NYSE:ESS Essex Property Trust Q4 2021 Earnings Report $275.50 -1.10 (-0.40%) Closing price 04/25/2025 03:59 PM EasternExtended Trading$274.90 -0.60 (-0.22%) As of 04/25/2025 05:21 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Essex Property Trust EPS ResultsActual EPS$2.10Consensus EPS $3.24Beat/MissMissed by -$1.14One Year Ago EPS$3.02Essex Property Trust Revenue ResultsActual RevenueN/AExpected Revenue$368.12 millionBeat/MissN/AYoY Revenue GrowthN/AEssex Property Trust Announcement DetailsQuarterQ4 2021Date2/2/2022TimeAfter Market ClosesConference Call DateWednesday, February 2, 2022Conference Call Time9:23PM ETUpcoming EarningsEssex Property Trust's Q1 2025 earnings is scheduled for Tuesday, April 29, 2025, with a conference call scheduled on Wednesday, April 30, 2025 at 12:00 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Annual Report (10-K)Earnings HistoryCompany ProfilePowered by Essex Property Trust Q4 2021 Earnings Call TranscriptProvided by QuartrFebruary 2, 2022 ShareLink copied to clipboard.There are 14 speakers on the call. Operator00:00:01Good day, and welcome to the Essex Property Trust 4th Quarter 2021 Earnings Conference Call. As a reminder, today's conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties. Forward looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Operator00:00:35Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Shaw, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. Operator00:00:48You may begin. Speaker 100:00:50Good day, and welcome to our Q4 earnings call. Angela Kleinman and Barb Pack will follow me with comments and Adam Barry is here for Q and A. Today, I will provide an overview of 4th quarter and full year results, our expectations for 2022 and an overview of the apartment investment market. Essex experienced a strong recovery in 2021 Following the unprecedented and extraordinary challenges of 2020, the 4th quarter was our 2nd consecutive quarter of positive same store results And core FFO exceeded our original guidance midpoint by $0.05 per share. Overall, net effective rents remain above pre COVID despite a modest seasonal slowdown that occurs every Q4. Speaker 100:01:41In California, The pandemic and related regulation has led to an unprecedented divergence in apartment performance across our portfolio. The suburban areas that underperformed for most of the past 30 years are now our top performers and our historical top performers are now our ladders. To demonstrate, net effective rents in San Diego, Orange and Ventura Counties are up at least 25% from pre COVID levels, pushing rent to income ratios in these counties to all time highs. Conversely, rents in the tech markets remain well below pre COVID levels, especially San Francisco and San Mateo Counties, which remain down at least 15% and now screen both urban and suburban areas. For example, in Los Angeles County, Downtown LA net effective are flat from pre COVID levels, while suburban areas such as Long Beach and Santa Clarita are up 15% to 20%. Speaker 100:02:57We attribute the underperformance of the urban core to the damaging lockdowns in 2020, which resulted in severe job losses in restaurants and the service sectors. More broadly, recoveries in the urban core and major tech companies have been While the large tech companies generally did not experience job losses, their hiring slowed during the pandemic and many employees relocated in the initial phase of the pandemic due to citywide shutdowns. As of December 2021, The U. S. Has recovered about 96% of jobs lost in the pandemic compared to only 78% for the Essex markets. Speaker 100:03:47Obviously, we are disappointed that many tech employers push back their office reopenings during the surge of the Omicron variant over the holidays. However, the data indicates that most large tech employers will adopt a hybrid office environment And therefore, the return to office should be a significant catalyst for housing demand in our poorest performing markets. With job growth now exceeding the U. S. Average, we believe that our recovery is well underway And several observations support our positive outlook. Speaker 100:04:23As highlighted on previous earnings calls, There has been many large investments in office space by the large tech companies this past year contributing to Positive net office absorption in 7 of our 8 major markets representing 4,800,000 square feet of space. Available office sublease space has begun to decline in San Francisco, San Jose, Los Angeles and Seattle, which supports our belief that many companies are moving forward with their return to office plans. As expected, there is a resurgence in Service and hospitality related hiring as our cities recover with year over year increases Leisure Hospitality Employment ranging from about 29% in Ventura to about 56% in San Francisco. Recent immigration policy changes from the White House announced last week should also support the positive momentum that we're seeing in job growth at the higher income levels. For many years, Santa Clara and San Mateo Counties disproportionately benefited from foreign immigration. Speaker 100:05:37However, during the COVID pandemic, stricter immigration policies during the previous administration drove net Foreign immigration to a 30 year low. We suspect that the recently announced immigration policy changes will to job growth, particularly in the Bay Area. The venture capital investment in the Essex markets continues unabated. In the Q4, approximately $37,500,000,000 of capital was invested in West Coast based companies or approximately 40% of the total venture capital deployed in the United States and representing 124% year over year increase. The West Coast remains a leader in venture capital, which is a driver of global innovation and in turn local economies and job growth. Speaker 100:06:27The top 10 tech employers in our markets continue to seek talent and with open positions listed in California or reaching 47,000 in the 4th quarter, far exceeding the pre COVID peak by 62%. Turning to our expectations for 2022, Page S-seventeen of our supplemental package summarizes our key operating We continue to expect full year rent growth of 7.7% for Essex's West Coast markets. Our rent estimates are derived from a top down and bottoms up approach that we continue to refine with each passing year. We are expecting 4.1 percent job growth in our markets next year, suggesting moderation from the 5.5% West Coast job growth should significantly outpace the nation. Our research team conducts its own fundamental analysis of apartment supply and they expect around 37,000 apartment deliveries in 20 Similar to 2020, there are pockets of apartment supply deliveries in some urban submarkets, notably CBD LA. Speaker 100:08:03Similar to 2021, for sale housing deliveries will remain very muted at about 0.6% of total stock of for sale homes. Continued improvement in apartment trends in 2022 may be bolstered by inflationary pressures in the United States currently at the highest level since the early 1980s. While inflation and its countermeasures have potential to slow the economy, it's worth noting that apartments are resilient with short lease durations and high operating margins. In addition, it is incredibly difficult to ramp up rental and for sale housing production on the West Coast given long entitlement processes, Government restrictions and construction labor shortages. Finally, we have a conservative debt Estimating future supply a few years from now is another important part of Essex's capital allocation process and Page F17 Point 1 of the supplemental highlights recent increases in housing permit activity in various prominent residential REIT markets. Speaker 100:09:23While supply while future supply in the Essex markets is expected to drop in 2023 Few brief comments on the apartment investment markets where the deal volume in our markets has now surpassed pre COVID levels as institutional capital targets West Coast Apartments. Cap rates are consistently in the low to mid 3% range And we've seen yields converge across markets, construction types, location and age. We sold 4 Properties last year valued at $330,000,000 using the proceeds to fund stock repurchases early on and then acquisitions as the year progressed and our cost of capital improved. For the year, we acquired $432,000,000 with the majority of acquisitions completed in a co investment So we are optimistic about more opportunities to create value in the transaction market in 2022 and Barb will detail our 2022 guidance assumptions in a moment. With that, I'll turn the call over to Angela Kleinman. Speaker 200:11:02Thanks, Mike. First, I'd like to express my gratitude for the exceptional operations and support teams we have here at Essex. As the challenge to our business continue to evolve, Our team has also continued to step up, which speaks to the dedication, work ethic and the can do attitude across the organization. On to today's comments. I'll begin with key operation highlights of our major regions, then focus on our outlook for the year, followed by an update on the progress we are making by leveraging technology, data analytics and transforming our operating platform. Speaker 200:11:40We are pleased with our 4th quarter results of 4% year over year and 1.6% sequential growth in same property revenues. We have detailed on S-sixteen of our supplement, which shows the 4th quarter year over year new and renewal rent spreads up by 17.1% and 10.7%, respectively. The significant recovery in rents over the last year was bolstered by the Occupancy and concession strategies we implemented throughout the pandemic. To review our markets By region, I'll begin in Southern California, which represents almost 45% of our NOI and was our best performing region in 2021. Through many economic cycles, we have consistently relied on Southern California for steady performance and during the pandemic It has exceeded our expectations. Speaker 200:12:34The one caveat is the Los Angeles submarket. While it is also showing strong rent growth, This market faces offsetting challenges from the ongoing eviction moratorium and disproportionate bad debt. Notwithstanding these challenges, we remain optimistic with the broader Los Angeles submarket because of the continued strategic commercial investments by companies like Warner Brothers, which is planning to develop a 1,300,000 square feet of studio and office space in Burbank. This will be the largest studio development in the country and is expected to bring about 1400 new jobs to the market. Film LA recently reported the production activity hit an all time high in the 4th quarter and Apple recently proposed a 500,000 square foot development in Culver City, which should create approximately 2,500 new jobs. Speaker 200:13:31The continued job growth and high cost of homeownership amidst a slight increase in supply deliveries in Orange County and San Diego Our factors considered in our expectation for demand for rental housing and the basis for our 2022 outlook for Southern California market rent growth of 7.1%. Moving north to the Bay Area and Northern California. It is no secret that Northern California Rents have lagged the nation in the Essex portfolio average. We view the region as in early stages of its recovery. Unlike most markets across the country, which are effectively back to normal economic levels, the Bay Area has yet to fully recover due to ongoing COVID regulations such as mask mandates and delayed return to office, tempering the momentum of normal economic activities. Speaker 200:14:22We have seen communications by Bay Area Companies informing employees of plans to return to office After Omicron case subsides and we remain encouraged by the large tech companies expansion plans and commercial investments in our markets as highlighted by Mike. Furthermore, our supply delivery forecasts a decline in 2022. Thus, we anticipate Rapid recovery in rent growth without requiring a comparable level of increased housing demand. Keep in mind that our Northern California portfolio is mostly suburban and should benefit from those employees having fewer commuting days in a hybrid environment. These factors contribute to our expectations for Northern California to be one of our Turning to our Seattle portfolio, which continues to perform well. Speaker 200:15:22We anticipate similar level of supply Deliveries this year as last year with the majority concentrated in downtown Seattle. Because our portfolio skews to the east side in Bellevue and surrounding suburbs, The demand for our communities remains strong from the continued investments by several companies, most notably Amazon, which has committed to developing a second tower in Bellevue with constructions to start this year and is expected to create an additional 3,500 jobs. Therefore, we forecast Seattle's market rent growth as 7.2% for 2022. Moving on to the advancements in our operating model. By way of background, our disciplined focus of investing in high quality submarkets has resulted in 70% of our properties being located within 5 miles of each other. Speaker 200:16:14With this competitive advantage in geographic concentration and innovation in technology and data analytics. We have re envisioned Essex operating model with property collections. Essentially, we are transitioning from a dedicated team at an individual property to teams that will cover A collection of properties, allowing each associate to specialize in specific function and improving our ability to cross sell among nearby properties. By organizing properties into collections and centralizing certain administrative duties, we expect to generate more efficiencies across the We have already implemented this collections model in Orange County and San Diego and have achieved a reduction in personnel by approximately 10% to 15% through natural attrition. In addition, our data analytics has determined that our ability to cross sell neighboring communities has increased by over 800 basis points following the adoption of the collections model. Speaker 200:17:20We plan to complete the rollout of the collections Operating model to the remaining regions by the end of this year. While Essex has been efficient historically with each associate covering 40 units prior to 2019. With recent enhancements, we currently have each associate covering 43 units across the entire portfolio. Further benefits are expected in 2022 and thereafter as we complete our technology and other implementation plans. We are currently co developing proprietary applications with partners from REIT Ventures Fund and other software developers that will enhance the associate and customer experience. Speaker 200:18:04One example of advancements in our operating model over the past months has enabled 100% Contactless tours, which currently consists of 92% self guided tours and 8% virtual tours. As part of our technology initiative, we are starting the rollout of Alloy Access, a smart rent common area solution, which will elevate the resident experience, while also further the productivity of our operations team by enhancing security, usability and monitoring along with improving the effectiveness of the self guided tours for prospective customers. In addition, we are working with funnel to co develop a tailored solution to further automate our platform, which we plan to roll out later this year. We believe this will directly benefit both the associates and customers through streamlined systems, on demand features and link communications across properties, which will meaningfully accelerate the timetable to turn prospects into renters. We integrate these advancements with our data analytics platform to provide new operational insights. Speaker 200:19:14For example, Leveraging newly available data on our leasing patterns from funnel has improved the quality and effectiveness of our customer interactions. We have also