Essex Property Trust Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2023

Key Takeaways

  • Essex generated 16.2% core FFO per share growth in 2022—its highest annual increase in a decade—driven by disciplined operations, its property collections model and strong recovery in West Coast markets despite COVID-19 headwinds.
  • For 2023, the company targets ~4% same-property revenue growth, ~3% same-property NOI growth and ~1.6% core FFO growth, offset by a $0.60 per share drag from elevated delinquencies that should decline to ~1.5–2% gross by year-end.
  • COVID-related delinquencies, concentrated in LA and Alameda counties under extended moratoria, are expected to normalize by 2024; 2023 bad debt is guided at ~2% of scheduled rents with ongoing unit recoveries.
  • Operational improvements include an occupancy-focused leasing strategy that cut concessions to under a week, completion of phase 1 of its property collections model (admin costs +0.7% in 2022), mid-year roll-out of phase 2 maintenance efficiencies and launch of proprietary revenue-management software.
  • Despite limited macro visibility, Essex cites resilient West Coast fundamentals (December job growth 3.8%, unemployment 3.2%), long-term tech sector cyclical strength—especially around AI innovation—and muted supply, keeping suburban cap rates in the mid- to high-4% range.
AI Generated. May Contain Errors.
Earnings Conference Call
Essex Property Trust Q4 2022
00:00 / 00:00

There are 16 speakers on the call.

Operator

Welcome to the Essex Property Trust 4th Quarter 2022 Earnings Conference Call. As a reminder, today's conference call 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.

Operator

Further 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 Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall.

Operator

You may begin.

Speaker 1

Good morning, and welcome to our Q4 earnings conference call. Angela Kleiman and Barb Pack will follow me with comments And Adam Barrios here for Q and A. Today, I will touch briefly on our full year results, expectations for 2023 Overall, 2022 was a positive year for Essex As we generated full year core FFO per share growth of 16.2%, our highest year over year increase in a decade And 9.3% above pre COVID levels. We attribute these strong results to relentless execution by the S-sixteen, Improved efficiencies from the implementation of our property collections model and the strong recovery in our West Coast markets for the better part of the year. Our positive results were achieved despite the challenges associated with COVID-nineteen regulations in our markets.

Speaker 1

Our near term results will remain impacted by elevated delinquency, which we estimate will represent a $0.60 per share drag on FFO In 2023 compared to our pre COVID levels of delinquency, notwithstanding the impact of delinquency In 2023, we believe we are entering the final phase of these challenges and that our COVID related headwinds We'll be behind us in 2024. For 2023, we reaffirm our 2% market which is predicated on consensus assumptions for a slowdown in the U. S. Economy driven by higher interest rates. Macroeconomic visibility is limited by a variety of factors, which translates into a wider than normal range of potential outcomes this year.

Speaker 1

Recent economic data highlights continued resiliency in the labor market with solid reports for job growth and unemployment Claims even with elevated layoff announcements. In Essex markets, preliminary job growth for December was 3.8% And the recent unemployment rate was only 3.2%, both outperforming national averages. Looking ahead, layoff announcements and lower job openings among large tech companies Shown on Page S-seventeen. Our primary challenge since early 2020 Relates to the massive layoffs that occurred as a direct result of the government's response to the pandemic, which eliminated nearly 3,000,000 jobs in California alone and forced people out of densely populated areas in search of work. It has taken Over 2 years to recover those jobs lost during the pandemic, and I'm pleased to say that the Essex markets have now fully recovered those losses.

Speaker 1

It is notable that each of the 8 major metros in the Essex portfolio have now recovered from 98 0.8% to 100.9 percent of the jobs lost in the early part of the pandemic, leading us to believe that most of the slack As with past economic slowdowns, a frequent concern involves the tech companies that The tech sector is often volatile, yet over longer periods, the industry has reliably generated Top paying jobs and wealth creation that are at the foundation of the strong rental growth. A core strength The tech industries is their ability to evolve in a cyclical process of reinvention where the groundwork for New rounds of innovation are laid while the prior cycle is slowing. I am confident that this is what is occurring today. Going back to the 1980s, Big Tech was focused on IBM PCs and R and D efforts to improve semiconductor manufacturing And that phase ended with the recession in the early 1990s. Growth of the Internet and e commerce Soon emerged and then later boomed and busted capping the dotcom era from which many believe tech would never recover.

Speaker 1

Instead, a wave of social and mobile products emerged 20 years ago, including Facebook, YouTube and the Pod and iPhone setting up a much larger and more profitable era of growth. Then following the Great Recession, Cloud Computing and Machine Learning added to the next period of rapid growth, both for new startups And for sector leaders like Amazon, Google and Microsoft. And now despite a very similar set of concerns, Many of you will have followed the explosive recent adoption of new AI products such as chat, GPT and DALL E, consistent with the transformative technologies of the past, the innovators And investors in artificial intelligence are overwhelmingly concentrated in our markets, including OpenAI in San Francisco And Google Brain and Mountain View. And despite a broad VC slowdown last year, funding for AI increased 70% and is now poised to grow vastly more in 2023. In a recent search of leading Of the leading 100 startups in artificial intelligence, we found that more are headquartered in the Bay Area Then in the entire rest of the United States.

Speaker 1

Thus, it is a combination of entrepreneurial spirit, Financial capital and technical talent found on the West Coast as well as housing supply constraints that drives our expectation A relatively small number of apartment sales indicate that property values and cap rates have not changed materially since last quarter And cap rates generally are in the mid to high 4% range for high quality suburban apartments. At this point, we've seen pockets of distress, Mostly focused on owners subject to variable rate debt and maturing short term loans. It's possible that an extended period Elevated interest rates and slower rent growth could create new opportunities to generate FFO and NAV per share. We sold one property in the 4th quarter and we are working on other potential sales. In conclusion, assuming my math is correct, this is my 115th consecutive conference call on behalf of Essex, which will be my last Given my pending retirement as CEO at the end of March, I am incredibly grateful for the opportunity to be part of the highly skilled, disciplined And focus leadership team for this great company.

