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Essex Property Trust Q1 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Michael Schall
    President and Chief Executive Officer
  • Angela Kleiman
    Senior Executive Vice President and Chief Operating Officer
  • Adam W. Berry
    Executive Vice President and Chief Investment Officer
  • Barb Pak
    Executive Vice President and Chief Financial Officer

Analysts

Presentation

Operator

Good day, and welcome to the Essex Property Trust First Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded.

Statements made on this conference call regarding expected operating results, 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. 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. You may begin.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thank you for joining us today, and welcome to our First Quarter Earnings Conference Call. Angela Kleiman and Barb Pak will follow me with prepared remarks, and Adam Berry is here for Q&A.

Today, I will comment on our first quarter results, recent housing demand and supply trends, in a brief overview of the apartment transaction market. We are pleased to announce our fourth consecutive quarter of improving core FFO per share and same-store revenue growth, with this quarter's core FFO exceeding our guidance midpoint by $0.07 per share. As mentioned in our earnings release, our results in rent growth trajectory support an increase in core FFO in same property revenue guidance for the year, which Barb will review shortly.

Overall, rents have continued to improve, and, as of April 2022, net effective rents in the Essex markets are now 11.4% above pre-COVID rent levels and up 22% compared to one year ago. All of our markets have a positive sequential rent growth, with Northern California leading the portfolio, improving sequentially by approximately 3% in each month of the first quarter. We expect further improvement in Northern California as progress is made on return-to-office programs for the large technology companies, following several COVID-related delays.

The top tech companies also continue to hire rapidly in the Essex markets, with over 50,000 job openings posted for California and Washington, a 79% increase compared to March of 2020. Other indicators, including job growth, venture capital deployment, and office investment, continue to support our thesis that Northern California will remain the epicenter of the technology industries. A significant recent example came from Google, which announced a plan to invest more than $3.5 billion on additional office and data centers at Mountain View, Downtown San Jose and elsewhere across the Bay Area.

The easing of COVID-related regulation has been pivotal for return-to-office in our markets. Mask mandates have been significantly relaxed versus prior quarters, making it easier to bring employees back to the office. Business travel, in-person meetings, property tours and conferences have resumed, and we look forward to in-person investor meetings once again. As COVID-related regulations continued to subside on the West Coast, the deadline to apply for rental relief in California has now passed as of April 1st.

Government sponsored rental relief has been a double-edged sword for California apartment owners, as tenants were often encouraged to seek government rental relief programs rather than paying rent. Delays in government reimbursements led to the highest delinquency since the onset of the pandemic. With the rental relief program now close to new applications in California, we are now cautiously optimistic that underlying delinquency trends will improve.

California's rental assistance program remains far behind with respect to payments, providing potential upside as we continue to pursue in the approximately $76 million of rent owed to the company. Given the extraordinary government restrictions during the pandemic, it became clear that our portfolio would need to achieve two inflection points before we could be confident that a full recovery was underway. The first was the reopening of our markets which occurred in July of 2021, and the second was a return-to-office for the largest technology companies. Over the past few months, we've seen Google, Microsoft, Meta and Apple, all begin to reopen and re-staff their offices.

Our leasing specialists are reporting more applicants returning from out of state, as hybrid and similar arrangements require regular office attendance for employees. Return-to-office mandates are generating economic activities, which is apparent in the job growth reports, with San Francisco leading our portfolio with 8.9% trailing 3-month job growth. On average, the Essex markets reported job growth of 6.7% on a trailing 3-month basis versus the broader U.S. average of 4.7%, marking the second consecutive quarter that Essex markets have outpaced the nation in job growth. We expect this outperformance will continue, as FX has still only recovered 80% of the jobs compared to pre-COVID levels versus the U.S. recovery of 95%.

We expect service and hospitality-related jobs to continue a strong growth trajectory, supported by increased travel generally and demand for services from the well-paid workforce on the West Coast. The confluence of increasing job growth, a lower unemployment rate of 3.6% in the Essex markets, and expensive for-sale housing, all contribute to favorable rental housing tailwinds.

Turning to housing supply. The ability to ramp up housing production is more challenging along the West Coast, as a result of long entitlement processes, burdensome regulations, labor shortages and inflating construction cost. As a result, housing permits in Essex markets remain at levels roughly consistent with our long-term averages. Our bottoms-up supply analysis indicates that new deliveries will moderate for the rest of 2022, and we are also expecting a 15% decline in apartment supply in 2023, which includes a 54% reduction in new supply expected in Northern California. All of our markets remain on the lower end of the supply growth spectrum versus other U.S. metros.