applied advanced analytics with data from site plan to streamline our maintenance workflow, which which reduced our unit turn times by 10% in the 4th quarter on a year over year basis despite COVID related labor challenges. We expect that these initiatives will continue to provide us with additional levers and insights to improve our revenue growth and operating margins in the coming years. With that, I'll turn the call over to Barb PAC. Speaker 300:19:51Thanks, Angela. Today, I will discuss the key assumptions supporting our 2022 guidance and conclude with an update on the balance sheet. We ended 2021 with strong momentum in the 4th quarter as demonstrated by 4.7% same property NOI growth and 7.6% core FFO. We believe the economic recovery has only just begun on the West Coast And thus this positive momentum will continue throughout 2022. As such, we are forecasting core FFO per share growth of 9.7% at the midpoint, which is the highest growth in 6 years. Speaker 300:20:29We are pleased that our 2022 core FFO per share guidance is expected to exceed our pre pandemic FFO achieved in 2019 despite the challenging operating environment. This is a testament to our disciplined operating strategy and capital allocation process, which is driving results to the bottom line. Our 2022 FFO growth is primarily driven by a 7 point percent increase in our same property revenues on a cash basis and 8.3% on a GAAP basis. For the year, we expect fewer concessions as compared to last year, but delinquency remains a challenge and we are expecting delinquency of 2.4% Scheduled rent in 2022, which is 30 basis points higher than 2021. We have 2 counties representing 50% of our total delinquency where tenant protections remain in place. Speaker 300:21:22In addition, response times on tenant applications seeking emergency rental assistance remains slow and outside of our control, leading to large monthly swings in the delinquency line item. As a reminder, our historical annual delinquency has been around 35 basis points of schedule rent and given our long history of high collections, we believe we can ultimately return to this level once the various restrictions are lifted. We continue to assist residents in applying for federal tenant relief funds and have received $29,000,000 to date, of which $12,000,000 was in the 4th quarter. As for operating expenses, We are forecasting a 4% increase, which is above our historical average of 2% to 3%. This is a result of wage Throughout the past year, we have seen an elevated level of early redemptions of our preferred equity and subordinated loan investments due to high demand for West Coast Apartments and low interest rates. Speaker 300:22:40In 2021, we had approximately $210,000,000 of redemptions and our 2022 guidance contemplates another $350,000,000 of redemptions, some of this was pushed from the Q4 into this year. Over the past year, it has become more challenging to find new investments given the influx of capital to this segment. However, we were able to secure $117,000,000 of new commitments with an average yield of 11%, maintaining our disciplined approach to underwriting these projects. Our 2022 guidance contemplates an additional $100,000,000 of new commitments at the midpoint, of which we assume $50,000,000 will be funded during the second half of the year. The remainder of the preferred equity redemption proceeds will be used to fund new acquisitions. Speaker 300:23:30Finally, the balance sheet remains in a strong position. During the quarter, we saw continued improvement in our credit metrics And our net debt to EBITDA ratio declined to 6.3 times as EBITDA grew. We expect this trend to continue throughout 2022. Over the past 2 years, we have taken advantage of the low interest rate environment and refinanced nearly 40% of our debt, locking in low rates and reducing our weighted average interest rate by 70 basis points. As such, we have only 6% of our debt maturing over the next 2 years. Speaker 300:24:04In addition, we have minimal exposure to short term rates with only 4% of our consolidated debt subject to floating rates. As such, we have minimal risk to the rising interest rate environment. Given limited near term maturities, no material development funding needs and ample liquidity, the company remains in a strong financial position. With that, I will now turn the call back to the operator for questions. Operator00:24:31Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to one question and one follow-up question. Our first questions come from the line of Rich Hill with Morgan Stanley. Please proceed with your questions. Speaker 400:25:14Hey, good morning guys. I wanted to maybe just start off with a question about new leases relative to same store revenue. I typically view new leases as a leading indicator for same store revenue Speaker 100:25:26and you put up just a Speaker 400:25:28huge number for new leases in January, I think around 17%. So how are we supposed to think about that? And maybe if I can push you a little bit, why Speaker 100:25:35is the same store revenue higher? Speaker 200:25:39Sure, Rich. It's Angela here. So let me just give you a little context on the S-sixteen that shows our new lease rates and it is terrific With that 17%, but keep in mind that's a year over year number to Starz. And we have communicated that Between Q4 of 2020 to Q1 of 2021, so that comparable period, that's when Market rent troughed. And so from a year over year perspective, we are really hitting kind of the greatest delta, if you will, from a differential So if we're talking about really the same store guidance, what we probably I think a better Indicator is to look to the S-seventeen that Mike talked about earlier and you take that market rent of 7.7% That market rent growth. Speaker 200:26:36And then you factor in the loss to lease at year end. And I know we normally do this look to the September loss lease, but You might recall that we were we had a typical seasonality And the seasonal peak was pushed. So we had cautioned against using the September loss release. So if we look at the December loss release, it's around 6 And you factor those 2 in, and then some of these other Factors such as legislation and delinquency, that's what ultimately drives our midpoint guidance of 7.8%. Speaker 400:27:22Got it. And look, that makes sense to me. We spend a lot of time on your macro forecasts. So I guess your revenue guide Was consistent with that, which is sort of what we expected. The Nuuly spread was just really high and that's helpful color. Speaker 400:27:37Just one more question for me. When we're unpacking what you reported and guided to relative to our numbers, one of the things that stood out to us was rising interest expenses and then rising non same store expenses. Can you just maybe talk through what you're expecting for the interest expense side of the equation and if you're intentionally being conservative given the interest rate environment that we're in right now. Speaker 300:28:07Hi, Rich, it's Barb. In terms of the interest expense line, the biggest factor there is the reduction in cap interest as our development pipeline has substantially We rolled off and so that's a pretty substantial increase in the interest expense. We do have a couple of rate increases forecasted in the guidance and It's really why we have a range, but we don't have a lot of variable rate debt. We only have 4% of our consolidated debt as variable rate, so that's a Small impact to the numbers. It really is the cap interest side of the equation. Speaker 300:28:42I think that's a $4,000,000 reduction. Speaker 400:28:45Okay. That's helpful. Guys, I'm sure a lot of people have other questions. So I'll jump back in. But thank you for that. Speaker 100:28:54Thanks, Rich. Operator00:28:56Thank you. Our next questions come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions. Speaker 500:29:03Hey, good morning. Good morning out there. Operator00:29:07So just a few Speaker 500:29:07questions from me. As far as Southern California goes, the strength that that market is experiencing in general, Do you think that will continue? So when San Francisco reopens and those tech jobs once again have to be in the office, Are you expecting a migration back of people who migrated down to Southern Cal going back to Northern Cal or your view is that everyone who is Populate Southern Cal loves the lifestyle and is not looking to relocate back. Speaker 100:29:43Hey, Alex, it's Mike. I'll start with this and then flip it to Angela maybe for some more comments. We think that There is a reversion underway and it will draw people back to where the jobs were kind of pre pandemic. And so the pandemic caused a lot of disruption with respect to where people went and many people went to Southern California and elsewhere. And so we think as the pandemic winds down, people will go back to where they once were again With the hybrid model being the typical format for a lot of the big companies out here. Speaker 100:30:23So we think that some Of the people who moved from Southern California back to Northern California, but keep in mind, there were people from Southern California that moved to Phoenix and other places as well. So it's not just a one direction movement. And we think that the overall impact will be beneficial for California in total. So even though some people move from Southern California back to Northern California, that'll be offset by potentially other people moving back Yes, for job reasons and or lifestyle decisions. So with that, I'll turn it over to Angela. Speaker 100:30:59Anything to add, Angela? Speaker 200:31:00Maybe just a little Historical context, Alex. With the Southern California portfolio and in particular San Diego, Ventura and Orange County, These are markets that were at that perform at a 97% occupancy even pre COVID. So it's already a highly desirable place to be. And we combine that with this region having the most The strongest loss to lease, and it actually has, as far as we can see, pretty long legs. So in the interim, during the reversion that Mike is referring to, It may be more of a net neutral, but long term, this market was still we would see this market to continue to perform well with a good tailwind from loss to lease. Speaker 600:31:48Okay. And then just Speaker 500:31:49as a follow-up to that, as part of guidance, and Mike, you've spoken about the exodus Yes, the high-tech worker and then the service worker who left when their businesses were shut down. But as far as guidance goes, How much of guidance is predicated on the return of tech workers, return of the baristas? Just trying to get a sense or If return to office occurs and if service job, those people who left came back, that's incremental above and beyond what you're already assuming in your numbers. Speaker 100:32:23Yes, Alex, I would say that it's already happening. So it's not a future event necessarily. I think we're in the middle of The reversion and I think to point to a statistic, just look at job growth and job growth is trailing 3 month job growth. It's highest In Seattle, 6.2% followed by Northern California at I'm sorry, Southern California by 5.8% and Northern California by 5%. So Jobs are coming back. Speaker 100:32:50People are starting to move. The Bay Area obviously is a step behind, but we think it will catch up given The strength and the uniqueness of the tech employers that are there. And so we think it's all underway and it's just going to take some time to play out. I guess the question is, can it accelerate? I mean, we actually expect it to accelerate, especially in the tech markets, which were, of course, Those that were most impacted. Speaker 100:33:18By the end of the year, we expect that California We'll or our markets will have about 93% of their jobs that they lost during the pandemic We covered, we're currently at about 78% now. So we expect again these trends to continue and pretty favorable for our markets given What the impact on jobs is? Thank you. Thank you. Operator00:33:48Thank you. Our next question has come from the line of Nick Joseph with Citi. Please proceed with your questions. Speaker 700:33:54Thanks. Maybe just following up on that, it seems like another topic, at least for San Francisco and maybe Seattle as It's just been quality of life overall. And obviously, a return to the office will help improve things. But do you think there's other Steps that need to be taken or will the return to the office really help with quality of life as well? Speaker 100:34:18I think quality of life considerations really come into play in the CBDs. This homelessness, concerns about defunding the police, etcetera, I think that is where quality of life issues are More manifest and obvious. And as I say, they're not creating any more beaches around here. So that's Obviously a benefit. And so I think that the quality of life in suburbia is actually very high. Speaker 100:34:52And we're as we said before, we're going to push out a little bit farther strategically into some other some different markets. And Adam's here, he can talk about this Vista deal, which we've never bought at Vista before, but it represents one of those markets that's in suburbia, Good community, good decent schools in a very nice Northern San Diego submarket. And Yes, we're looking for that and we think that we can find great quality of life in some of those markets and there's great opportunity out there. Speaker 700:35:25Thanks. So then as you think about the co investment in the preferred and the mezz book, obviously you've gotten good returns from it And it's led to some opportunities. But as you think about kind of earnings and some of the volatility that we're seeing this year associated with it, How do you think about the size going forward from a strategic perspective? Speaker 100:35:46Yes, Nick, I think it's about right actually. So we have About $700,000,000,000 combined between preferred equity and mezz debt. And again, we don't want that business to get To be too large, we, I think, took advantage of an opportunity in 2020 to grow the business a bit, given that there was very little else that was working. And I think that's helped, but it will be somewhat lumpy. And that's the primary reason why the Board and all of us think that we should control its size and Not let it get too large. Speaker 100:36:20So that's 1st and foremost on our mind. From our perspective, it is Probably the best risk reward of what we do in terms of how we generate income and plus there's some other advantages. One of our Investments this quarter was a joint venture that came out of the preferred business. So I thought that was having other types of business tied to that is important. Plus we get a look at many development deals that are going on in the marketplace And that allows us to be more discerning with respect to our development pipeline. Speaker 700:36:58Thank you. Speaker 600:37:00Thanks. Thank Operator00:37:03you. Our next questions come from the line of Rich Hightower with Evercore. Please proceed with your questions. Speaker 800:37:09Hi, good morning out there guys. I want to go back to a couple of the prepared comments in terms of delinquencies and I guess the longer term assumption that that delinquency rate will revert more to historical norms. Every time we talk to Your coastal peers regulatory risk is obviously very prominent in the decision to diversify outside of certain markets. I assume this is part of that. So I guess what over the longer term gives you the confidence that the regulatory environment in that regard will Indeed, get back to where we were pre COVID. Speaker 100:37:50Yes, it's a good question and it's definitely something that's On our minds and we will say that it's frustrating from time to time. But I guess we would ask that everyone take A balanced view of these regulatory risks and look at the other side. I mean the other side is