Speaker 1

I'm taking a step back with full confidence in Angela's ability to lead the company Along with our determined and like minded team, thank you all. Finally, I have enjoyed Working with so many of you in the investment community, and I thank you for your trust and support over many years. I remain confident Many great years for the company are on the horizon. With that, I'll turn the call over to Angela Kliman.

Speaker 2

Thank you, Mike. The evolution of Essex under your 37 year leadership has been remarkable. I and the Senior team are grateful for your mentorship and will continue to diligently serve this company as we move forward. My comments today will start with brief operational highlights of our 4th quarter performance, followed by our current operating strategy and updates on key operational initiatives. Essex had a productive 2022, which included optimizing the strong leasing momentum Heading into our peak leasing season, addressing delinquency and recapturing units from nonpaying tenants, while transforming our operating business model.

Speaker 2

These accomplishments are the results of the exceptionally hardworking operations and support teams thoughtfully executing We shifted to an occupancy focused strategy in late September in anticipation of softening demand and Elevated move outs related to eviction activity. The confluence of these factors created a challenging operating environment in the final months of 2022. Our switch to favoring occupancy helped us moderate the seasonal weakness And the elevated turnover caused by higher evictions. Excluding LA and Alameda Counties, I am pleased to report that we have made significant We are capturing approximately 50% of delinquent units compared to 1 year ago. In addition, as we start the New Year, Demand fundamentals have improved in line with our expectations.

Speaker 2

Our net effective new lease rates troughed At the end of November, and we have been able to reduce concessions, while gradually increasing new lease rates from December to January In the near term, we will maintain our occupancy focused strategy as we continue to make We continue to make progress with our property collections operating model. Phase 1 is now complete, which centralized administrative and leasing functions, which Combined nearby properties into 1 centrally managed business unit. The efficiency benefit can be seen in our financial results With administrative expense growth of only 0.7% last year and for 2023, we anticipate only a 3% increase despite inflationary pressures. Phase 2 expands the same operating principles to the maintenance function. We expect numerous benefits, including savings from reduction in third party vendor contracts and unit churn efficiencies.

Speaker 2

The maintenance collections pilot is progressing well and is expected to conclude mid year. At that point, We will provide additional details on the rollout. Lastly, on the technology front, we continue to make progress, most recently with the launch of our proprietary revenue management software. We have been developing this capability over the past 2 years and are This concludes my remarks, and I will now turn the call over to Barb PAC.

Speaker 3

Thanks, Angela. Today, I will focus on our 2023 guidance followed by comments on investments and the balance sheet. Our 2023 guidance assumes same property revenue growth of 4% at the midpoint on a cash basis. Overall, we expect healthy top line growth and stable occupancy To be partially offset by 70 basis points of higher delinquency. The reason we believe delinquency will be higher As compared to $34,000,000 we received last year on a same store basis.

Speaker 3

As it relates to operating expenses, We are forecasting a 5% increase at the midpoint, which is above our historical run rate. There are a couple of reasons for the higher than expected increase. First, controllable expenses are forecasted to increase 4%, which is driven by wage inflation and elevated eviction related costs, Partially offset by savings we achieved via the rollout of our property collections model last year. We are experiencing elevated cost pressures within utilities and insurance. In total, we expect same property NOI growth of 3 In terms of core FFO, our midpoint assumes 1.6% growth.

Speaker 3

The primary reasons for the modest increase include higher interest expense and delinquency and lower structured finance income, which are outlined on Page 6 of the earnings release. In total, these items equate to a $0.57 per share headwind, representing nearly a 4% reduction to growth on a year over year basis. Turning to investments. Given the challenging investment environment and our elevated cost Capital, we have not provided specific estimates for new acquisitions as it is difficult to generate accretion today Given the significant disconnect between public and private market pricing. Given this disconnect, the best way It should be noted that we have a long track record of finding ways to create NAV and FFO per share in all environments, and we will maintain that discipline going forward, while at the same time match funding our investments on a leverage neutral basis.

Speaker 3

As it relates to the structured finance portfolio, During the quarter, we completed a comprehensive review of our investments, performing a wide range of sensitivity analysis on a variety of key metrics. The analysis confirm the portfolio is performing as expected with the exception of 2 investments, both located within the Oakland submarket. One of the investments was redeemed in the 4th quarter resulting in a $2,000,000 impairment. For the other investment, we took a conservative approach Given the uncertainty around fundamentals in Oakland due to high apartment deliveries, which is leading to an elevated concessionary environment. As a result, we stopped accruing on this investment during the Q4, resulting in a $0.06 reduction to our 2023 guidance.

Speaker 3

Overall, we have a long successful track record of investing in Structured Finance Investments. Over the past 12 years, we have Approximately $690,000,000 in structured finance investments that have been fully redeemed, achieving a 13% average annual return for our Lastly, on to the balance sheet. During the quarter, we saw a continued improvement in our credit metrics with net debt to EBITDA Returning to pre COVID levels at a healthy 5.6 times. With no debt maturing on our consolidated balance sheet until 2024, Limited development funding needs and ample liquidity, our balance sheet remains in a strong position. I will now turn the call back to the operator for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session.

Speaker 1

Thanks. First of all, congratulations again, Mike and Angela. Mike, I appreciate the comments on kind of the tech cycle and future thoughts there, but what gives you the comfort that the benefit for any recovery or the eventual recovery, I guess, in tech Will accrue mostly to the West Coast markets like we've seen in the past versus maybe some of the more newer tech markets or Sunbelt markets given Population and job growth trends that we've seen there. Well, thank you for the congratulations. I appreciate it.

Speaker 1

I think tech is just growing in terms of its share of the overall employment base. So we expect tech To grow throughout the United States and certainly wouldn't exclude the Sunbelt. But I think that as with the past, most of the Cutting edge technology and the people that are really driving innovation will be located As they have been in the past here on the West Coast. So that gives us a great deal of comfort. And I went through that relatively long Description of my career here and what Teck has done really because of that, because we've seen it reinvent itself so many times over and over again.