Turning to the apartment investment markets. Geopolitical events, turbulent financial market conditions, and high levels of inflation create uncertainty, which may become a headwind for transactions. However, cap rates generally don't move quickly and are mostly a function of investor demand for property. As to the West Coast specifically, strong evidence of recovering apartment market conditions, higher inflationary growth expectations, and significant capital-pursuing apartments, appeared to have mostly offset the impact of higher interest cost, keeping cap rates unchanged at this point.

Our review of cap rates for recent apartment transactions across the Essex markets indicate most institutional quality assets trading in the mid-3% range for stabilized properties, with little deviation across markets, building class and location. We will continue to be selective with our capital allocation strategy focusing on deals that have the best growth potential and generate accretion to our financial benchmarks.

In closing, I'd like to briefly highlight the importance of ESG and its impact on the Company. As a leading provider of housing along the West Coast, we know that our Company has a responsibility to operate in an environmentally conscious way. Consistent with that thesis, we recently released our TCFD report, which is the first step toward alignment with proposed SEC reporting requirements.

Last week, we announced that Essex will co-anchor an ESG Housing Impact Fund managed by RET Ventures. Finally, we are also pleased to announce the upcoming publication of our fourth CSR report, which should be available in early May.

With that, I'll turn the call over to Angela Kleiman.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Thanks, Mike. First, I would like to express my appreciation for our operations and support teams. As we have implemented new systems and structures to optimize our operations, our team has taken on these challenges in stride and continues to demonstrate exceptional work ethic and dedication to our Company's success.

In today's comments, I'll begin with key operational highlights on our major regions, including our outlook for 2020 to rent growth, and conclude with an update on the rollout of our property collections operating model. We are pleased with our first quarter operating results, especially in delivering a 6.5% same property revenue growth on a year-over-year basis. This is primarily driven by increases in schedule rents and improvements in concessions, detailed on Page 2 of our press release.

The first quarter performance exceeded our expectations and included some of our strongest leasing spreads reported in the Company's history, with net effective new leases of 20% and renewals up 11.7% compared to the same period last year. Average concessions for the portfolio continues to remain minimal. With April loss to lease for the same-store portfolio at 9.5%, we are well positioned heading into the summer leasing season.

Here are the key operational highlights from North to South. Beginning with our Washington portfolio, rents in the Pacific Northwest had a strong start to the year, improving sequentially each month since December. In addition, we successfully decreased concession in Downtown Seattle throughout the quarter. Our supply Forecast reflects a modest break in deliveries throughout 2022, and the Seattle job market remained strong with March average trailing three-month growth rate of 6.1%. Moving forward, we anticipate steady performance from our Seattle region, with the loss to lease in April of 7.7%.

On to Northern California, as Mike mentioned earlier, rents in this region are being lifted by the return-to-office of large tech companies and a solid rebound in job growth. After a typical seasonal slowdown in the fourth quarter, concession usage in San Francisco and San Jose declined throughout the first quarter, leading to a steady improvement in net effective rents. Looking ahead, we expect the supply picture to remain steady for the rest of the year. And on the demand side, job growth is accelerating, with March average trailing three-months growth rate of 6.7%. As Northern California is in its early stages of recovery, we are seeing a steady increase to loss to lease, which stands at 5.1% in April, and we continue to expect this region to beat our market rent growth in 2022.

Turning to Southern California, which has been our best performing market throughout the pandemic. We continue to be confident about Southern California, as rents did not experience the typical seasonal decline in the fourth quarter and have continued to improve each month in the first quarter. Concessions have been below one week for almost a year. Turnover in Southern California remains at the lowest level relative to the rest of our markets, demonstrating continued strength and stability of this region. For 2022, we have forecasted a modest increase in supply delivery and anticipate concession may temporarily elevate in areas near those development lease-ups. On the demand side, Southern California was a top performing region, with March average trailing three-months job growth of 7.9%. Furthermore, our April loss to lease of 14% will provide a tailwind to revenues into 2023.

It is with the strong fundamental backdrop that Essex continues to make progress in advancing our property collections operating model. We discussed on previous earnings calls on how we successfully improved efficiency last year in San Diego and Orange County by operating closely located properties as a single unified business. The benefits of this operating model include - enhancing our customer service through virtual on-demand experience, creating more career advance opportunities for associates through specialization, and ultimately generating a 10% to 15% reduction in administrative staffing needs through natural attrition, which is also mitigating the inflationary pressures we are experiencing today.

Historically, Essex has operated with an employee-to-unit ratio of 42:1. Today, we are at 43:1. And our target by the end of 2022 is 45:1. At this point, we have completed the rollout of Southern California and expect company-wide implementation by year-end. In addition, we have ongoing digital platform improvements rolling out over the next few years. As such, we have yet to fully optimize our business, and we anticipate further benefits in 2023 and thereafter.

With that, I'll turn the call over to Barb Pak.