that limited housing supply really comes from All the regulations that make it difficult to build housing in these markets. And so we try to balance that equation as best we can And knowing that we are a beneficiary of the supply issues that California has because there's always another regulation that is making it more difficult for us to build housing Right around the corner, which is what keeps supply under control in California. So keep that in mind. Speaker 100:38:39And we know that We need to be a strong advocate with respect to sensible housing policies and we're going to be active in that area going forward. But again, we would hate to trade away the unique benefits that we have given the supply restrictions in California. Speaker 800:39:00Okay. I appreciate there's no side to the coin there, Mike. Maybe one quick follow-up. I mean, just Are you able to delineate for us on this call the bad debt percentages in terms of leases that were signed in the pre COVID vintage, True sort of COVID hardship at the time versus any leases that were signed in the world started to get better again. I mean, and people that were gaming the system After COVID was already a factor, is there a way to do that? Speaker 100:39:32I'll start and then flip it To Barb, a lot of this, there was nothing in the pre COVID period that indicated that there were any issues With delinquency, so I'll make that comment number 1. Most of the issues that we have are really related to the government, The governmental agency, which is there's a website called Housing is Key and they have very recently About $7,000,000,000 in applications and they paid out about $1,900,000,000 So they're way behind. And so there is this delay And getting reimbursed for all these claims. And Barb has some information about what's in process, etcetera. But I guess the key here is that the state agencies are way behind and there's a lot of money that has been Submitted and we don't know we don't have control over what's going to happen with those funds. Speaker 100:40:29And so we're just going to have to wait, which led to What we hope to be is obviously conservative guidance. We weren't intending to be conservative, but we realize that Some of these factors are out of our control and so that we aired maybe to the conservative perspective, but we just don't know. Barb, with that said, I think you have some additional numbers. Speaker 300:40:53Yes, Rich. So in terms of our cumulative delinquency, we're at about 67,000,000 We have applied for reimbursement for 80% of that, so about $53,000,000 And of that amount, $33,000,000 relates to our existing residents. However, the tenant the timing and amount of Being able to collect that is unknown because the program prioritizes based on the residents area median income, which is Something that we're not fully privy to at the time they apply. The remainder is applications we've applied for on behalf of past residents. Now our ability to collect on that is if the resident will engage and that's unknown at this time, but we have applied for everything that we can. Speaker 300:41:40And as Mike said, the State of California has been slow to disperse funds, which is causing a lot of the noise in our numbers at this point. Speaker 800:41:50Okay. Thanks for the color guys. Speaker 100:41:53Thank you. Operator00:41:56Thank you. Our next questions come from the line of Brad Heffern with RBC Capital Markets. Please proceed with your questions. Speaker 900:42:03Yes. Hi, everyone. Thanks. I was wondering about rent to income. You talked in the prepared comments about the big divergence between urban and suburban. Speaker 900:42:11You give any figures about where rent to incomes have trended in those 2 splits? And if they've moved, has that largely been because rent has moved or has income moved as well? Thanks. Speaker 100:42:26Yes, this is Mike and there may be Andrew may have a comment too here. But generally speaking, The good news is that incomes are moving and that affects us in terms of our guidance, but it also helps us charge More brand allows us to have higher rent levels and helps us much more than what Cost is on the operating expense side. So we're pleased with higher income levels, and we're seeing that throughout our portfolio. And in terms of numbers, so Southern California, for example, has a rent in median income. This is Median, this is not our data. Speaker 100:43:08This is general data that comes from our data vendors. But using median Rent and median incomes, we're currently at 26.9 percent rent to income in Southern California versus the long term average 22.3%, so well in excess of that average. And then conversely, in Northern California, We're currently at 22.1 percent rent to income versus a long term average of 23.1%, so well below In that regard, Seattle is a little bit different. It's at 21.1% versus 18.7%, respectively. So it Suggested it's higher in the rent to income versus the long term average, although that market has changed pretty dramatically in terms of It going from being a lower cost to a higher cost or higher rent market over the last 10 years or so. Speaker 100:44:07So I'd say it's fundamentally changed Does that help answer your question? Speaker 600:44:12It does. I mean, one of the things Speaker 900:44:14I was trying to get at is specifically for Northern California. When you have the backfill after the initial sort of COVID pain, I'm curious, did you see significantly lower incomes from those people and that's part of what caused Pricing pressure and is there any reversion of that or is the pricing pressure truly just due to other factors? Speaker 100:44:35Yes, if that's the question. Yes, we see so take the leisure and hospitality segment, Which lost a tremendous number of jobs because the state shut down the restaurants and the hotels shut and travel was shut down So all those people that are generally pretty low wage earners left the Bay Area and went Somewhere else. They migrated far and wide or went home with parents, etcetera. And so we're Starting to see them come back. They're skewing the data in terms of their impact on rent income. Speaker 100:45:13It looks like we're bringing in a lot of lower income workers, but it's Just replacing what we lost a while ago. So there's nothing fundamentally wrong with the Bay Area or any of our markets With respect to income levels, I think they're still in very good shape. The tech companies continue to they didn't lose a lot of And they continue to hire at robust levels, at high income levels. And then those high income levels are what really drive the demand for the services, All the jobs that we lost early on in the pandemic and the higher incomes, people here make enough money that they can pay A little bit more for their dinner and some of these other services. And so we just don't see that as a key issue. Speaker 100:45:57The key issue is how do you draw back People that left in the early parts of the pandemic, how do you draw them back now? And I think that's an ongoing process. Operator00:46:16Thank you. Our next questions come from the line of John Kent with BMO Capital Markets. Please proceed with your questions. Speaker 600:46:23Hello. I was wondering if you talked about sourcing new preferred meds has been challenging in this environment. Would you consider doing deals outside of your core markets, not necessarily to own the equity, but just provide a wider pool of investment opportunities? Speaker 100:46:41This is Mike. Actually, I'm going to give this to Adam in a minute. But we the answer is we are to some extent In other words, we're not going to completely different markets, but we're pushing into other markets. Adam, you want to give them a couple of examples of deals that we've done? Speaker 900:46:56Yes, John. So we have been tracking into other markets since really the platform was put into place. And we've actually we've done to So we've looked slightly outside of our markets to where we think the fundamentals are still there. And so a couple of stuff we've done, We did one in Redlands, which is Inland Empire. That one's going well currently funded. Speaker 900:47:21And then we have one round trip in Sacramento that That market has obviously done very well. So we continue to track markets within our overall footprint, but a little outside and we'll consider a little further beyond that. Speaker 600:47:39Okay. So nothing outside of the West Coast really? Operator00:47:43Yes. Speaker 600:47:45My second question is on your revenue generating CapEx guidance of $100,000,000 Which is more than double what you invested in last year. How much does this add to same store revenue growth this year versus 2023? Is it fair to assume that most of this CapEx will be outside of Northern California? Speaker 200:48:07We actually Are looking at these opportunities throughout the portfolio. So it's not skewed toward one region because we are seeing Strong market rent growth in all of our portfolios in all of our regions. And as far as when They will be realized less likely in 2022, just because as you know, it takes time to Renovate and then get them leased up. And so by the time that occurs, you certainly wouldn't have a full year of revenue. So it's more likely going to impact 2023. Speaker 600:48:48Great. Thank you. Operator00:48:53Thank you. Our next Questions come from the line of Austin Wurschmidt with KeyBanc. Please proceed with your questions. Speaker 1000:49:00Great. Thank you. Mike, in your prepared remarks, you referenced The buyers in the markets are not really discerning, I guess, between location and maybe vintage of product. And Is that simply just a function of the amount of capital that's coming into your markets and chasing deals? And separately, is there really any opportunity for you to pull forward any portfolio management objectives as a result of kind of everything seemingly converging in pricing. Speaker 900:49:30Hey, Austin, this is Adam. I can start with that and then if Mike has any follow ups. So we're seeing a different buyer pool for different vintages in different locations. But ultimately, what you said in your question is right. There's so much capital chasing these deals, whether it's coming from value add funds or larger core funds or whomever, That the compression between product age, type, construction type and location Has been significant and continues to remain today. Speaker 900:50:04As it relates to that, Mike, do you want to cover Speaker 100:50:09Yes. Could you repeat the question about the portfolio? Speaker 1000:50:14Yes. Just portfolio management objectives trading around submarkets, Increasing product quality, whatever sort of is in your purview, I guess? Speaker 100:50:23Yes, the broader Management objectives, yes. Well, we continue to believe that we can add value in a variety of ways. And it isn't that we're necessarily going to Dramatically increase our portfolio allocation to any one market or decrease it. I think that we're overall Pretty happy, and we want to see how the pandemic recovery plays out. Like everyone else, there's a number of unknowns about Portfolio transitions, and we would like to get into a more normal world. Speaker 100:50:57As I mentioned in the in my prepared remarks, The laggards of the last 30 years are now our top performing markets. Is that possible that that continues or does it revert back? And I suspect that there will be some Fairly significant amount of reversion. As we think of the world, we think that probably the urban core, again, given Issues with homelessness, crime, etcetera are probably a mild negative. Hopefully, the cities get control over some of these issues. Speaker 100:51:32I think that they can definitely do that with respect to crime. I'm not so sure that there is a plan When it comes to homelessness, but again, that's pretty focused on the urban core, much less so in throughout the suburban Parts of our portfolio, which is where the vast majority of our property is located. We've commented actually before The pandemic on deemphasizing the city centers, partially due to what I just said. And so that remains something that we will take a look at and potentially transact around Going forward, but overall, north south balance, Seattle, I think, is doing really incredibly well, great job growth And a couple of key drivers up there in Microsoft and Amazon that are really pushing that market. So we'd like to increase our Portfolio up there actually, but it's difficult to find the product at the price that adds value. Speaker 100:52:31So more of the same. We've been there before. Speaker 1000:52:35Yes, got it. And then just maybe, given where the stock is trading, certainly preferreds, I think the Preferred equity investments have been one of the most attractive you've referenced. But beyond that, given where your stock is trading, is the joint venture still One of the best uses, do you take a look at issuing from time to time where you're trading today? What sort of the thinking around your cost of capital and potential uses? Speaker 100:53:05Yes. We when we look at deals, our deal generation is sort of independent of How we capitalize or how we take the deal down and where we believe that we're adding value to the company and that could be core FFO or cash flow and or NAV per share to the company, We will take it down on the balance sheet. And at times like now where we don't think we can add value, We will do it in our one of our co investments where we're still a substantial owner. We still own about 50% These transactions and we manage it and therefore we earn some small amount of fee income, but it's really driven by the capital side of the equation. And again, at this point, we probably wouldn't issue stock. Speaker 100:53:56We would prefer to transact in a co investment format. Speaker 1100:54:01Thank you. Operator00:54:06Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your questions. Speaker 1200:54:13Thanks. Just one follow-up question to that, the North and South Southern California balance in the portfolio either for Mike or Adam. I guess I'm listening, Mike, to your opening remarks and The unsaid investment takeaways by Northern California, by the laggards and maybe sell or prune The winner is just in terms of the dispersion of relative rents we've seen in the last 24 months. So and kind of pounding the table on the mean reversion trade, Why don't you have as much conviction to go out and tilt the portfolio on the margin towards Northern California more heavily? Speaker 100:54:50John, it's a great question. And Adam, will you bring me 100 buildings in Northern California, please at a 3.8% cap rate, that's the answer. It's not there. And if we could do it, we would. We did buy one property in Fremont, Again, in a co investment, we would buy more if we could, John. Speaker 100:55:11But again, these the markets are going to evolve and perhaps We'll continue to see more product hit the market and we wouldn't for high quality property in the right areas of the Bay Area, we're not BlackLine in the Bay Area by any means. Operator00:55:30Just to tack on a little there. Speaker 900:55:32We see every deal that's marketed and every deal that's Not marketed. And so it's always a relative game. And so we're underwriting consistently up and down the portfolio and Jumping in where we see opportunity for that value add. Otherwise, we've seen deals in the Bay Area close at 3.132 GAAP and that's not where we're going to compete. Speaker 1200:55:59Okay. So going in economic yields are still meaningfully lower in Northern California than LA, Orange County, San Diego? Speaker 100:56:08I keep telling Adam, I say, Adam, well, interest rates are going up. So what's going on with cap rates? And Adam keeps telling me they're pushing down, right? I mean that's effectively what we've seen. Speaker 900:56:19That's effectively right. And so John, it's Not even going in. So that 3,132 gap