's the most attractive at that point.
Speaker Change: In terms of what's in our guidance with a variety of assumptions in terms of timing and rates in that number so I'm not going to go into that specifically, but where we are today is kind of consistent with where we were most of last year, we're kind of bouncing around in the mid five range for most of last year as well.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Our next question is from Wes Golladay with Baird. Please proceed.
Wes Golladay: Hey, good morning, everyone. I just had a quick question on the structured finance book I think you said you have about $150 million of redeeming. This year do you have the timing of that and then on a multiyear look it looks like it was about one six years of term for the just under $500 million of investments well that most of that it's a mature next year.
Speaker Change: Yeah.
Speaker Change: Yeah. This is Barbara it's a good question. So in terms of the timing of the $150 million of redemptions, we do expect about 50% to be by mid year. So most of that in the second quarter and then one maturity later in the year end 2025, and then in terms of.
Speaker Change: That timing is obviously subject to some movement as a couple of our redemptions in 'twenty five or early sponsors arent looking determines out as you know getting permanent financing is cheaper than their construction loans. So some some of those that timing does move around a little bit or could move on us, but that's our best guess based on talking to.
Speaker Change: Our sponsors and then in terms of the maturities yeah. There is the short duration a couple of them are maturing in the next year, but do have some extension option. So it may or may not get redeemed it depends on market conditions.
Speaker Change: Okay, and then do you expect to invest more I think you mentioned you wanted to 3% to 5% of the business to be in the structured finance, where you replenish this or just timing might not be right now.
Okay.
Speaker Change: I think it depends on the opportunities right. So if we see a good opportunity that's appropriate on a risk adjusted basis, we'll look at it we haven't seen a lot of those there is a lot of money raised for this product type and so it's become very competitive and so we focus more on buying hard assets, we think that's actually better long term.
Speaker Change: For shareholders, so, but it will be dependent on market conditions, and what we see in terms of opportunities out there.
Speaker Change: Okay. Thanks for the time.
Speaker Change: Our next question is from rich Hightower with Barclays. Please proceed.
Rich Hightower: Hey, good morning out there guys.
Speaker Change: Hum.
Speaker Change: I'm just I'm just piecing together I guess a couple of comments.
Speaker Change: Made related to the the broader transaction market. So Ryan I think you said you know for high quality product.
Speaker Change: Cap rates in your markets or maybe in the mid fours and if I heard correctly agency financing, perhaps in the mid fives. So I just want to make sure that I guess that implies negative leverage going in.
Speaker Change: And maybe outsized growth.
Speaker Change: As you kind of pushed the model forward. So is that pretty consistent with what you guys are seeing in the marketplace and just you know maybe a little more color on the transaction market in general.
Speaker Change: Hey, Roger that's a fair question and I think your assessment is correct I think a lot of buyers. They are assuming a negative leverage in year, one and trying to solve for how quickly they can get out of it.
Speaker Change: As it relates to the transaction market at a high level there was around $16 billion of transactions in California, and Washington, and our product type in 2024 compared to $7 billion in 2023 and two.
Speaker Change: Wanting to high watermarks in the below 20. So there was a lot more volume traded last year. It feels relatively healthy there's a very competitive bidding process.
Again for the product that I mentioned that we were targeting so it feels healthy and it feels the bidder pool is deep and we just came from and it made sheet, where there was a similar message that there's a lot of capital out there looking to deploy it.
Speaker Change: And you know people are I think growing more increasingly optimistic about the west coast. So that is the challenge for us in 25 is to figure out how we can accretively grow.
Speaker Change: You know the competitive market.
Speaker Change: Got it that's very helpful. Thanks for island, and then maybe just a quick follow up on the insurance side of things I know you said you. Angela you said you renewed the policy in December and so you know maybe in relation to the timing of the wildfires.
Speaker Change: You know happening after that but but also before most I think other companies renew their insurance policies ethics isn't a little bit different spot. There. So if you guys could maybe forecast out how you feel like the next round of negotiations and pricing might go later in 2025.
Speaker Change: On the other hand.
Speaker Change: Equity residential yesterday said they did not anticipate.