Speaker 1

And I would I have a hard time believing that that is anywhere close to being at an end. And finally, I guess I would add that The prospects and the importance of AI to almost any every application from Businesses to consumers, etcetera, is pretty extraordinary. So I think this is going to continue onward, and I think that we will be right in the center of that innovation here on the West Coast. Yes, yes, AI innovation is pretty exciting. I think just on the structured Finance program, I guess, two questions.

Speaker 1

Just number 1 for the asset in Oakland that you're not accruing income. If you walk through how that potentially could play out going forward in terms of your role there? And then Sounds like you ran an analysis across everything and everything all the other are performing as expected. But are there any on the watch list or Potentially maybe could become issues?

Speaker 3

Hi, Nick, it's Barb. Yes, we did a comprehensive review and on the rest of The portfolio, we don't have any other assets that are on the watch list. Keep in mind, we leaned in heavily in 2020 and prior when cap rates HIRE, NOI has grown significantly since we started this portfolio. And so none of the other properties screened Hi. On the capital stack, the one in Oakland is really a function of the high concessionary environment right now.

Speaker 3

Net effective rents are lower, NOI is lower than how we underwrote it. And so we're higher in the stack than what we'd like to be. So that's why we took a conservative approach to stop accruing. We have constant dialogue with the sponsor and they're very engaged in our participating, writing checks as needed. And so we don't See any other fallout at this time from that asset.

Speaker 1

Thank you very much.

Operator

Our next question comes from the line of Anthony Paolone with JPMorgan. Please proceed with your question.

Speaker 4

Thank you and add my well wishes and congrats to you Mike as well. First question is, I think last quarter and at NAREIT, you talked about a week of free rent, I think in Seattle and a couple of weeks in San Francisco. And just wondering where those numbers sit today, and whether or not you feel like You've seen the effect of all the layoffs that have really been announced since the fall.

Speaker 2

Hi, It's Angela here. On the concessions, we have seen it essentially taper off throughout the portfolio Since December, which is basically I've mentioned earlier that our portfolio troughed late November And it's significantly improved as an overall average in the Q4, particularly in December. We're running about 2 weeks concessions and right now as a portfolio average, we're running less than a week. So that gives you an indication Directionally, how things have improved pretty quickly.

Speaker 4

Okay. And then just One follow-up for Barb. You gave us the bad debts like the per share drag in the 70 basis points on growth. But If I look at the Q4, it was 1.1%, I think. Is there a way to express it in those terms in terms of where your expectations are for 2023?

Speaker 3

Yes, Toni, for 2023, we're expecting bad debt as a percent of scheduled rent to be 2%. Now keep in mind, we don't expect any emergency rental assistance in 2023 as compared to the 34 We received on a same store basis in 2022. And so that's why the net number is going to increase. We were at 1.3% in 2020 And it's going to 2%. Now the underlying gross delinquency is improving, because We are able to evict.

Speaker 3

It's just taking longer than we had initially expected, but we are making progress on that front as Angela mentioned in her script.

Speaker 5

Okay, great. Thank you.

Operator

Our next question

Speaker 4

I'm curious how does supply pressure change throughout the year and at what point do you start to push rate?

Speaker 1

Wes, thank you for the congrats. I appreciate that. In terms of supply pressure, There are pockets of supply in a few places. We noted Oakland earlier. I think there are multiple lease ups in Oakland, which are Really having the effect of pushing down price.

Speaker 1

Seattle has more supply deliveries this year and especially the Q4 because it's generally Seasonally weak period at Seattle tends to be weaker than the California markets, primarily because demand goes to 0 in the 4th quarter, close to 0 And Seattle has more supply of apartments. But going forward, the supply picture looks like it's declining. And this is a result of obviously lack of rent growth for the last few years. So The ability to produce housing at an accretive level is pretty challenged and we see that in our preferred equity book as well. And so I think it's going to be we're going to be at a period where there's relatively not a lot of supply and if we get any demand, we'll be In good

Speaker 4

shape. Got it. And then just curious what happens to all these people that are evicted? If you have a new tenant coming in, Yes. Say in June, would you know if they were a non payer at their prior apartment or just everyone going to swap non paying tenants?

Speaker 2

Well, on the tenant screening front, we have a pretty robust process there. Having said that, we of course will do credit checks and that will let us know if they are a non or they have any Prior debt that needs to be paid. And so that's our best indicator on that front.

Speaker 4

So that would be a relatively timely event. I guess, there's like the tenants that are not paying, it's already in the books for you as a delinquent tenant?

Speaker 2

Correct. And in fact, even for us, for tenants who have left, we have We immediately have updated the credit report as well on our end. And there's, of course, ongoing report Ongoing desk. So there are various resources that we can use and we haven't used.

Speaker 6

Great. Thanks for

Speaker 4

the time everyone.

Operator

Next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.

Speaker 7

Yes, thanks. I wanted to revisit the delinquency. I think last quarter you referenced LA County I believe 40% of the overall delinquency. What is that figure today? And then I'm curious on the $0.60 per share, What is the annualized run rate that you'll be running at or that you're assuming by the Q4 of 2023?

Speaker 2

So I'll just touch on the delinquency population. It's Angela here. In the past, LA is about 40% and it's ticked up to about 50% LA delinquency and that doesn't surprise us. Given the Additional moratorium has not been lifted. We had expected LA to continue to accrue under delinquent basis.

Speaker 2

However, the good news is that the new tenants coming in, we're not seeing those tenants

Speaker 3

And then Austin, this is Barb. On the $0.60 that Mike referred to, that is compared to our pre COVID run rate for not only the revenue piece, but also the expense piece, because we have elevated eviction and turnover costs Our gross delinquency will be around 1.5% for the second half of the year, 2% for the full year. So we do expect to make Progress, but given the timing on these evictions is very difficult to predict at this point. We don't expect to be To our normalized run rate by the end of the year.