that I quoted is economics. They're taking all units to market as of today. So it doesn't include any future growth, but that's still absorbing the loss of lease. Speaker 900:56:36So yes, very competitive. Operator00:56:41Okay. Thank you. Speaker 100:56:44Thanks, John. Operator00:56:47Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your questions. Speaker 600:56:54Hey, I guess it's still morning out there. Good morning. Operator00:56:58I wanted to ask I have Speaker 600:57:00a question on your blended free. I guess I'm trying to better understand the cadence In the back half of the year versus the first half and some of the key drivers or underlying assumptions, you started off the year on a strong foot, You seem to be fairly optimistic about an improvement in those kind of back half of the year. But looking at the guide, But there's a massive drop off to get through your same store revenue guide. So maybe you can help me understand or square that a bit more. Thanks. Speaker 200:57:27Sure, Haendel. It's really more of a function of the year over year comparable. And so we expect the first half To be much stronger because first half of twenty twenty one was still quite soft. And of course, we started recovering in the second half of twenty twenty one. And so from a year over year perspective, this year, the second half will be a harder comparable and that's really what's driving The trends. Speaker 600:57:56No, I understand that. So I guess maybe helping us understand maybe the delta perhaps between Some of the regions in the back half year, obviously, there's some tailwinds helping NOCAL, but perhaps SoCal has more headwinds given how well it's formed. So maybe A bit more color perhaps on maybe the spread that you're thinking of there. Speaker 200:58:20In terms of the spread, what we The auto will be the highest from a year over year on the second half because it has Higher loss to lease and lower delinquency and better concession benefit in Northern California and Southern California are Pretty much very comparable. Southern California because of the challenge by delinquency, while Northern California has that concessionary benefit And so they end up more similar. But in terms of spread, we're not talking we're talking, say, 40 basis points versus that now hundreds of basis points. So they're all pretty darn close. Speaker 600:59:08Got you. Okay. That's helpful. Speaker 300:59:10And Haendel, just one question. Are you asking about market rent growth or same store growth? I'm just trying to understand. Speaker 600:59:18Yes. I guess the first question was more on the blended rate growth within the same store, but the market commentary is helpful. Where are you guys sending out? I don't know if I missed it, but did you guys mention where you're sending out renewals today for February March? Speaker 200:59:37We didn't just that. Let me take a quick look. So under renewals, Sending out, hold on, 2022. Where is that? Where did it go? Speaker 200:59:56Oh, here we are. So we're sending renewals out Portfolio average in the low teens, so around, say, 13 ish percent and with Seattle the highest, Followed by North Cal and then SoCal around 10 ish. Speaker 601:00:13Got you. That's helpful. Speaker 701:00:15Mike, I guess a question Speaker 601:00:16for you. I heard your Comment, Joey, about VC Investments. And I understand there's a lot of profitable and very viable established companies, tech companies today. But I guess I'm curious How concerned you might be regarding the ongoing Facebook or Meta troubles and the number of not yet profitable start ups? I guess I'm Curious what any level of concern you might have at all as to what might happen to your jobless assumptions that these companies have to cut G and A? Speaker 101:00:47Yes. Hey, Haendel, it's definitely a concern. But I don't think in terms of the STEM graduates and The workers that are in these fields, I don't think there's any shortage of positions that might be available to them. There's plenty of jobs out there. I was Coming out of college, I worked for a venture capital company and so I was there for quite some time and it's amazing how different the world is. Speaker 101:01:12And These companies are venture financed for a much longer period of time now and the rounds are much larger. In fact, I think most of the Money that was deployed that I discussed in the script was mega rounds, rounds exceeding $100,000,000 So we have some concern about it. Obviously, those And therefore, I think that's warranted. I've been through that in my career in the late '90s where All these companies went public and without a product and it didn't work out well. So I think the current model of venture capital funding is much better and much more resilient. Speaker 101:01:49And A lot of these companies, the best ones we'll see it through. And the ones that don't succeed, I think the employees, there's plenty of opportunity out there At some of the other companies, that's what makes us the Bay Area such a unique place from a technology employment standpoint. Speaker 601:02:10Okay. That's helpful. And if I could squeeze one more, I don't know if I missed that number too, but did you guys tell us what's embedded in The guide for rental assistance payments for this year? Speaker 301:02:23Yes, Haendel, this is Barb. Like I mentioned earlier, we have applied for $52,000,000 of our cumulative Delinquency, dollars 33,000,000 of that is our existing tenants and We feel good about that number. However, the timing is very uncertain. And what we do is we forecast on a net basis. So we've assumed net delinquency does increase this year because of the uncertainty related to the timing of payments on These applications as well as the California program, which The applications have exceeded the amount that's already been allocated to the state. Speaker 301:03:06So there's a variety of things that led us to that assumption. Speaker 601:03:11Okay. So if I understand it, should you be successful in getting well, I guess I'm trying to understand how What level of payments are kind of embedded and where the upside where that line lies? I guess I'm having trouble understanding what exactly is the net number, the absolute number that's included in the guide for this year? Speaker 301:03:34So in our guidance is a 2.4% delinquency as a percent of schedule rent. That's what will drive our numbers. And One thing that we are seeing is our delinquency has gotten worse our net delinquency has gotten worse over the last couple of months as more of our tenants Are applying for aid as the program has changed recently to allow tenants to apply for 3 additional months. Therefore, applications are going up. Speaker 601:04:14Okay. I think we'll follow-up offline. But thank you all. Appreciate the time. Appreciate your thoughts. Speaker 601:04:19Thanks. Operator01:04:22Thank you. Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your questions. Speaker 1101:04:28Hey, thanks. Good afternoon now. So is there any logic to the concept that Regulatory environment could actually be a good thing in terms of being a magnet for residents. I know Some of your peers are running because of regulation, but on the other side of that table is perhaps a resident, I don't know. I'd like to know that I have tenant friendly regulation behind me if I'm living in California. Speaker 1101:04:59Is there any Relevance to that line of thinking in your mind, Mike? Speaker 101:05:06Yes, Rich. It's a good concept. People generally don't thank their landlord very much. We don't hear a great deal of appreciation. But having said that, I mean, I think that tenants do appreciate it. Speaker 101:05:20Candidly, from my perspective, I worry that it's taken advantage of the system as opposed to We're all for a safety net. We're all for helping people out, but it can go too far and trying to find That comfortable middle ground, I think, is what they're trying to do. And I'm very glad I'm not managing that program, by the way. So I think it's a good point. I think people do appreciate that part of California. Speaker 101:05:50And But they're going to do what's best for them, which ultimately will come down to their job and their quality of life and those factors that we spend most of our time thinking about. Speaker 1101:06:02I mean Costa Hawkins reversal is defeated, CPI plus 5% statewide, rent cap. I mean these More terrible events in the life cycle of Family California. But anyway, second question is, you mentioned Cap rates are still going down with, I guess, what we would call the threat of rising interest rates, still 10 years at historical lows, but I look back 2018 tenure was over 3%. And I looked at what you said in your call at the time, you Cap rates are running around 4.25%. So are you kind of quietly hoping for perhaps an increase Interest rates to something more like that and also inflation because of the pass through qualities of multifamily and that you could really start to See some opportunities come. Speaker 1101:06:56I know it's 3.1 now on the cap rate, but maybe that changes if we get some real change to the interest And that perhaps opens up opportunities for you and your more substantial costs or capital raising Yes. Speaker 101:07:14No, it's a great question, great observation. And we I think that The company is positioned sort of for the worst case scenario, whatever that might be in terms of the balance sheet and the overall structure, a world in which Incomes are inflating and rents are inflating is a good world for us, I think. I mean, I think that there will be opportunity. And even though our probably our Interest costs would go up in that scenario. The vast majority of our debt is pretty well locked down in terms of maturities and rates. Speaker 101:07:48So that would be A good world for us and I think there's a reasonable chance that's the road we're on. So Speaker 1101:07:56is a 4 handle type cap rate, is there anything systemic about your world right now that that can't happen even if a scenario of 3% plus tenure were to happen? Could I would assume that that's a very realistic opportunity. Speaker 101:08:12Yes, it's I mean the one the comment I would make is that cap rates tend to be pretty sticky over time, so they don't just change overnight just because interest rates move up or down. And I would say, Back in those the 2018 period you were referring to, we were maybe a little frustrated that cap rates weren't moving down somewhat given how much the Tenure had rallied, but until the COVID period, they were they remain pretty sticky even though you had Pretty significant reductions in interest rates over that period of time. I think that probably you're not going to see Cap rates adjust upward quickly. There's too much money looking for a yield and a yield investment and 3% versus some of the options is still 3% and is still, in the scheme of things, interesting To some investors, so I wouldn't expect that to change. It really is all about the flow of money and The number of investors that need yield and what the other yield alternatives are. Speaker 1101:09:20Great. Okay, great. Thanks very much. Speaker 601:09:23Thank you. Operator01:09:25Thank you. Our next question comes from the line of Chandani Luthra. Please proceed with your questions. Speaker 1301:09:32Hi, good afternoon everyone. Thank you for taking my questions. Could you talk about the drivers sequential same store revenue declines in some of your markets in Q4. I'm talking about markets like San Diego 3% of GenFAN down about 2%, similarly contract cost. I mean, how much of this was Perhaps a disappointment on return to office as we were just crossing that Labor Day mark versus Say some seasonal factors that had a role to play here. Speaker 201:10:07Sure, happy to. It's Angela here. The sequential revenue Decline really was not a concern for us this time because it's really attributed to the timing Of the lumpy delinquency recovery. And so what I mean by that is in the Q3, we have very favorable delinquency So if you take San Diego, for example, if I back out delinquency, the sequential revenue growth would have been 1.6%. And so similar relationship plays out for both Contra Costa and San Francisco as well. Speaker 1301:10:45Very helpful. Makes sense. And my follow-up question is around your collections operating model. So you talked about rollout by the end of 2022. And you also said that you implemented this in Orange County and San Diego. Speaker 1301:11:00So taking that sort of as an example, And let's say, thinking about a 10% to 15% reduction in personnel to natural attrition across the portfolio, Is there a way to contextualize that in some cost savings, either in terms of dollars or in terms of margins? That could be very helpful. Speaker 201:11:26Yes. I think the one example that we provided with The rollout and some of our other enhancements has already realized a saving of about 150 basis points in margin Improvement and that represents about $15,000,000 to the bottom line to NOI. And so My point in providing that context is that from a If you look at the rollout, we're only a third way through and that was that represents a rollout of really just 2 major 2 of our major regions. And so which is why I provided indication of an additional 200 basis points to 300 basis points expectation of margin Improvement just from the cost savings. And of course, with revenue, there's more to come on that, but that's several years down the road. Speaker 1301:12:28Very helpful. Thank you so much. Operator01:12:34Thank you. Our next questions come from the line of Joshua Dennerlein with Bank of America. Please proceed with your questions. Yes. Hi, everyone. Operator01:12:42Just maybe wanted to explore Speaker 501:12:44your comments around maybe pushing farther out into the suburbs. I guess how do you think about kind of identifying these new targets kind of further out from the urban core? And maybe does this also imply you'll have more capital Cycling for those paths Speaker 901:13:01closer in. Hi, Joshua. This is Adam. I can start off. As Mike noted previously, we've been somewhat rotating outside of the urban centers now here for a few years since before the pandemic. Speaker 901:13:16And so we use our research team to assess we look at all the top line metrics to see What areas within kind of our core footprint makes sense? And that's how to say Sacramento, for instance, that deal was done pre pandemic. And even at that point, the between job growth and incomes and affordability, Lack of affordability for single family homes, it made sense on all of our metrics, which That's what drives our investment decisions. So we have a research team that reviews all of those metrics Amongst a number of both our more core markets as well as more secondary markets. Operator01:14:15Thank you. There are no further questions at this time. I would like to turn the call back over to Michael Schall for any closing comments. Speaker 101:14:23Thank you. Thank you, everyone, for joining us today. I appreciate your participation on the call, and we hope to see many of you in the not distant future at the Citi conference. Thank you.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallEssex Property Trust Q4 202100:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Annual report(10-K) Essex Property Trust Earnings HeadlinesEssex Property: Undervalued High Quality In Plain SightApril 22, 2025 | seekingalpha.comEssex Property Trust Sees RS Rating Climb To 74April 15, 2025 | msn.comFrom Social Security to Social Prosperity?In less than a decade, Social Security could be out of money. But a surprising plan from Trump’s inner circle may not just save the system — it could unlock a major opportunity for savvy investors. Financial insider Jim Rickards calls it “Social Prosperity,” and says those who act now could see the biggest gains.April 26, 2025 | Paradigm Press (Ad)Earnings Preview: What to Expect From Essex Property Trust’s ReportApril 15, 2025 | msn.comBarclays Remains a Hold on Essex Property (ESS)April 12, 2025 | markets.businessinsider.comEssex Property Trust price target lowered to $303 from $304 at BarclaysApril 12, 2025 | markets.businessinsider.comSee More Essex Property Trust Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Essex Property Trust? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Essex Property Trust and other key companies, straight to your email. Email Address About Essex Property TrustEssex Property Trust (NYSE:ESS), an S&P 500 company, is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast markets. Essex currently has ownership interests in 252 apartment communities comprising approximately 62,000 apartment homes with an additional property in active development.View Essex Property Trust ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Markets Think Robinhood Earnings Could Send the Stock UpIs the Floor in for Lam Research After Bullish Earnings?Market Anticipation Builds: Joby Stock Climbs Ahead of EarningsIs Intuitive Surgical a Buy After Volatile Reaction to Earnings?Seismic Shift at Intel: Massive Layoffs Precede Crucial EarningsRocket Lab Lands New Contract, Builds Momentum Ahead of EarningsAmazon's Earnings Could Fuel a Rapid Breakout Upcoming Earnings Cadence Design Systems (4/28/2025)Welltower (4/28/2025)Waste Management (4/28/2025)AstraZeneca (4/29/2025)Mondelez International (4/29/2025)PayPal (4/29/2025)Starbucks (4/29/2025)DoorDash (4/29/2025)Honeywell International (4/29/2025)Regeneron Pharmaceuticals (4/29/2025) Get 30 Days of MarketBeat All Access for Free Sign up for MarketBeat All Access to gain access to MarketBeat's full suite of research tools. 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There are 14 speakers on the call. Operator00:00:01Good day, and welcome to the Essex Property Trust 4th Quarter 2021 Earnings Conference Call. As a reminder, today's conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties. Forward looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Operator00:00:35Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Shaw, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. Operator00:00:48You may begin. Speaker 100:00:50Good day, and welcome to our Q4 earnings call. Angela Kleinman and Barb Pack will follow me with comments and Adam Barry is here for Q and A. Today, I will provide an overview of 4th quarter and full year results, our expectations for 2022 and an overview of the apartment investment market. Essex experienced a strong recovery in 2021 Following the unprecedented and extraordinary challenges of 2020, the 4th quarter was our 2nd consecutive quarter of positive same store results And core FFO exceeded our original guidance midpoint by $0.05 per share. Overall, net effective rents remain above pre COVID despite a modest seasonal slowdown that occurs every Q4. Speaker 100:01:41In California, The pandemic and related regulation has led to an unprecedented divergence in apartment performance across our portfolio. The suburban areas that underperformed for most of the past 30 years are now our top performers and our historical top performers are now our ladders. To demonstrate, net effective rents in San Diego, Orange and Ventura Counties are up at least 25% from pre COVID levels, pushing rent to income ratios in these counties to all time highs. Conversely, rents in the tech markets remain well below pre COVID levels, especially San Francisco and San Mateo Counties, which remain down at least 15% and now screen both urban and suburban areas. For example, in Los Angeles County, Downtown LA net effective are flat from pre COVID levels, while suburban areas such as Long Beach and Santa Clarita are up 15% to 20%. Speaker 100:02:57We attribute the underperformance of the urban core to the damaging lockdowns in 2020, which resulted in severe job losses in restaurants and the service sectors. More broadly, recoveries in the urban core and major tech companies have been While the large tech companies generally did not experience job losses, their hiring slowed during the pandemic and many employees relocated in the initial phase of the pandemic due to citywide shutdowns. As of December 2021, The U. S. Has recovered about 96% of jobs lost in the pandemic compared to only 78% for the Essex markets. Speaker 100:03:47Obviously, we are disappointed that many tech employers push back their office reopenings during the surge of the Omicron variant over the holidays. However, the data indicates that most large tech employers will adopt a hybrid office environment And therefore, the return to office should be a significant catalyst for housing demand in our poorest performing markets. With job growth now exceeding the U. S. Average, we believe that our recovery is well underway And several observations support our positive outlook. Speaker 100:04:23As highlighted on previous earnings calls, There has been many large investments in office space by the large tech companies this past year contributing to Positive net office absorption in 7 of our 8 major markets representing 4,800,000 square feet of space. Available office sublease space has begun to decline in San Francisco, San Jose, Los Angeles and Seattle, which supports our belief that many companies are moving forward with their return to office plans. As expected, there is a resurgence in Service and hospitality related hiring as our cities recover with year over year increases Leisure Hospitality Employment ranging from about 29% in Ventura to about 56% in San Francisco. Recent immigration policy changes from the White House announced last week should also support the positive momentum that we're seeing in job growth at the higher income levels. For many years, Santa Clara and San Mateo Counties disproportionately benefited from foreign immigration. Speaker 100:05:37However, during the COVID pandemic, stricter immigration policies during the previous administration drove net Foreign immigration to a 30 year low. We suspect that the recently announced immigration policy changes will to job growth, particularly in the Bay Area. The venture capital investment in the Essex markets continues unabated. In the Q4, approximately $37,500,000,000 of capital was invested in West Coast based companies or approximately 40% of the total venture capital deployed in the United States and representing 124% year over year increase. The West Coast remains a leader in venture capital, which is a driver of global innovation and in turn local economies and job growth. Speaker 100:06:27The top 10 tech employers in our markets continue to seek talent and with open positions listed in California or reaching 47,000 in the 4th quarter, far exceeding the pre COVID peak by 62%. Turning to our expectations for 2022, Page S-seventeen of our supplemental package summarizes our key operating We continue to expect full year rent growth of 7.7% for Essex's West Coast markets. Our rent estimates are derived from a top down and bottoms up approach that we continue to refine with each passing year. We are expecting 4.1 percent job growth in our markets next year, suggesting moderation from the 5.5% West Coast job growth should significantly outpace the nation. Our research team conducts its own fundamental analysis of apartment supply and they expect around 37,000 apartment deliveries in 20 Similar to 2020, there are pockets of apartment supply deliveries in some urban submarkets, notably CBD LA. Speaker 100:08:03Similar to 2021, for sale housing deliveries will remain very muted at about 0.6% of total stock of for sale homes. Continued improvement in apartment trends in 2022 may be bolstered by inflationary pressures in the United States currently at the highest level since the early 1980s. While inflation and its countermeasures have potential to slow the economy, it's worth noting that apartments are resilient with short lease durations and high operating margins. In addition, it is incredibly difficult to ramp up rental and for sale housing production on the West Coast given long entitlement processes, Government restrictions and construction labor shortages. Finally, we have a conservative debt Estimating future supply a few years from now is another important part of Essex's capital allocation process and Page F17 Point 1 of the supplemental highlights recent increases in housing permit activity in various prominent residential REIT markets. Speaker 100:09:23While supply while future supply in the Essex markets is expected to drop in 2023 Few brief comments on the apartment investment markets where the deal volume in our markets has now surpassed pre COVID levels as institutional capital targets West Coast Apartments. Cap rates are consistently in the low to mid 3% range And we've seen yields converge across markets, construction types, location and age. We sold 4 Properties last year valued at $330,000,000 using the proceeds to fund stock repurchases early on and then acquisitions as the year progressed and our cost of capital improved. For the year, we acquired $432,000,000 with the majority of acquisitions completed in a co investment So we are optimistic about more opportunities to create value in the transaction market in 2022 and Barb will detail our 2022 guidance assumptions in a moment. With that, I'll turn the call over to Angela Kleinman. Speaker 200:11:02Thanks, Mike. First, I'd like to express my gratitude for the exceptional operations and support teams we have here at Essex. As the challenge to our business continue to evolve, Our team has also continued to step up, which speaks to the dedication, work ethic and the can do attitude across the organization. On to today's comments. I'll begin with key operation highlights of our major regions, then focus on our outlook for the year, followed by an update on the progress we are making by leveraging technology, data analytics and transforming our operating platform. Speaker 200:11:40We are pleased with our 4th quarter results of 4% year over year and 1.6% sequential growth in same property revenues. We have detailed on S-sixteen of our supplement, which shows the 4th quarter year over year new and renewal rent spreads up by 17.1% and 10.7%, respectively. The significant recovery in rents over the last year was bolstered by the Occupancy and concession strategies we implemented throughout the pandemic. To review our markets By region, I'll begin in Southern California, which represents almost 45% of our NOI and was our best performing region in 2021. Through many economic cycles, we have consistently relied on Southern California for steady performance and during the pandemic It has exceeded our expectations. Speaker 200:12:34The one caveat is the Los Angeles submarket. While it is also showing strong rent growth, This market faces offsetting challenges from the ongoing eviction moratorium and disproportionate bad debt. Notwithstanding these challenges, we remain optimistic with the broader Los Angeles submarket because of the continued strategic commercial investments by companies like Warner Brothers, which is planning to develop a 1,300,000 square feet of studio and office space in Burbank. This will be the largest studio development in the country and is expected to bring about 1400 new jobs to the market. Film LA recently reported the production activity hit an all time high in the 4th quarter and Apple recently proposed a 500,000 square foot development in Culver City, which should create approximately 2,500 new jobs. Speaker 200:13:31The continued job growth and high cost of homeownership amidst a slight increase in supply deliveries in Orange County and San Diego Our factors considered in our expectation for demand for rental housing and the basis for our 2022 outlook for Southern California market rent growth of 7.1%. Moving north to the Bay Area and Northern California. It is no secret that Northern California Rents have lagged the nation in the Essex portfolio average. We view the region as in early stages of its recovery. Unlike most markets across the country, which are effectively back to normal economic levels, the Bay Area has yet to fully recover due to ongoing COVID regulations such as mask mandates and delayed return to office, tempering the momentum of normal economic activities. Speaker 200:14:22We have seen communications by Bay Area Companies informing employees of plans to return to office After Omicron case subsides and we remain encouraged by the large tech companies expansion plans and commercial investments in our markets as highlighted by Mike. Furthermore, our supply delivery forecasts a decline in 2022. Thus, we anticipate Rapid recovery in rent growth without requiring a comparable level of increased housing demand. Keep in mind that our Northern California portfolio is mostly suburban and should benefit from those employees having fewer commuting days in a hybrid environment. These factors contribute to our expectations for Northern California to be one of our Turning to our Seattle portfolio, which continues to perform well. Speaker 200:15:22We anticipate similar level of supply Deliveries this year as last year with the majority concentrated in downtown Seattle. Because our portfolio skews to the east side in Bellevue and surrounding suburbs, The demand for our communities remains strong from the continued investments by several companies, most notably Amazon, which has committed to developing a second tower in Bellevue with constructions to start this year and is expected to create an additional 3,500 jobs. Therefore, we forecast Seattle's market rent growth as 7.2% for 2022. Moving on to the advancements in our operating model. By way of background, our disciplined focus of investing in high quality submarkets has resulted in 70% of our properties being located within 5 miles of each other. Speaker 200:16:14With this competitive advantage in geographic concentration and innovation in technology and data analytics. We have re envisioned Essex operating model with property collections. Essentially, we are transitioning from a dedicated team at an individual property to teams that will cover A collection of properties, allowing each associate to specialize in specific function and improving our ability to cross sell among nearby properties. By organizing properties into collections and centralizing certain administrative duties, we expect to generate more efficiencies across the We have already implemented this collections model in Orange County and San Diego and have achieved a reduction in personnel by approximately 10% to 15% through natural attrition. In addition, our data analytics has determined that our ability to cross sell neighboring communities has increased by over 800 basis points following the adoption of the collections model. Speaker 200:17:20We plan to complete the rollout of the collections Operating model to the remaining regions by the end of this year. While Essex has been efficient historically with each associate covering 40 units prior to 2019. With recent enhancements, we currently have each associate covering 43 units across the entire portfolio. Further benefits are expected in 2022 and thereafter as we complete our technology and other implementation plans. We are currently co developing proprietary applications with partners from REIT Ventures Fund and other software developers that will enhance the associate and customer experience. Speaker 200:18:04One example of advancements in our operating model over the past months has enabled 100% Contactless tours, which currently consists of 92% self guided tours and 8% virtual tours. As part of our technology initiative, we are starting the rollout of Alloy Access, a smart rent common area solution, which will elevate the resident experience, while also further the productivity of our operations team by enhancing security, usability and monitoring along