Speaker Change: Too much of a an incremental impact to the way insurance gets priced based on the wildfires alone. So just help us understand how that might play out as we thought.
Speaker Change: About even 2026 at this point.
Speaker Change: Yeah.
Rich Hightower: Yeah, Hi, rich as far so you are correct, we did renew our property insurance in December. So we're locked in for 11 months of 2025, So really no risk on our insurance renewal to this year, it's way too early but the outcome will be and you know we had no damage from the fire.
Rich Hightower: So we're not actively in discussions with our insurance carrier on any claims or anything like that so we will just have to see how it plays out as the year goes on one thing I will note is over the last two years, our insurance is up 50%. So we have you know we've.
Rich Hightower: <unk> seen a steep increase.
Rich Hightower: And you know the residential home market, where it was more limited so that that's the only thing I would call. It an otherwise I would say, we'll know more as we enter the fall of this year.
Barb Pak: Very helpful. Thanks Barb.
Speaker Change: Our next question is from Julien.
Speaker Change: Goldman Sachs. Please proceed.
Julien: Yeah. Thank you.
Speaker Change: You sort of touched on this a little bit earlier, but sort of Angela you commented that Seattle and San Jose are projected to lead the portfolio at approximately 4% market rent growth. This year because were also the markets, where you had sort of previously warned about this supply pocket.
Speaker Change: As you looked at the fourth quarter and so far what youre seeing in the first quarter. How is the sort of rent growth compare to your expectations and I guess, what is sort of giving you confidence that those markets will sort of hold up this year.
Speaker Change: Hey, Joanne on the supply landscape.
Speaker Change: As far as San Jose is concern.
Speaker Change: What we experienced in the fourth quarter it was that.
Speaker Change: There was an uptick and.
Speaker Change: In terms of the supply delivery, which of course, you know put pressure on rents.
Speaker Change: For about two months and then the supplies that absorbed and we are back to a normalized environment and so what we expect is that to occur but the difference with the northern region is that we see a stronger demand relative to the southern region.
Speaker Change: And that of course is going to.
Speaker Change: To provide you know pricing power in an environment where there.
Speaker Change: There was there was low supply so even though you have supply delivery, it's going to cause some interim.
Speaker Change: Disruption, but it's not permanent and similarly with Seattle.
Speaker Change: We're seeing is the supply delivery the level is similar to 2024.
Speaker Change: And what we're expecting is that the cadence to occur in the first half of the year, which is much better than the second half because when supply delivery comes during a period of strong demand that absorption happens quickly and the destruction is really minimized, it's when they come into <unk>.
Speaker Change: Number four in November then it lingers on it takes some more concessions and it takes longer to work through it but it all but all in all net net is that our economy and the fundamentals are quite healthy and therefore, we expect you know these are supply delivers to absorb it.
Speaker Change: Similar to a typical pace and so there may be interim lumpiness from month to month, but overall, we are well set up for the year.
John Kim: Got it. Thank you that's that's helpful and following up on John's question on bad debt.
John Kim: So the 50 bps of same store benefit in 'twenty five excluding the noncash charge it doesn't seem like you're you're sort of baking in much improvement from where you ended the year.
John Kim: I guess, just wondering if absent eviction moratoriums.
John Kim: If we could see some improvement in India, La Alameda delinquency levels, which would still sit above 100 basis points right now.
Yeah. This is barb I think that's where we need to see the continued improvement. It is it's taken us the longest to improve la Alameda a we've made a lot of progress in 2024, but we still need to.
John Kim: Make further progress to get us back to our long term run rate and so that's why we're not making as much progress. We're in 24 relative to prior years, because we've made the vast majority of that already so we think it'll be incremental but we.
John Kim: Most of that tailwind already in the prior year.
Speaker Change: Got it thank you.
John Kim: Yeah.
Speaker Change: Our next question is from Michael Goldsmith with UBS. Please proceed.
John Kim: Yeah.
Michael Goldsmith: Good morning, Thanks, a lot for taking my question.
Speaker Change: We've seen pretty good improvement in operating conditions over the last year with Richard the office those supply favorable affordability for apartments turnover is low.
Yes, we're still forecasting blended growth of 3% at the midpoint and this growth is off a relatively muted 2024.