Speaker 7

No, that's fair. Just trying to understand what sort of the earnings power going into 2024 is, But we'll have to revisit that later this year. Second question, you referenced your shift to favoring occupancy late last And you highlighted some month over month improvement from December to January. I guess, what would it take for you guys to pivot towards going back to pushing rate? And would that mean that the 5.5% renewal rate growth that you're at in January could stabilize or

Speaker 2

In terms of the occupancy strategy and when we would shift, it's going to be a little bit different in In each of the markets, so for example, we actually are seeing great strength in our Southern California portfolio. However, we are running a little bit higher occupancy in anticipation of the eviction and the opportunities to vacate nonpaying units that's coming our way. So we're building that not because we're seeing a market softness issue, it's more of a strategic To assure that we are well positioned. And so for example, in places like Seattle, Which is, as we noted, highly seasonal, when we see demand come back as it typically does during peak leasing season, We would expect that we should be able to switch back to favoring rent growth, especially now that we've been able to And reduce concessions in a meaningful way.

Speaker 1

And is it safe

Speaker 7

to assume that Northern California has a similar setup as Seattle in terms of Some seasonality maybe, and the opportunity being to be able to push a little bit harder as we come out of the seasonal lull, if you will.

Speaker 2

Yes. That makes sense. And the one caveat is, of course, the supply conversation that we talked earlier, right? So for example, places like Oakland, That will continue to probably take a little bit longer because of the supply. But in areas where we are not Trying to manage through pockets of supply, there's some good opportunities there.

Speaker 4

Okay. Thanks for the time. I'll hop back in the queue.

Operator

Our next question comes from the line of Steve Sakwa with Evercore. Please proceed with your question.

Speaker 8

Yes, thanks. Mike, offer my congratulations as well to you and to Angela Can you maybe just talk about how you think that progresses throughout the year and maybe what the first half looks like versus the second half? I realize there are some In the delinquency numbers that Barb just spoke about, but when you kind of look at that sort of midpoint, say 4% on a cash basis, How heavy is that in the first half? And I guess, how light is that in the second half?

Speaker 3

Yes, Steve, it's Barb. I would say the first half, we That to be higher than the second half. We're about 5% in the first half. The Q1 will probably be north of that and it will trend down throughout the year with 3% on average in the second half of the year. And that's really a function of the year over year comps because last year while rents accelerated, it didn't fully hit our Revenue growth line and so we expect to capture that this year.

Speaker 3

First half will be higher than the second half.

Speaker 8

Okay. And you talked a lot about, well, I guess, let me just stay on for kind of the second question. But when you think about some of the potential soft points that Mike talked about in tech, I guess, how are you thinking about maybe some of the potential occupancy loss in either Seattle or San Francisco? Or what have you baked in, I guess,

Speaker 2

From an occupancy perspective, we're not running at a whole lot different than prior periods. The one caveat is really more focused on Southern California, particularly LA, because we're anticipating Some vacancies there from Eviction. So for example, we saw the similar headwind in Northern California in the 4th quarter And we anticipated that. So we employ the same strategy. So it's really more focused on some of these unique Situation as we come out of COVID related legislation to really to position us for better growth.

Speaker 2

And Mike, do you want to talk about the employment?

Speaker 1

Yes. Let me just add one more quick thing. Steve, a big question here is what is going to happen to the pace Employment, as I noted in the prepared remarks, job growth has been really strong. However, maybe some of the layoffs or the warm notice Haven't actually showed up in job growth yet. So our expectation for the year, just to remind everyone, on S-seventeen was For minus 2% 0.2 percent job growth for the U.

Speaker 1

S. And so as we're going to be watching job growth over the next several months, but it seems like we are running stronger than we expected, Certainly, with respect to January's job growth number. And if that continues, then you'll get to a point where maybe our U. S. Job growth estimate on S-seventeen is too conservative.

Speaker 1

So we'll watch that closely.

Speaker 8

Great. Thank you.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Alexander Goldfarb with Piper Sandler, please proceed with your question.

Speaker 4

Good morning. Good morning out there and just joining in. Mike, Congratulations on your tenure in your last earnings call. And Angela, best on taking the helm next quarter. So two questions.

Speaker 4

First, maybe just sticking with that job rebound, Mike, you had mentioned early on in COVID when everything in California was shut A lot of service industries, those jobs literally had to flee because they were closed down. They couldn't work, whereas a lot of tech people could work from home. As you talked about that really strong job rebound in December and the fact that California has recovered all of its jobs, how would you rate When we see these headlines of the layoffs versus it sounds like there is pretty good job growth, is it more of the job growth coming from the service jobs? And maybe that's what you're seeing more demand in your apartments? Or as you look at your resident mix profile, you're like, look, our resident

Speaker 1

That pandemic period. And but I would say, yes, we are recovering leisure, hospitality and other service jobs at a very high rate And that continues onward and but it appears to be normalizing. But also the tech job growth during the pandemic was And we think that some of the more recent tech announcements are just sort of giving back a small portion Of the job gains that occurred during the pandemic, so we don't even consider tech to be all that weak at this I think it's just transitioning from what it was and taking the next step or the next chapter of things. So overall, We think jobs are on the right track. Again, our S-seventeen was based on the consensus estimates All the big economists in the U.

Speaker 1

S. And it's possible and it almost seems like whatever weakness we might have is Because we're stronger earlier, which would probably be a net benefit for this year if that continues. And so we'll be Paying close attention to that. And I want to maybe go into the 2 more things actually. One is the warn notices.

Speaker 1

And we had our data analytics team do an analysis of The major, the largest layoffs announced and what portion of them are in California and Washington Versus the total. So this is Amazon, Google, Meta, Microsoft, Salesforce. At Cisco, they globally have 1,600,000 employees And the layoff rate is about 4% or 64,000 announced layoffs. In the California Washington market, the Employees of those companies in these markets are about 335,000 people And there's about 10,000 layoffs. So the percentage of layoffs is lower actually in California and Washington As compared to the broader enterprise.

Speaker 1

So I think that is important. And finally, it's interesting, the unemployment rates are so low. San Francisco, 2.2 percent in San Jose, 2.4 percent and everyone under the U. S. Average except for Los Angeles, which is at 0.5%, no doubt that's because people are drawing benefits and able to stay in our apartment subject to the eviction moratorium.