with improving the effectiveness of the self guided tours for prospective customers. In addition, we are working with funnel to co develop a tailored solution to further automate our platform, which we plan to roll out later this year. We believe this will directly benefit both the associates and customers through streamlined systems, on demand features and link communications across properties, which will meaningfully accelerate the timetable to turn prospects into renters. We integrate these advancements with our data analytics platform to provide new operational insights. Speaker 200:19:14For example, Leveraging newly available data on our leasing patterns from funnel has improved the quality and effectiveness of our customer interactions. We have also applied advanced analytics with data from site plan to streamline our maintenance workflow, which which reduced our unit turn times by 10% in the 4th quarter on a year over year basis despite COVID related labor challenges. We expect that these initiatives will continue to provide us with additional levers and insights to improve our revenue growth and operating margins in the coming years. With that, I'll turn the call over to Barb PAC. Speaker 300:19:51Thanks, Angela. Today, I will discuss the key assumptions supporting our 2022 guidance and conclude with an update on the balance sheet. We ended 2021 with strong momentum in the 4th quarter as demonstrated by 4.7% same property NOI growth and 7.6% core FFO. We believe the economic recovery has only just begun on the West Coast And thus this positive momentum will continue throughout 2022. As such, we are forecasting core FFO per share growth of 9.7% at the midpoint, which is the highest growth in 6 years. Speaker 300:20:29We are pleased that our 2022 core FFO per share guidance is expected to exceed our pre pandemic FFO achieved in 2019 despite the challenging operating environment. This is a testament to our disciplined operating strategy and capital allocation process, which is driving results to the bottom line. Our 2022 FFO growth is primarily driven by a 7 point percent increase in our same property revenues on a cash basis and 8.3% on a GAAP basis. For the year, we expect fewer concessions as compared to last year, but delinquency remains a challenge and we are expecting delinquency of 2.4% Scheduled rent in 2022, which is 30 basis points higher than 2021. We have 2 counties representing 50% of our total delinquency where tenant protections remain in place. Speaker 300:21:22In addition, response times on tenant applications seeking emergency rental assistance remains slow and outside of our control, leading to large monthly swings in the delinquency line item. As a reminder, our historical annual delinquency has been around 35 basis points of schedule rent and given our long history of high collections, we believe we can ultimately return to this level once the various restrictions are lifted. We continue to assist residents in applying for federal tenant relief funds and have received $29,000,000 to date, of which $12,000,000 was in the 4th quarter. As for operating expenses, We are forecasting a 4% increase, which is above our historical average of 2% to 3%. This is a result of wage Throughout the past year, we have seen an elevated level of early redemptions of our preferred equity and subordinated loan investments due to high demand for West Coast Apartments and low interest rates. Speaker 300:22:40In 2021, we had approximately $210,000,000 of redemptions and our 2022 guidance contemplates another $350,000,000 of redemptions, some of this was pushed from the Q4 into this year. Over the past year, it has become more challenging to find new investments given the influx of capital to this segment. However, we were able to secure $117,000,000 of new commitments with an average yield of 11%, maintaining our disciplined approach to underwriting these projects. Our 2022 guidance contemplates an additional $100,000,000 of new commitments at the midpoint, of which we assume $50,000,000 will be funded during the second half of the year. The remainder of the preferred equity redemption proceeds will be used to fund new acquisitions. Speaker 300:23:30Finally, the balance sheet remains in a strong position. During the quarter, we saw continued improvement in our credit metrics And our net debt to EBITDA ratio declined to 6.3 times as EBITDA grew. We expect this trend to continue throughout 2022. Over the past 2 years, we have taken advantage of the low interest rate environment and refinanced nearly 40% of our debt, locking in low rates and reducing our weighted average interest rate by 70 basis points. As such, we have only 6% of our debt maturing over the next 2 years. Speaker 300:24:04In addition, we have minimal exposure to short term rates with only 4% of our consolidated debt subject to floating rates. As such, we have minimal risk to the rising interest rate environment. Given limited near term maturities, no material development funding needs and ample liquidity, the company remains in a strong financial position. With that, I will now turn the call back to the operator for questions. Operator00:24:31Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to one question and one follow-up question. Our first questions come from the line of Rich Hill with Morgan Stanley. Please proceed with your questions. Speaker 400:25:14Hey, good morning guys. I wanted to maybe just start off with a question about new leases relative to same store revenue. I typically view new leases as a leading indicator for same store revenue Speaker 100:25:26and you put up just a Speaker 400:25:28huge number for new leases in January, I think around 17%. So how are we supposed to think about that? And maybe if I can push you a little bit, why Speaker 100:25:35is the same store revenue higher? Speaker 200:25:39Sure, Rich. It's Angela here. So let me just give you a little context on the S-sixteen that shows our new lease rates and it is terrific With that 17%, but keep in mind that's a year over year number to Starz. And we have communicated that Between Q4 of 2020 to Q1 of 2021, so that comparable period, that's when Market rent troughed. And so from a year over year perspective, we are really hitting kind of the greatest delta, if you will, from a differential So if we're talking about really the same store guidance, what we probably I think a better Indicator is to look to the S-seventeen that Mike talked about earlier and you take that market rent of 7.7% That market rent growth. Speaker 200:26:36And then you factor in the loss to lease at year end. And I know we normally do this look to the September loss lease, but You might recall that we were we had a typical seasonality And the seasonal peak was pushed. So we had cautioned against using the September loss release. So if we look at the December loss release, it's around 6 And you factor those 2 in, and then some of these other Factors such as legislation and delinquency, that's what ultimately drives our midpoint guidance of 7.8%. Speaker 400:27:22Got it. And look, that makes sense to me. We spend a lot of time on your macro forecasts. So I guess your revenue guide Was consistent with that, which is sort of what we expected. The Nuuly spread was just really high and that's helpful color. Speaker 400:27:37Just one more question for me. When we're unpacking what you reported and guided to relative to our numbers, one of the things that stood out to us was rising interest expenses and then rising non same store expenses. Can you just maybe talk through what you're expecting for the interest expense side of the equation and if you're intentionally being conservative given the interest rate environment that we're in right now. Speaker 300:28:07Hi, Rich, it's Barb. In terms of the interest expense line, the biggest factor there is the reduction in cap interest as our development pipeline has substantially We rolled off and so that's a pretty substantial increase in the interest expense. We do have a couple of rate increases forecasted in the guidance and It's really why we have a range, but we don't have a lot of variable rate debt. We only have 4% of our consolidated debt as variable rate, so that's a Small impact to the numbers. It really is the cap interest side of the equation. Speaker 300:28:42I think that's a $4,000,000 reduction. Speaker 400:28:45Okay. That's helpful. Guys, I'm sure a lot of people have other questions. So I'll jump back in. But thank you for that. Speaker 100:28:54Thanks, Rich. Operator00:28:56Thank you. Our next questions come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions. Speaker 500:29:03Hey, good morning. Good morning out there. Operator00:29:07So just a few Speaker 500:29:07questions from me. As far as Southern California goes, the strength that that market is experiencing in general, Do you think that will continue? So when San Francisco reopens and those tech jobs once again have to be in the office, Are you expecting a migration back of people who migrated down to Southern Cal going back to Northern Cal or your view is that everyone who is Populate Southern Cal loves the lifestyle and is not looking to relocate back. Speaker 100:29:43Hey, Alex, it's Mike. I'll start with this and then flip it to Angela maybe for some more comments. We think that There is a reversion underway and it will draw people back to where the jobs were kind of pre pandemic. And so the pandemic caused a lot of disruption with respect to where people went and many people went to Southern California and elsewhere. And so we think as the pandemic winds down, people will go back to where they once were again With the hybrid model being the typical format for a lot of the big companies out here. Speaker 100:30:23So we think that some Of the people who moved from Southern California back to Northern California, but keep in mind, there were people from Southern California that moved to Phoenix and other places as well. So it's not just a one direction movement. And we think that the overall impact will be beneficial for California in total. So even though some people move from Southern California back to Northern California, that'll be offset by potentially other people moving back Yes, for job reasons and or lifestyle decisions. So with that, I'll turn it over to Angela. Speaker 100:30:59Anything to add, Angela? Speaker 200:31:00Maybe just a little Historical context, Alex. With the Southern California portfolio and in particular San Diego, Ventura and Orange County, These are markets that were at that perform at a 97% occupancy even pre COVID. So it's already a highly desirable place to be. And we combine that with this region having the most The strongest loss to lease, and it actually has, as far as we can see, pretty long legs. So in the interim, during the reversion that Mike is referring to, It may be more of a net neutral, but long term, this market was still we would see this market to continue to perform well with a good tailwind from loss to lease. Speaker 600:31:48Okay. And then just Speaker 500:31:49as a follow-up to that, as part of guidance, and Mike, you've spoken about the exodus Yes, the high-tech worker and then the service worker who left when their businesses were shut down. But as far as guidance goes, How much of guidance is predicated on the return of tech workers, return of the baristas? Just trying to get a sense or If return to office occurs and if service job, those people who left came back, that's incremental above and beyond what you're already assuming in your numbers. Speaker 100:32:23Yes, Alex, I would say that it's already happening. So it's not a future event necessarily. I think we're in the middle of The reversion and I think to point to a statistic, just look at job growth and job growth is trailing 3 month job growth. It's highest In Seattle, 6.2% followed by Northern California at I'm sorry, Southern California by 5.8% and Northern California by 5%. So Jobs are coming back. Speaker 100:32:50People are starting to move. The Bay Area obviously is a step behind, but we think it will catch up given The strength and the uniqueness of the tech employers that are there. And so we think it's all underway and it's just going to take some time to play out. I guess the question is, can it accelerate? I mean, we actually expect it to accelerate, especially in the tech markets, which were, of course, Those that were most impacted. Speaker 100:33:18By the end of the year, we expect that California We'll or our markets will have about 93% of their jobs that they lost during the pandemic We covered, we're currently at about 78% now. So we expect again these trends to continue and pretty favorable for our markets given What the impact on jobs is? Thank you. Thank you. Operator00:33:48Thank you. Our next question has come from the line of Nick Joseph with Citi. Please proceed with your questions. Speaker 700:33:54Thanks. Maybe just following up on that, it seems like another topic, at least for San Francisco and maybe Seattle as It's just been quality of life overall. And obviously, a return to the office will help improve things. But do you think there's other Steps that need to be taken or will the return to the office really help with quality of life as well? Speaker 100:34:18I think quality of life considerations really come into play in the CBDs. This homelessness, concerns about defunding the police, etcetera, I think that is where quality of life issues are More manifest and obvious. And as I say, they're not creating any more beaches around here. So that's Obviously a benefit. And so I think that the quality of life in suburbia is actually very high. Speaker 100:34:52And we're as we said before, we're going to push out a little bit farther strategically into some other some different markets. And Adam's here, he can talk about this Vista deal, which we've never bought at Vista before, but it represents one of those markets that's in suburbia, Good community, good decent schools in a very nice Northern San Diego submarket. And Yes, we're looking for that and we think that we can find great quality of life in some of those markets and there's great opportunity out there. Speaker 700:35:25Thanks. So then as you think about the co investment in the preferred and the mezz book, obviously you've gotten good returns from it And it's led to some opportunities. But as you think about kind of earnings and some of the volatility that we're seeing this year associated with it, How do you think about the size going forward from a strategic perspective? Speaker 100:35:46Yes, Nick, I think it's about right actually. So we have About $700,000,000,000 combined between preferred equity and mezz debt. And again, we don't want that business to get To be too large, we, I think, took advantage of an opportunity in 2020 to grow the business a bit, given that there was very little else that was working. And I think that's helped, but it will be somewhat lumpy. And that's the primary reason why the Board and all of us think that we should control its size and Not let it get too large. Speaker 100:36:20So that's 1st and foremost on our mind. From our perspective, it is Probably the best risk reward of what we do in terms of how we generate income and plus there's some other advantages. One of our Investments this quarter was a joint venture that came out of the preferred business. So I thought that was having other types of business tied to that is important. Plus we get a look at many development deals that are going on in the marketplace And that allows us to be more discerning with respect to our development pipeline. Speaker 700:36:58Thank you. Speaker 600:37:00Thanks. Thank Operator00:37:03you. Our next questions come from the line of Rich Hightower with Evercore. Please proceed with your questions. Speaker 800:37:09Hi, good morning out there guys. I want to go back to a couple of the prepared