Speaker Change: And the 3% growth is generally in line with long term conditions seem pretty favorable so over the next few years like are we thinking about growth rates continuing to expand it as really.
Speaker Change: Or is this kind of like as good as it gets given the favorable environment. Thanks.
Speaker Change: Hi, Yeah, no. That's a good question, we do see that the.
Speaker Change: Fundamentals will continue to build strength.
Speaker Change: And one of the reasons why it's more gradual improvement this year is that the overall economy.
Speaker Change: Is moderating from 'twenty 'twenty, four and that's by consensus forecast.
Speaker Change: And so we cant disconnect from that too much now we do expect the west coast to outperform given all the fundamentals that we talked about earlier.
Speaker Change: And that is we expect that to build and to be gradual. So for example, you know October was the first time that we saw job openings from the top 20 tech companies to reach pre Covid average and since then it has remained steady.
Speaker Change: That's fantastic, but it's at the three months and so you would want that to continue to build and and gain momentum and we are seeing that so it's going to be more gradual for this year and we'll see what happens in the following years.
Speaker Change: That's helpful context.
Speaker Change: Quick clarification are you assuming a normal seasonal curve of blends in the first half of this year.
Speaker Change: Yeah.
Speaker Change: Yeah our R.
Speaker Change: Our our budget does assume a normal.
Speaker Change: Seasonal curve for the entire year.
Speaker Change: Okay. Thank you very much.
Speaker Change: Yeah.
Speaker Change: Our next question is from Rich Anderson with Wedbush Securities. Please proceed.
Speaker Change: Thanks for hanging in with me.
Speaker Change: So on the kind of the Pie chart of the company.
Speaker Change: In terms of its Jack.
Speaker Change: Footprint I wonder if you'd be leaning more into northern regions.
Speaker Change: In light of some of the regulatory things that have been brought up in.
Speaker Change: On this call know way and.
Speaker Change: <unk>.
Speaker Change: President.
Speaker Change: President mask, I guess running point.
Driving check.
Speaker Change: I Wonder if you could start to see your aggressive more offense on external growth.
Speaker Change: Leaning more into northern areas and in selling out of southern California.
Rich: Hey, rich glad you hang with us as well on our investment activities you actually saw that.
Rich: Our activities in 2024, and it was heavily focused in the northern region and the Bay area and we.
Rich: You know that dominate that focus because really the supply and demand and affordability drivers. It was the most favorable.
Rich: Yeah.
Rich: Louis supply relative to all the other regions and of course with all of the centers of innovation and technology companies, expanding and growing and the Bay area. Yeah in recovery in the midst of recovery, So southern California, as well rents by 20, 30%.
Rich: Since Covid and Bay area is still in the low single digits as an average so it has the most upside potential and you throw an affordability metrics boy gets really compelling.
Rich: And so our focus will continue to be you know in the northern regions really for the reasons that it has the most upside if nothing else just from the recovery.
Rich: As far as the legislation we've been dealing with legislation our entire lives.
Rich: So you know that in itself would not.
Rich: <unk> be a reason to significantly to that.
Rich: From one region to another and so when we're talking divestitures, which as you know you're asking us if we're going to just sell out of a L. A for example, we've approached it more property specific rather than.
Rich: A particular city, we we like all our markets have all generated above U S average long term returns.
And so it's gonna be driven by ASIC specific reason. So for example, when we sold the $250 million asset in the Bay area that Rowan talked about earlier.
Rich: It was a attractive valuation and it was super Super old.
Rich: No.
Rich: Hopefully that helps.
Rich: Technical turn Super numerous.
Rich: Bush.
Rich: Yes.
Speaker Change: For me as I'm on structured finance. It was said earlier today that redeploying the proceeds from the redemptions would be accretive and you kind of said, yes sure.
Speaker Change: Short term nature of structured finance is <unk> accretive, but relative to fee simple ownership.
Speaker Change: Not as accretive to earnings.
Speaker Change: You mentioned also that you are targeting 4% of your business is structured finance for 2025 selling point being slow.
Speaker Change: So if that's the case.
Speaker Change: Why doesn't that trend lower why don't you just sort of sort of step out of this business longer term or is there some reason why.