Speaker 4

Okay. And then the second question is just getting back to the delinquencies. I think you guys have highlighted obviously LA and Oakland. Is that the bulk of what's driving delinquencies this year? And then as a consequence, especially in LA with the good cause eviction, Should we assume that you guys will look to pair your exposure to LA County?

Speaker 1

Yes, let me Talk about that and Angela or someone else may have a comment. But the 2 Really difficult eviction moratoria are in Alameda County, which is Oakland and LA City, LA City expired. However, LA County extended to March 31. Actually, LA City was a really horrible ordinance. LA County is not nearly as restrictive.

Speaker 1

For example, it only applies to 80% of median income tenants, for example. And so there's a little bit of relief in LA. And in terms of exiting LA, I think that that is It depends. I mean, we will exit enter and exit markets as we deem necessary using a much broader set of criteria For supply demand analysis, rent growth expectations, cap rates, etcetera. And so that will drive That discussion, as well as jobs and some of these other issues.

Speaker 4

Okay. Thank you.

Speaker 3

Yes, Alex. And then on the delinquent unit front, LA and Alameda are the bulk of Our delinquent units over 60% of our delinquent units, long term greater than 3 months are in LA Alameda. And so that's a factor as well as The slowdown in the courts, courts are really bogged down. It's taking longer to evict in our other markets and that is a factor as well in the 2023 guidance

Operator

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Speaker 9

Yes. Hi, everyone. Thanks. Mike, last quarter you said that the 2% rent growth forecast seemed pretty dire at the time, And it was more based on what the Fed was doing and projections from economists and what you're actually seeing on the ground. I know you reiterated the 2%, but your commentary around employment seems to Jeff, that you still think it's a somewhat pessimistic outlook.

Speaker 9

Am I interpreting that right?

Speaker 1

I think, Angela and Barb will kick me if I Do anything that I say anything that's inconsistent with our published position. I mean, the reality is, I don't know. And in the comments, I referred to a range of outcomes that's broader than historically. We've been able to triangulate in the past, for most of the past, the relationship of supply and demand much more Much better than we can this year. So there are more moving pieces.

Speaker 1

And given that inherent uncertainty, I still think that F-seventeen is Within the range of potential outcomes. But again, we'll be watching job growth and warm notices and all those various items for better visibility. Notably, a warm notice out there may not have hit the layoff part of the reported job growth. So There's a lag there. And so it's a little bit unfair to comment on that until we see what how that plays out.

Speaker 9

Okay, fair enough. And then non revenue generating CapEx seemed elevated in the Q4. And I think the 2022 total was up about 40% year over year. What's driving that? And can you give any expectation for where 2023 will shake out?

Speaker 2

Sure. Hey, it's Angela here. The I think it may be helpful to just talk about how we look at CapEx because looking at a 1 year Can be misleading. Our CapEx program is for each property is on a 10 year plan. And so on years where there A large improvement that needs to be made, replacement for example, is going to show up as going to look lumpy.

Speaker 2

So having said that, in 2022, we also had to catch up from the when we paused The activities in 2020. So for example, pre COVID, We're running closer to about $1700 per door. And in 2020, We were down to like 1300, so over 20% increase. And so you Play that forward a couple of years later, there is that lag effect. So that's what you're seeing as well.

Speaker 2

If you look at a, say, 10 year average, Our CapEx per door is pretty similar to where our peers are. Now we do have a little older Portfolio on average, so it naturally we should run a slightly higher CapEx per door. So that's sorry for the long When they answer, but there's just a little bit more to it than just one number per year. And next year, we're evaluating The expectations is you have also inflation. So it's probably going to be similar to 2023, I mean, 2022.

Speaker 2

But like I said, over a period of time, over a long period of time, it should revert to a long term average.

Speaker 4

Okay. Thank you.

Operator

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Speaker 6

Thank you. Congrats to everyone. I wanted to ask about the pricing of Anavia, which seemed better than expected given the interest rate environment. Any commentary you could provide on this pricing if it's of other asset sales that you're working on and sort of on a related topic, the Mansion Tax in LA, what do you think that's going to have, the impact that will have On both the transaction market near term and pricing.

Speaker 10

Sure. Hi, John, this is Adam. So beginning with ANNOVEA. ANAVEA was, I'd say, an opportunistic sale to it was a very specific buyer and which That's reflected in the pricing. Generally speaking, we're seeing cap rates Kind of trading in the market in the mid to high 4s.

Speaker 10

So, ANOVIA, I'd say outperformed that by a bit again just because this very situation. Regarding the Mansion tax in LA, so we've seen a slight elevated Potential transaction volume in LA due to the Mansion Tax coming into effect April 1st, for the most part, I think most Those deals probably won't trade, just given they were all on very short runways and Pricing expectations just doesn't seem like they are being met. Going forward, I think we've seen this in Washington when they Bump their transfer tax up. It actually did not affect transaction volume generally at all. I think the one thing That may be an outcome of the L.

Speaker 10

A. Mansion Tax is it could potentially hinder development within Los Angeles. Any significant headwind to development returns, especially for merchant builders, That's just going to affect their back end and make it that much harder to build.

Speaker 6

Okay. My second question is just a follow-up on delinquencies. Looks like it's going to be $40,000,000 on a gross basis this year. How does that compare to last year? We estimated at about 50 Just based on your disclosure.

Speaker 6

Just wanted to make sure that was accurate. And as part of that, can the ERA Surprise to the upside, there's not much baked in guidance.

Speaker 3

Hi, John. I may have to follow-up with you on those numbers when I get back My office and have the model in front of me. So I don't know if I want to quote the numbers here on the call. In terms of ERA, that would be upside if we were to collect some, but we've exhausted most of that, so that we don't Much in the way of ERA. The one thing I would keep in mind though is we do have $90,000,000 uncollected Bad debt cumulative since the start of COVID.

Speaker 3

We only have a $3,400,000 accounts receivable balance. We think we'll collect More than $3,400,000 It's just the timing of when we're going to collect that. So that is upside to the numbers. It's just We don't have that baked into our forecast given the inherent nature of when we're going to collect that. But that's really the upside is on that more so than even ERA, I would say.