comments in terms of delinquencies and I guess the longer term assumption that that delinquency rate will revert more to historical norms. Every time we talk to Your coastal peers regulatory risk is obviously very prominent in the decision to diversify outside of certain markets. I assume this is part of that. So I guess what over the longer term gives you the confidence that the regulatory environment in that regard will Indeed, get back to where we were pre COVID. Speaker 100:37:50Yes, it's a good question and it's definitely something that's On our minds and we will say that it's frustrating from time to time. But I guess we would ask that everyone take A balanced view of these regulatory risks and look at the other side. I mean the other side is that limited housing supply really comes from All the regulations that make it difficult to build housing in these markets. And so we try to balance that equation as best we can And knowing that we are a beneficiary of the supply issues that California has because there's always another regulation that is making it more difficult for us to build housing Right around the corner, which is what keeps supply under control in California. So keep that in mind. Speaker 100:38:39And we know that We need to be a strong advocate with respect to sensible housing policies and we're going to be active in that area going forward. But again, we would hate to trade away the unique benefits that we have given the supply restrictions in California. Speaker 800:39:00Okay. I appreciate there's no side to the coin there, Mike. Maybe one quick follow-up. I mean, just Are you able to delineate for us on this call the bad debt percentages in terms of leases that were signed in the pre COVID vintage, True sort of COVID hardship at the time versus any leases that were signed in the world started to get better again. I mean, and people that were gaming the system After COVID was already a factor, is there a way to do that? Speaker 100:39:32I'll start and then flip it To Barb, a lot of this, there was nothing in the pre COVID period that indicated that there were any issues With delinquency, so I'll make that comment number 1. Most of the issues that we have are really related to the government, The governmental agency, which is there's a website called Housing is Key and they have very recently About $7,000,000,000 in applications and they paid out about $1,900,000,000 So they're way behind. And so there is this delay And getting reimbursed for all these claims. And Barb has some information about what's in process, etcetera. But I guess the key here is that the state agencies are way behind and there's a lot of money that has been Submitted and we don't know we don't have control over what's going to happen with those funds. Speaker 100:40:29And so we're just going to have to wait, which led to What we hope to be is obviously conservative guidance. We weren't intending to be conservative, but we realize that Some of these factors are out of our control and so that we aired maybe to the conservative perspective, but we just don't know. Barb, with that said, I think you have some additional numbers. Speaker 300:40:53Yes, Rich. So in terms of our cumulative delinquency, we're at about 67,000,000 We have applied for reimbursement for 80% of that, so about $53,000,000 And of that amount, $33,000,000 relates to our existing residents. However, the tenant the timing and amount of Being able to collect that is unknown because the program prioritizes based on the residents area median income, which is Something that we're not fully privy to at the time they apply. The remainder is applications we've applied for on behalf of past residents. Now our ability to collect on that is if the resident will engage and that's unknown at this time, but we have applied for everything that we can. Speaker 300:41:40And as Mike said, the State of California has been slow to disperse funds, which is causing a lot of the noise in our numbers at this point. Speaker 800:41:50Okay. Thanks for the color guys. Speaker 100:41:53Thank you. Operator00:41:56Thank you. Our next questions come from the line of Brad Heffern with RBC Capital Markets. Please proceed with your questions. Speaker 900:42:03Yes. Hi, everyone. Thanks. I was wondering about rent to income. You talked in the prepared comments about the big divergence between urban and suburban. Speaker 900:42:11You give any figures about where rent to incomes have trended in those 2 splits? And if they've moved, has that largely been because rent has moved or has income moved as well? Thanks. Speaker 100:42:26Yes, this is Mike and there may be Andrew may have a comment too here. But generally speaking, The good news is that incomes are moving and that affects us in terms of our guidance, but it also helps us charge More brand allows us to have higher rent levels and helps us much more than what Cost is on the operating expense side. So we're pleased with higher income levels, and we're seeing that throughout our portfolio. And in terms of numbers, so Southern California, for example, has a rent in median income. This is Median, this is not our data. Speaker 100:43:08This is general data that comes from our data vendors. But using median Rent and median incomes, we're currently at 26.9 percent rent to income in Southern California versus the long term average 22.3%, so well in excess of that average. And then conversely, in Northern California, We're currently at 22.1 percent rent to income versus a long term average of 23.1%, so well below In that regard, Seattle is a little bit different. It's at 21.1% versus 18.7%, respectively. So it Suggested it's higher in the rent to income versus the long term average, although that market has changed pretty dramatically in terms of It going from being a lower cost to a higher cost or higher rent market over the last 10 years or so. Speaker 100:44:07So I'd say it's fundamentally changed Does that help answer your question? Speaker 600:44:12It does. I mean, one of the things Speaker 900:44:14I was trying to get at is specifically for Northern California. When you have the backfill after the initial sort of COVID pain, I'm curious, did you see significantly lower incomes from those people and that's part of what caused Pricing pressure and is there any reversion of that or is the pricing pressure truly just due to other factors? Speaker 100:44:35Yes, if that's the question. Yes, we see so take the leisure and hospitality segment, Which lost a tremendous number of jobs because the state shut down the restaurants and the hotels shut and travel was shut down So all those people that are generally pretty low wage earners left the Bay Area and went Somewhere else. They migrated far and wide or went home with parents, etcetera. And so we're Starting to see them come back. They're skewing the data in terms of their impact on rent income. Speaker 100:45:13It looks like we're bringing in a lot of lower income workers, but it's Just replacing what we lost a while ago. So there's nothing fundamentally wrong with the Bay Area or any of our markets With respect to income levels, I think they're still in very good shape. The tech companies continue to they didn't lose a lot of And they continue to hire at robust levels, at high income levels. And then those high income levels are what really drive the demand for the services, All the jobs that we lost early on in the pandemic and the higher incomes, people here make enough money that they can pay A little bit more for their dinner and some of these other services. And so we just don't see that as a key issue. Speaker 100:45:57The key issue is how do you draw back People that left in the early parts of the pandemic, how do you draw them back now? And I think that's an ongoing process. Operator00:46:16Thank you. Our next questions come from the line of John Kent with BMO Capital Markets. Please proceed with your questions. Speaker 600:46:23Hello. I was wondering if you talked about sourcing new preferred meds has been challenging in this environment. Would you consider doing deals outside of your core markets, not necessarily to own the equity, but just provide a wider pool of investment opportunities? Speaker 100:46:41This is Mike. Actually, I'm going to give this to Adam in a minute. But we the answer is we are to some extent In other words, we're not going to completely different markets, but we're pushing into other markets. Adam, you want to give them a couple of examples of deals that we've done? Speaker 900:46:56Yes, John. So we have been tracking into other markets since really the platform was put into place. And we've actually we've done to So we've looked slightly outside of our markets to where we think the fundamentals are still there. And so a couple of stuff we've done, We did one in Redlands, which is Inland Empire. That one's going well currently funded. Speaker 900:47:21And then we have one round trip in Sacramento that That market has obviously done very well. So we continue to track markets within our overall footprint, but a little outside and we'll consider a little further beyond that. Speaker 600:47:39Okay. So nothing outside of the West Coast really? Operator00:47:43Yes. Speaker 600:47:45My second question is on your revenue generating CapEx guidance of $100,000,000 Which is more than double what you invested in last year. How much does this add to same store revenue growth this year versus 2023? Is it fair to assume that most of this CapEx will be outside of Northern California? Speaker 200:48:07We actually Are looking at these opportunities throughout the portfolio. So it's not skewed toward one region because we are seeing Strong market rent growth in all of our portfolios in all of our regions. And as far as when They will be realized less likely in 2022, just because as you know, it takes time to Renovate and then get them leased up. And so by the time that occurs, you certainly wouldn't have a full year of revenue. So it's more likely going to impact 2023. Speaker 600:48:48Great. Thank you. Operator00:48:53Thank you. Our next Questions come from the line of Austin Wurschmidt with KeyBanc. Please proceed with your questions. Speaker 1000:49:00Great. Thank you. Mike, in your prepared remarks, you referenced The buyers in the markets are not really discerning, I guess, between location and maybe vintage of product. And Is that simply just a function of the amount of capital that's coming into your markets and chasing deals? And separately, is there really any opportunity for you to pull forward any portfolio management objectives as a result of kind of everything seemingly converging in pricing. Speaker 900:49:30Hey, Austin, this is Adam. I can start with that and then if Mike has any follow ups. So we're seeing a different buyer pool for different vintages in different locations. But ultimately, what you said in your question is right. There's so much capital chasing these deals, whether it's coming from value add funds or larger core funds or whomever, That the compression between product age, type, construction type and location Has been significant and continues to remain today. Speaker 900:50:04As it relates to that, Mike, do you want to cover Speaker 100:50:09Yes. Could you repeat the question about the portfolio? Speaker 1000:50:14Yes. Just portfolio management objectives trading around submarkets, Increasing product quality, whatever sort of is in your purview, I guess? Speaker 100:50:23Yes, the broader Management objectives, yes. Well, we continue to believe that we can add value in a variety of ways. And it isn't that we're necessarily going to Dramatically increase our portfolio allocation to any one market or decrease it. I think that we're overall Pretty happy, and we want to see how the pandemic recovery plays out. Like everyone else, there's a number of unknowns about Portfolio transitions, and we would like to get into a more normal world. Speaker 100:50:57As I mentioned in the in my prepared remarks, The laggards of the last 30 years are now our top performing markets. Is that possible that that continues or does it revert back? And I suspect that there will be some Fairly significant amount of reversion. As we think of the world, we think that probably the urban core, again, given Issues with homelessness, crime, etcetera are probably a mild negative. Hopefully, the cities get control over some of these issues. Speaker 100:51:32I think that they can definitely do that with respect to crime. I'm not so sure that there is a plan When it comes to homelessness, but again, that's pretty focused on the urban core, much less so in throughout the suburban Parts of our portfolio, which is where the vast majority of our property is located. We've commented actually before The pandemic on deemphasizing the city centers, partially due to what I just said. And so that remains something that we will take a look at and potentially transact around Going forward, but overall, north south balance, Seattle, I think, is doing really incredibly well, great job growth And a couple of key drivers up there in Microsoft and Amazon that are really pushing that market. So we'd like to increase our Portfolio up there actually, but it's difficult to find the product at the price that adds value. Speaker 100:52:31So more of the same. We've been there before. Speaker 1000:52:35Yes, got it. And then just maybe, given where the stock is trading, certainly preferreds, I think the Preferred equity investments have been one of the most attractive you've referenced. But beyond that, given where your stock is trading, is the joint venture still One of the best uses, do you take a look at issuing from time to time where you're trading today? What sort of the thinking around your cost of capital and potential uses? Speaker 100:53:05Yes. We when we look at deals, our deal generation is sort of independent of How we capitalize or how we take the deal down and where we believe that we're adding value to the company and that could be core FFO or cash flow and or NAV per share to the company, We will take it down on the balance sheet. And at times like now where we don't think we can add value, We will do it in our one of our co investments where we're still a substantial owner. We still own about 50% These transactions and we manage it and therefore we earn some small amount of fee income, but it's really driven by the capital side of the equation. And again, at this point, we probably wouldn't issue stock. Speaker 100:53:56We would prefer to transact in a co investment format. Speaker 1100:54:01Thank you. Operator00:54:06Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your questions. Speaker 1200:54:13Thanks. Just one follow-up question to that, the North and South Southern California balance in the portfolio either for Mike or Adam. I guess I'm listening, Mike, to your opening remarks and The unsaid investment takeaways by Northern California, by the laggards and maybe sell or prune The winner is just in terms of the dispersion of relative rents we've seen in the last 24 months. So and kind of pounding the table on the mean reversion trade, Why don't you have as much conviction to go out and tilt the portfolio on the margin towards Northern California more heavily? Speaker 100:54:50John, it's a great question. And Adam, will you bring me 100 buildings in Northern California, please at a 3.8% cap rate, that's the answer. It's not there. And if we could do it, we would. We did buy one property in Fremont, Again, in a co investment, we would buy more if we could, John. Speaker 100:55:11But again, these the markets are going to evolve and perhaps We'll continue to see more product hit the market and we wouldn't for high quality property in the right areas of the Bay Area, we're not BlackLine in the Bay Area by any means. Operator00:55:30Just to tack on a little there. Speaker 900:55:32We see every deal that's marketed