Speaker Change: Rounding out our amount of it in the portfolio matters to you.
Speaker Change: And the firm.
Speaker Change: Hey, rich well, let me just provide you with a little context, you know we got them to this business.
Speaker Change: At a time, where construction costs are growing in double digits and rents were nowhere near and so preferred equity business provided a very attractive risk adjusted yields and complemented our development pipeline because we have effectively stopped developing during those times.
Speaker Change: And that was really the primary thesis for being in that business. So it's not that we don't like the business it's that over time its grown.
Speaker Change: In such a way that you know it's it's.
Speaker Change: It's lumpy, it's not as predictable and it made sense to rightsize that platform, but we still like the business and having a small percentage of that also gives us additional visibility into.
Speaker Change: The activities of their local developers as well and keep us connected that way. So overall, it's still a decent business.
Speaker Change: You know in terms of fee simple.
I just you know went through the compelling fundamentals on the northern California.
Speaker Change: Region, and so you know owning be simple and having that durable.
Speaker Change: Growths to our NAV per share is is really the key focus for us at this cycle.
Speaker Change: Okay, great. Thanks, Thanks, very much for that color I appreciate it.
Speaker Change: As a reminder, this star one on your telephone keypad. If you would like to ask a question. Our next question is from Tayo Okusanya with Deutsche Bank. Please proceed.
Speaker Change: Yes, thanks for hanging in there just a very quick one barb again.
Speaker Change: Our non cash charge off could you talk exactly about why.
Speaker Change: Why you decided at this point to charge. It off is it purely an accounting thing where it at age 90 days or more or was there. Some particular reason why you kind of thought that E. R was not going to be collectible going forward.
Speaker Change: Yeah, No. That's a good question, let me just step back and give you kind of our history. So pre COVID-19 ethics always had a cash policy. So if the rent wasn't collected in that month, we reserved against it and have no uncollected revenue on our books when Covid hit and we had unprecedented.
Speaker Change: That's it in a delinquency in 2020, we accrued a small amount of revenues that we have yet to collect because we knew we would collect revenue over time.
Speaker Change: And and that is not uncommon in the industry I think most of our peers actually have some on their books.
Speaker Change: And over the last few years, we slowly taken that accounts receivable balance down and given where we are in 2024, given the improvements we've seen and we feel like this is all behind us and we felt it was prudent to take the charge and just write off the remainder and get back to our historical accounting policies.
Speaker Change: Cash basis of accounting on revenues.
Speaker Change: And.
Speaker Change: That was always the goal to get back there and you know four years later, we're finally, there so where we're pleased with that we're happy to B factor, there's no risk to the financials in terms of we've booked any revenues that we havent collected and so we feel good about our conservative accounting policy on that front.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Our final question is from Alex Kim with Zelman and Associates. Please proceed.
Alex Kim: Hey, good morning out there thanks for taking my question.
Alex Kim: I wanted to ask about your assumptions for renewals and market rents to converge.
Alex Kim: Is there any timeline that you're assuming for the spread to tighten and then I guess just with supply easing on a year over year basis in your markets is there any risk.
Alex Kim: Mid to late 'twenty five even in 26 at this spread actually widened.
Alex Kim: Widens once again.
Alex Kim: Yeah.
Speaker Change: Hi, I know that's a good question, it's it's tough to predict on timing just because it does.
Speaker Change: Related to market conditions. So for example, if we.
Speaker Change: We see a much stronger demand than expected, we're actually would get better market rents what that means is that spread within widened the renewal and new lease spreads, which is a great thing because that means we have more upside in our renewals.
Speaker Change: And but as far as you.
Speaker Change: As it relates to our base case, we are very confident in what we can achieve given that supply is unknowable and with this landscape supply landscape you don't need a lot of job growth to achieve our numbers and so I you know our view is that we are in good shape.
Speaker Change: With a mid point.
Speaker Change: Got it.
Speaker Change: The color that's all for me.
Speaker Change: And that is all the time, we have for today.
Speaker Change: This will conclude today's conference Essex wed like to thank you for joining them for their first quarter earnings call. Thank you again for your participation you may now disconnect.
Speaker Change: Goodbye.