Speaker 6

Okay. Just I'll follow-up with you offline, but that $57,000,000 we calculated

Operator

Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Speaker 4

Yes. Hey, everyone. Sorry if I missed it, but did you guys say we're sending out new and renewal notices today?

Speaker 2

This is Angela here. Now we haven't talked about that. Our new and renewals are sending out Somewhere between say 4% to 5% depending on the market. So this is for February March. But keep in mind that does get negotiated.

Speaker 2

So if we're sending out renewals, say, north of 5%, we Assume maybe 100 basis points negotiation depending on when and some of these markets we're sending out well in advance. For example, Seattle, it goes out 6 months in advance. So hopefully that gives you a better sense of the range of outcome.

Speaker 4

Okay. Yes, I know that's helpful. Then, Barbara, I wanted to touch base on, You mentioned eviction costs and same store expenses, and I guess those were being elevated. I guess, How are those showing up in same store expenses? And then, if you kind of normalize for those, what would your same store expense look like?

Speaker 3

Yes. So, eviction costs show up in our administrative line and obviously we have elevated turnover as well in the R and M line. So it's in both lines. So I would say in total relative to our historical average, our controllables Our forecast is to be 4% this year, but without the elevated eviction and turnover costs, we think we'd be closer to 4% or 3%. So it's about 100 basis points impact to the controllable line item for the year.

Speaker 4

Okay. That's awesome. Thanks, Mark.

Operator

Our next question comes from the line of Nick Yulico with Scotiabank.

Speaker 11

First question is just in terms of when you're looking at some of your data on move outs, Maybe you could talk about how that's trending in terms of reasons for move outs, job losses versus Rents being too high or even move outs to other regions.

Speaker 2

Yes, it's Angela here. That's interesting because we keep expecting big Shifts coming out of COVID under move out reasons and moving out To buy a home really still hasn't changed from a long term average, I think because the cost of housing here is just Lot less affordable. Job transfers or other reasons pretty darn similar And to our historical averages, and so we have not seen any material changes on move out reasons.

Speaker 11

Okay. Thanks, Angela. And then just other questions on move ins, whether you're seeing any Benefit from return to office, which has been a little bit of a slower process in some markets on the West Coast. I mean, are you seeing any benefit from that in recent months, whether it's specific cities in the portfolio or even From your move in data, if you are seeing any instances of people relocating back into your markets because they're now Required to be in some sort of hybrid job in an office in your markets increasingly. And I'll just note as well, congrats Angela and Mike as well.

Speaker 2

Thank you. Congrats and once again another good question on the in migration. It's so I had mentioned that in the Q3, we saw a pretty big uptick on the in migration to our markets, 30% to 35% on average between Northern and Southern California. And of course, part of that is attributed to return to office. We have seen that trend continue in the Q4, but keep in mind, Q4 is Typically, just a low demand period.

Speaker 2

So it's really difficult for us to glean a The only thing I can tell you is that compared to the Q1, the in migration is still better Marginally, we're not talking huge numbers from that perspective. But once again, Q4 is just a tough time to Trying to get an indication of that. Mike, do you have anything you want to

Speaker 8

add? Yes.

Speaker 1

I just wanted to maybe add, we

Operator

do some work,

Speaker 1

again, data analytics team That deals with micron patterns.

Speaker 4

And I guess I want to make

Speaker 1

a comment that it seems to be normalizing As well, again, you had that mass exodus early on in the pandemic and we've been making progress and just got to the point where we Replaced all those jobs, but the places where people are coming from and going to, again using LinkedIn data, not our own data, Appear to be pretty similar to what they were in the past. So generally speaking, the migration pattern here is we get people from The large Eastern and Midwestern Metros and actually more recently Dallas and Atlanta are On that list of incoming in the top five and the place where people Typically, people will retire, sell their house in California, their expensive house and use it as part of their retirement plan. And so they go to less

Speaker 11

Thanks. Appreciate that, Mike. Any plans to move or are you staying in California?

Speaker 1

I'm staying and I'm looking to spending some time with the grandkids and that type of stuff. And I'm still going to be around if Angela will have me And in a role to be determined. So I love the company and love what I do here. So Not ready to completely check-in. This whole thing is really driven by Angela being ready and that's what's important.

Speaker 1

And so she'll do a great job. I'm very confident.

Speaker 11

Great. Best of luck to you. Thanks.

Operator

Our next question comes from the line of Adam Kramer with Morgan Stanley, please proceed with your question.

Speaker 12

Hey, thanks for the question and congrats again. Yes, look, just wanted to ask about, obviously, Tech markets overall, right, where you guys are located, but maybe just kind of specifically, the tech exposure among your Maybe just kind of explicitly tenants who are employed by tech employers, if you kind of have that percentage for your residents?

Speaker 2

Yes, that's a good question. What we do is we track the top 6 because everything else It's just too fungible on that number. So currently, we're about 7% of our tenant base is linked directly linked to the top 6 tech companies and of course it's much more concentrated in Northern California and Seattle relatively speaking. But that's a very manageable base. And of course, in certain assets or properties that are that has a much closer proximity To all these headquarters, the percentage will be disproportionately higher.

Speaker 12

And how does that 7% kind of compared Maybe pre COVID or last year historical average types of numbers?

Speaker 2

Not a big change. We Tend to kind of run between say 5% to 7% and it kind of hovers around there.

Speaker 12

Got it. That's really helpful. Maybe just switching gears, wondering kind of the new versus renewal trends, New lease kind of modestly negative, I think kind of still in the 5% range for renewals for January. Look, I think conceptually, If I understand correctly, if that trend kind of continues, maybe it would form kind of a gain release. So wondering maybe your thoughts on that, If you could kind of see that happening or maybe kind of renewal and new converge over time and any kind of that gain to leases and forms?

Speaker 2

Yes. A couple of things. Just want to give you a little background first on the new lease rates. That's of course It's heavily impacted by our concessionary strategy, which is related to our occupancy strategy. And so part of that is not As much a market issue versus a strategy issue and of course that is something that we shift quickly away from The concessionary environment in January.