and every deal that's Not marketed. And so it's always a relative game. And so we're underwriting consistently up and down the portfolio and Jumping in where we see opportunity for that value add. Otherwise, we've seen deals in the Bay Area close at 3.132 GAAP and that's not where we're going to compete. Speaker 1200:55:59Okay. So going in economic yields are still meaningfully lower in Northern California than LA, Orange County, San Diego? Speaker 100:56:08I keep telling Adam, I say, Adam, well, interest rates are going up. So what's going on with cap rates? And Adam keeps telling me they're pushing down, right? I mean that's effectively what we've seen. Speaker 900:56:19That's effectively right. And so John, it's Not even going in. So that 3,132 gap that I quoted is economics. They're taking all units to market as of today. So it doesn't include any future growth, but that's still absorbing the loss of lease. Speaker 900:56:36So yes, very competitive. Operator00:56:41Okay. Thank you. Speaker 100:56:44Thanks, John. Operator00:56:47Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your questions. Speaker 600:56:54Hey, I guess it's still morning out there. Good morning. Operator00:56:58I wanted to ask I have Speaker 600:57:00a question on your blended free. I guess I'm trying to better understand the cadence In the back half of the year versus the first half and some of the key drivers or underlying assumptions, you started off the year on a strong foot, You seem to be fairly optimistic about an improvement in those kind of back half of the year. But looking at the guide, But there's a massive drop off to get through your same store revenue guide. So maybe you can help me understand or square that a bit more. Thanks. Speaker 200:57:27Sure, Haendel. It's really more of a function of the year over year comparable. And so we expect the first half To be much stronger because first half of twenty twenty one was still quite soft. And of course, we started recovering in the second half of twenty twenty one. And so from a year over year perspective, this year, the second half will be a harder comparable and that's really what's driving The trends. Speaker 600:57:56No, I understand that. So I guess maybe helping us understand maybe the delta perhaps between Some of the regions in the back half year, obviously, there's some tailwinds helping NOCAL, but perhaps SoCal has more headwinds given how well it's formed. So maybe A bit more color perhaps on maybe the spread that you're thinking of there. Speaker 200:58:20In terms of the spread, what we The auto will be the highest from a year over year on the second half because it has Higher loss to lease and lower delinquency and better concession benefit in Northern California and Southern California are Pretty much very comparable. Southern California because of the challenge by delinquency, while Northern California has that concessionary benefit And so they end up more similar. But in terms of spread, we're not talking we're talking, say, 40 basis points versus that now hundreds of basis points. So they're all pretty darn close. Speaker 600:59:08Got you. Okay. That's helpful. Speaker 300:59:10And Haendel, just one question. Are you asking about market rent growth or same store growth? I'm just trying to understand. Speaker 600:59:18Yes. I guess the first question was more on the blended rate growth within the same store, but the market commentary is helpful. Where are you guys sending out? I don't know if I missed it, but did you guys mention where you're sending out renewals today for February March? Speaker 200:59:37We didn't just that. Let me take a quick look. So under renewals, Sending out, hold on, 2022. Where is that? Where did it go? Speaker 200:59:56Oh, here we are. So we're sending renewals out Portfolio average in the low teens, so around, say, 13 ish percent and with Seattle the highest, Followed by North Cal and then SoCal around 10 ish. Speaker 601:00:13Got you. That's helpful. Speaker 701:00:15Mike, I guess a question Speaker 601:00:16for you. I heard your Comment, Joey, about VC Investments. And I understand there's a lot of profitable and very viable established companies, tech companies today. But I guess I'm curious How concerned you might be regarding the ongoing Facebook or Meta troubles and the number of not yet profitable start ups? I guess I'm Curious what any level of concern you might have at all as to what might happen to your jobless assumptions that these companies have to cut G and A? Speaker 101:00:47Yes. Hey, Haendel, it's definitely a concern. But I don't think in terms of the STEM graduates and The workers that are in these fields, I don't think there's any shortage of positions that might be available to them. There's plenty of jobs out there. I was Coming out of college, I worked for a venture capital company and so I was there for quite some time and it's amazing how different the world is. Speaker 101:01:12And These companies are venture financed for a much longer period of time now and the rounds are much larger. In fact, I think most of the Money that was deployed that I discussed in the script was mega rounds, rounds exceeding $100,000,000 So we have some concern about it. Obviously, those And therefore, I think that's warranted. I've been through that in my career in the late '90s where All these companies went public and without a product and it didn't work out well. So I think the current model of venture capital funding is much better and much more resilient. Speaker 101:01:49And A lot of these companies, the best ones we'll see it through. And the ones that don't succeed, I think the employees, there's plenty of opportunity out there At some of the other companies, that's what makes us the Bay Area such a unique place from a technology employment standpoint. Speaker 601:02:10Okay. That's helpful. And if I could squeeze one more, I don't know if I missed that number too, but did you guys tell us what's embedded in The guide for rental assistance payments for this year? Speaker 301:02:23Yes, Haendel, this is Barb. Like I mentioned earlier, we have applied for $52,000,000 of our cumulative Delinquency, dollars 33,000,000 of that is our existing tenants and We feel good about that number. However, the timing is very uncertain. And what we do is we forecast on a net basis. So we've assumed net delinquency does increase this year because of the uncertainty related to the timing of payments on These applications as well as the California program, which The applications have exceeded the amount that's already been allocated to the state. Speaker 301:03:06So there's a variety of things that led us to that assumption. Speaker 601:03:11Okay. So if I understand it, should you be successful in getting well, I guess I'm trying to understand how What level of payments are kind of embedded and where the upside where that line lies? I guess I'm having trouble understanding what exactly is the net number, the absolute number that's included in the guide for this year? Speaker 301:03:34So in our guidance is a 2.4% delinquency as a percent of schedule rent. That's what will drive our numbers. And One thing that we are seeing is our delinquency has gotten worse our net delinquency has gotten worse over the last couple of months as more of our tenants Are applying for aid as the program has changed recently to allow tenants to apply for 3 additional months. Therefore, applications are going up. Speaker 601:04:14Okay. I think we'll follow-up offline. But thank you all. Appreciate the time. Appreciate your thoughts. Speaker 601:04:19Thanks. Operator01:04:22Thank you. Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your questions. Speaker 1101:04:28Hey, thanks. Good afternoon now. So is there any logic to the concept that Regulatory environment could actually be a good thing in terms of being a magnet for residents. I know Some of your peers are running because of regulation, but on the other side of that table is perhaps a resident, I don't know. I'd like to know that I have tenant friendly regulation behind me if I'm living in California. Speaker 1101:04:59Is there any Relevance to that line of thinking in your mind, Mike? Speaker 101:05:06Yes, Rich. It's a good concept. People generally don't thank their landlord very much. We don't hear a great deal of appreciation. But having said that, I mean, I think that tenants do appreciate it. Speaker 101:05:20Candidly, from my perspective, I worry that it's taken advantage of the system as opposed to We're all for a safety net. We're all for helping people out, but it can go too far and trying to find That comfortable middle ground, I think, is what they're trying to do. And I'm very glad I'm not managing that program, by the way. So I think it's a good point. I think people do appreciate that part of California. Speaker 101:05:50And But they're going to do what's best for them, which ultimately will come down to their job and their quality of life and those factors that we spend most of our time thinking about. Speaker 1101:06:02I mean Costa Hawkins reversal is defeated, CPI plus 5% statewide, rent cap. I mean these More terrible events in the life cycle of Family California. But anyway, second question is, you mentioned Cap rates are still going down with, I guess, what we would call the threat of rising interest rates, still 10 years at historical lows, but I look back 2018 tenure was over 3%. And I looked at what you said in your call at the time, you Cap rates are running around 4.25%. So are you kind of quietly hoping for perhaps an increase Interest rates to something more like that and also inflation because of the pass through qualities of multifamily and that you could really start to See some opportunities come. Speaker 1101:06:56I know it's 3.1 now on the cap rate, but maybe that changes if we get some real change to the interest And that perhaps opens up opportunities for you and your more substantial costs or capital raising Yes. Speaker 101:07:14No, it's a great question, great observation. And we I think that The company is positioned sort of for the worst case scenario, whatever that might be in terms of the balance sheet and the overall structure, a world in which Incomes are inflating and rents are inflating is a good world for us, I think. I mean, I think that there will be opportunity. And even though our probably our Interest costs would go up in that scenario. The vast majority of our debt is pretty well locked down in terms of maturities and rates. Speaker 101:07:48So that would be A good world for us and I think there's a reasonable chance that's the road we're on. So Speaker 1101:07:56is a 4 handle type cap rate, is there anything systemic about your world right now that that can't happen even if a scenario of 3% plus tenure were to happen? Could I would assume that that's a very realistic opportunity. Speaker 101:08:12Yes, it's I mean the one the comment I would make is that cap rates tend to be pretty sticky over time, so they don't just change overnight just because interest rates move up or down. And I would say, Back in those the 2018 period you were referring to, we were maybe a little frustrated that cap rates weren't moving down somewhat given how much the Tenure had rallied, but until the COVID period, they were they remain pretty sticky even though you had Pretty significant reductions in interest rates over that period of time. I think that probably you're not going to see Cap rates adjust upward quickly. There's too much money looking for a yield and a yield investment and 3% versus some of the options is still 3% and is still, in the scheme of things, interesting To some investors, so I wouldn't expect that to change. It really is all about the flow of money and The number of investors that need yield and what the other yield alternatives are. Speaker 1101:09:20Great. Okay, great. Thanks very much. Speaker 601:09:23Thank you. Operator01:09:25Thank you. Our next question comes from the line of Chandani Luthra. Please proceed with your questions. Speaker 1301:09:32Hi, good afternoon everyone. Thank you for taking my questions. Could you talk about the drivers sequential same store revenue declines in some of your markets in Q4. I'm talking about markets like San Diego 3% of GenFAN down about 2%, similarly contract cost. I mean, how much of this was Perhaps a disappointment on return to office as we were just crossing that Labor Day mark versus Say some seasonal factors that had a role to play here. Speaker 201:10:07Sure, happy to. It's Angela here. The sequential revenue Decline really was not a concern for us this time because it's really attributed to the timing Of the lumpy delinquency recovery. And so what I mean by that is in the Q3, we have very favorable delinquency So if you take San Diego, for example, if I back out delinquency, the sequential revenue growth would have been 1.6%. And so similar relationship plays out for both Contra Costa and San Francisco as well. Speaker 1301:10:45Very helpful. Makes sense. And my follow-up question is around your collections operating model. So you talked about rollout by the end of 2022. And you also said that you implemented this in Orange County and San Diego. Speaker 1301:11:00So taking that sort of as an example, And let's say, thinking about a 10% to 15% reduction in personnel to natural attrition across the portfolio, Is there a way to contextualize that in some cost savings, either in terms of dollars or in terms of margins? That could be very helpful. Speaker 201:11:26Yes. I think the one example that we provided with The rollout and some of our other enhancements has already realized a saving of about 150 basis points in margin Improvement and that represents about $15,000,000 to the bottom line to NOI. And so My point in providing that context is that from a If you look at the rollout, we're only a third way through and that was that represents a rollout of really just 2 major 2 of our major regions. And so which is why I provided indication of an additional 200 basis points to 300 basis points expectation of margin Improvement just from the cost savings. And of course, with revenue, there's more to come on that, but that's several years down the road. Speaker 1301:12:28Very helpful. Thank you so much. Operator01:12:34Thank you. Our next questions come from the line of Joshua Dennerlein with Bank of America. Please proceed with your questions. Yes. Hi, everyone. Operator01:12:42Just maybe wanted to explore Speaker 501:12:44your comments around maybe pushing farther out into the suburbs. I guess how do you think about kind of identifying these new targets kind of further out from the urban core? And maybe does this also imply you'll have more capital Cycling for those paths Speaker 901:13:01closer in. Hi, Joshua. This is Adam. I can start off. As Mike noted previously, we've been somewhat rotating outside of the urban centers now here for a few years since before the pandemic. Speaker 901:13:16And so we use our research team to assess we look at all the top line metrics to see What areas within kind of our core footprint makes sense? And that's how to say Sacramento, for instance, that deal was done pre pandemic. And even at that point, the between job growth and incomes and affordability, Lack of affordability for single family homes, it made sense on all of our metrics, which That's what drives our investment decisions. So we have a research team that reviews all of those metrics Amongst a number of both our more core markets as well as more secondary markets. Operator01:14:15Thank you. There are no further questions at this time. I would like to turn the call back over to Michael Schall for any closing comments. Speaker 101:14:23Thank you. Thank you, everyone, for joining us today. I appreciate your participation on the call, and we hope to see many of you in the not distant future at the Citi conference. Thank you.Read morePowered by