Speaker 2

And so I don't want you to think that this is something permanent here to stay. And so but ultimately with the renewal rate in an environment where new leases are On our S-sixteen expected to be about 2%, there is going to be a convergence of New lease and renewal rates and it will probably take this full year to have that play out.

Speaker 12

Got it. Thanks again for the time. Really appreciate it.

Operator

Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Speaker 13

Good morning. Thanks a lot for taking my question. My first question is what is FX current exposure to corporate housing? And then how do we reconcile the impact of Job losses with return to the office.

Speaker 2

I'm sorry, can you repeat the first part on corporate housing?

Speaker 13

What is your current exposure to corporate housing?

Speaker 2

Expose your, got it, got it. So our current exposure is about 3%. And And what's interesting about that number is during COVID, it actually went down to 0. And so we've been building that up. So last year, it was around got up to about 2.5%.

Speaker 2

Now keep in mind, in Seattle, it's going to Move around because there's it's a temporary nature, right? It comes in pretty heavy during the seasonal peak around July and that can Ramp the portfolio up to 7% and then goes back down around October as they leave. So there's inherent there's an inherent cyclicality to that tenant basis.

Speaker 13

Got it. And my second question relates to the regulatory environment. Obviously, the markets that you operate in have gotten increasingly difficult, whether it's rent control, Prop 13, Seattle and Washington State potentially becoming an issue. So maybe can you walk through Kind of like your updated thoughts around this and then whether you would look to diversify your portfolio over time just given some of the given The more challenging operating environments. Thanks.

Speaker 1

Yes. No, that's a great question, and I'll handle that one. Yes, we have been maybe a little bit surprised just how aggressive some of these actions are. We have a pretty strong advocacy effort that is driven by CAA in California and the local one of the local Groups up in the Washington area, and so we spend a lot of time working with those organizations And trying to advocate against those policies, almost always those policies are sold on the basis of being good for The housing industry and when of course we all know that in fact is exactly 100% wrong, it's the exact opposite. So Unfortunately, it's something that we have to deal with and it is concerning to us and we spent a lot of time on it.

Speaker 1

The proposal in Washington is still very early on in the process. It's in the House and it hasn't come out of committees. And As a result of that, I think there's still a long way to go. Again, we will be monitoring that. And but all of these Different proposals tend to make California less appealing to a landlord and increase the risk Of that occurring, so to your point about other markets, I think I want to reiterate what I said before, which is We are tracking more markets now, 25 major metros across the country.

Speaker 1

We are looking for specific things, The things that essentially attracted us to California 30 years ago, let's say, and trying to rank those markets In terms of appeal and whether they can compete with California markets. And We have some interest in some of them. I don't want to get into great detail at this point in time. But as I said before, and I think actually this Last couple of quarters has played this out and why this is important. It's about timing and it's about making a shift at the appropriate time when our cost of capital is appealing and we can enter at a point where We can feel like rent growth is going to continue in any of the markets across the country, including our markets, San Diego notably, Orange County, etcetera.

Speaker 1

You just can't keep growing. There has to be some change. The markets become unaffordable. The average person can't afford The rent in that location, that causes people to move further out to find more affordable housing. The markets, In a certain sense, have a self correcting mechanism in them.

Speaker 1

And this has always been the case. It's true here. It's Everywhere. And so we're going to thoughtfully make that decision at the appropriate time. Does that help?

Speaker 13

No, that was really helpful. Congratulations everyone.

Speaker 4

Thank you.

Operator

Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.

Speaker 1

Thanks for the time. Adam, I wanted to follow-up on your transaction market comments. Just curious how you I see the depth of the bid at the cap rates you throw out there. If you brought a substantial number of assets to the market, do you think they would trade in those Mid to high core cap rates you suggest?

Speaker 10

We're still seeing a gap between the bid and the ask, But we are seeing, I'd say, a muted volume of deals going down in that mid to high 4s. So yes, If we got back to, I'd say, kind of normal volume, I think that's where we shake out today.

Speaker 1

Okay. Just so I understand those cap rates, are those kind of initial buyer cap rates or are those your disposition yields?

Speaker 10

Well, so for ANNOVEA specifically, what we quoted in the statement was disposition yield. What I'm saying, the mid to high fours, that's more a buyer cap rate.

Speaker 1

Okay. Last question for me. Just Angela, Curious for your thoughts on just the topic of just COVID impacts fully reversing. So as COVID is in the rearview mirror, would you expect market Rents in any of your Southern California markets that have seen huge cumulative rent growth that actually see absolute declines in market rents over the next few years?

Speaker 2

Keep in mind that market rent growth is a function of demand and supply. And so at this point, even looking out next Couple of years, supply is still relatively muted in Southern California. And pre COVID, in the pre COVID environment, Southern California performed really well. And so Southern California has similar employer base as the broad U. S.

Speaker 2

Market. That's We like it. It's less volatile, but it has a higher level of professional services, so better earning power. And for that reason, Southern California continues to be a stable. And so we wouldn't expect that because of COVID, Absent of that, it's going to just suddenly fall apart.

Speaker 1

Okay. Thanks for the time.

Operator

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Speaker 5

Hi, good morning. Just a question on the impact of return to work on the outlook on the West Coast. A lot of the technology firms have announced It's office space rationalization, office space sales. Could that be a headwind for rent growth in the next couple of years if Even if you have higher job growth, fewer people are in the cities because they're doing more hybrid work as these firms kind of reduce their footprints.

Speaker 1

Yes. Anthony, it's Mike here. Most of our portfolio actually is Suburban in nature, so we have relatively little in the cities. And but we're thinking that return to office It's something that will slowly evolve and there will be maybe we go from an average of 2 days a week in the office to 3 days a week in the office and That will all anything that is more office centric will pull people closer to our apartment communities. So that would be a positive impact In our view.

Speaker 1

And so at this point in time, because people have moved farther from the offices and that has Cause us to readjust sort of our template for looking for potential acquisitions and other things. But over time, I think that all of us, including I'd say Here at Essex, we have some of these same issues that we're better off, we're more productive, we make better decisions when we're together As a management group, senior leadership group and super important to the overall results So we think that return to office will be ultimately a tailwind.

Speaker 5

Thanks. And maybe one more in terms of dispositions and buybacks. You made some good progress there last year. Do you think if buyer to seller starts to agree that you can maybe increase the buyback amount year over year as you sell more assets?

Speaker 3

Yes, this is Barb. We'll assess that based on deal volume and whether we can create NAV and FFO per share. It's hard for me to tell you right now that we can do that, in this environment, But it is something that we're cognizant of. We have shown that we can run the machine in reverse many times over many different Cycles and so we'll be willing to do that if the right opportunities present themselves.

Speaker 5

All right. Thank you.

Operator

Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Speaker 14

Hey, good morning out there. And Mike, congratulations on a fantastic career and all the best to your next chapter and best of luck, Angela. So I just had a couple of follow-up questions left here on our list. I guess first, I want to go back to expenses. Barb, I think you mentioned Controllable expenses, you're expecting to be up 4% this year as part of the 5% guide, which I think is higher than a lot of us expected.

Speaker 14

So maybe can you go through a bit more of the building blocks of that 5% expense growth, and maybe if there's any contrast versus, say, Seattle, which doesn't have the Prop 13 benefit that California does, And if there's any benefit from the rollout of the property collections platform you mentioned earlier? Thanks.

Speaker 3

Yes, Haendel. On the expense growth, the 5%, really the biggest driver of that is non controllable. That's up 5.5% to 6%. And really the key factors are utilities. We're up 10% this year.

Speaker 3

We do expect High single digit increases next year. Insurance is expected to be up 20% next year. This is a very difficult insurance market. And then on real estate taxes, we've budgeted a 4.25% increase and that's really being driven by Seattle regarding more to our historical norms. So those are the key building blocks on the non controllable piece.

Speaker 3

On the controllable piece, 4% at the midpoint And we do expect admin to be up only 3%. Once again, we do have elevated eviction costs in that line, which is masking some of the benefits from the rollout of the central services or the property collections model that we rolled out last year that centralized some of those functions. So it's masking it a little bit this year, but overall, that should give you the major building blocks For why we have a little bit elevated expense growth.

Speaker 14

No, that's helpful. I appreciate that. But just so we're clear, how much impact in a more normalized environment would that Property collections platform has?

Speaker 2

Well, so I

Speaker 3

said the eviction costs About a 1% impact to controllable, so that's the factor you can use is it would be 1% lower.

Speaker 14

Appreciate it. What's the assumption built into the guide for turnover this year and year end occupancy?

Speaker 3

Occupancy, we've assumed is stable year over year, so flat, no change there. And then in terms of turnover, we did see elevated turnover in the 4th quarter and given the eviction headwinds that we expect to face and getting the So then we get tenants in that are paying rent. So we think that's actually a good thing. Okay.

Speaker 14

That's all for me. Thank you again.

Operator

Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Speaker 15

Great. Thank you. I just want to go back to a comment you made early in the call about distressed Acquisition opportunities coming up with some owners with floating rate debt. Can you talk more about what you're seeing, the magnitude? And do you think that's going to be something that

Speaker 10

Hey, Jamie, this is Adam. So we haven't seen much of that To date, we are more on the structured finance platform where we're seeing more opportunities on existing deals with maturing debt or with some expiring rate caps. We do think this will accelerate into the year and provide potentially more opportunities. Like I said, probably more Focus on the Sharpen Finance platform versus acquisitions, but looking at it from every angle.

Speaker 15

Okay. And then I guess sticking with structured finance, the impairments you took, How should we think about that, the risk profile of those investments versus the rest of the book or even Going forward, like was

Operator

that just kind of at

Speaker 15

the higher end of your risk profile or the market conditions really just changed that quickly that led to the impairments?

Speaker 3

Yes, I would say it's the latter. We didn't change our underwriting on that investment. We didn't go out wire on The risk spectrum or the curve, it really is a function of the Oakland market, highly concessionary, the developer wanted to sell And we ultimately agreed to the sale. Now keep in mind, we actually made money on our investment for shareholders. We invested $11,500,000 in this project and we got redeemed $14,000,000 So we made 7% annually for our shareholders.

Speaker 3

The coupon was $10,000,000 So we didn't quite earn what we thought we were But we thought it was in the best interest of shareholders to take our money back and redeploy elsewhere. And so we didn't lose money. And I think it is a unique function Of that market right now given I think there's 16 lease ups in the market right now.

Speaker 15

Okay. And then finally, just thinking about the just in terms of the Moratoriums, like how much of that is actually baked into your guidance, the upside potential upside from LA and Alameda County?

Speaker 3

Well, what we have in our guidance is we do assume that gross delinquency will continue to trend down throughout the year As we are able to recapture our delinquent units. So right now, we have about 3% of our units are delinquent. That's down from 5% at the start of the year Of 2022, and we expect that to continue to trend down. By the back half of the year, we expect to be in the 1.5 or lower range for the second half of the year. So it is a function of the guidance.

Speaker 3

We have baked that in that we'll get more of our units back

Speaker 15

Okay. But in terms of the revenue upside, you also have that in really I'm just thinking if maybe they get extended past March 31st, Is that a downside risk to the guidance or no?

Speaker 3

I don't we don't see that as being a downside risk, because keep in mind that What Mike said earlier about LA County, which is the new eviction moratorium, it's actually more strict than LA City was. And so We don't see that being a hindrance to us. In addition, we are making progress. It's just it's taking a little longer than we expected. So we don't see that as a significant downside at this point.

Speaker 15

Okay, great. Thank you.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 1

Thank you, operator. I want to thank everyone for joining us today. Hope to see many of you at the Citi Conference, and we definitely appreciate all the well wishing for Angela and me. I want to note that it's been an Absolute honor to work with so many of you and so have a great day. Thank you for joining.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines

Speaker 2

today and

Operator

have a wonderful day.

Powered by Quartr