Adam W. Berry
Executive Vice President and Chief Investment Officer at Essex Property Trust

Thanks, Angela. I'll start with a few comments on our first quarter results, discuss changes to our full year guidance, followed by an update on co-investment activity and the balance sheet.

I'm pleased to report core FFO for the first quarter exceeded our expectations. The favorable outcome was due to strong operating results and higher co-investment income. For the full year, we are raising the midpoint of core FFO by $0.25 per share to $13.95. The increase is driven by two factors. First, we are raising the midpoint of our same-property revenue growth by 85 basis points to 8.6% on a cash basis. This is driven by our solid first quarter operating results and an improvement in our net delinquency expectations for the year.

Our revised guidance now assumes net delinquency of 1.9% of scheduled rent as compared to our original guidance of 2.4% at the midpoint. As Mike mentioned, the deadlines for applying for federal tenant relief passed on April 1st. We believe this has led to an improvement in our residents paying current, while at the same time, we have also seen an increase in emergency rental assistance over the past two months. As such, our April net delinquencies were 20 basis points of scheduled rent, which is below our historical average of 35 basis points. While this is encouraging, underlying growth delinquencies were about 5% in April, and thus we still need to make progress before we can confidently put COVID-related delinquencies behind us.

A second factor in our improved core FFO guidance range relates to preferred equity investments, as we are now expecting approximately $250 million of redemptions compared to our initial midpoint of $350 million. The reduction in redemptions relates to three investments that we now anticipate being paid off in 2023.

Turning to our co-investment platform. We have recently monetized the promote income within two ventures, unlocking embedded value for our shareholders. In the first quarter, we amended our Wesco III joint venture, realizing $17 million of promote income which was paid in cash. The venture generated a 16% IRR for Essex shareholders.

Subsequent to quarter end, we amended our Wesco IV venture, earnings $37 million of promote income, which was elected to reinvest back into the venture and increase our ownership to 65%. This venture achieved a 20% IRR. These two transactions are expected to create over $2 million in additional core FFO on an annual basis. Overall, our private equity platform continues to create value for our investors and remains an important alternative source of capital.

Finally, turning to the balance sheet. In the first quarter, our net debt to EBITDA ratio improved to 6.1 times compared to 6.6 times at the depth of the pandemic. We expect this ratio will continue to improve throughout 2022, driven by stronger operating results. With over $1 billion of liquidity limited near-term funding needs and multiple sources of capital available to us, we remain in a strong financial position.

That concludes my prepared remarks. And I will now turn the call back to the operator for questions.


Questions and Answers

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your questions.

Rich Hill
Analyst at Morgan Stanley

Hey, guys. Thanks for taking my -- my questions. Hopefully, it's a relatively straightforward one. But given the really impressive new and renewal growth that you're putting up right now, I'm hoping you can disclose for us what the earn-in for 2023 is right now.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Hi, Rich. It's Angela. I would love to be able to give you the earn-ins for 2023, but it's, one, Barb will kill me, and two, it's just too early. I think you can see that our fundamentals are solid and we're doing quite well.

Rich Hill
Analyst at Morgan Stanley

Okay. So I'd figure that. I'd figure that try. So maybe just one follow-up question. I don't know if some of your peers talk about it. So, I know it's not the Essex way, but I figured. I'd give it a go. So we did -- we did notice that your occupancy dipped a little bit in April. I'm wondering if you can just walk us through if that was intentional pushing rates into the peak leasing season and how you think that might trend given turnover that feels pretty low.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Sure. That's a good question, Rich. And you've seen us do this, which is when we see market strength, we would change our strategy from favoring occupancy to pushing rents, especially when we see -- you know, when we are anticipating more market strengths coming ahead of us. So, it is very much intentional. And you will see that when we are past the leasing season usually during third quarter and especially in the fourth quarter, we would change that strategy back to pushing occupancy, instead.

Rich Hill
Analyst at Morgan Stanley

Okay, that's great. Mike, if I had another question, which I don't, I'd ask you about solar panels, but maybe we can table that for NAREIT.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

About what? I missed that.

Rich Hill
Analyst at Morgan Stanley

Just about solar panels and...

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Oh, solar panels. Oh. Okay, you mean the hope, the CSR effort. Yeah.

Rich Hill
Analyst at Morgan Stanley

Yeah.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

So I'll just make a couple of quick comments and then we'll move on from there. We have actually for over 10 years now been had our own, what we call, Resource Management group. So we've got a pretty long history of pursuing things that we thought were good for our properties, good for values, and creating more efficient ways of doing things. So, our CSR efforts have been -- they're nothing new and that've been part of our -- our past. And -- but I would say, as we think about California especially, there is a mandate here to remove gas cars by 2035. There are other mandates, as you all know, and they keep us focused on that. I think that there is a strong intersection between opportunity to add value to the portfolio and many of these ESG efforts. And you mentioned one of them, which is solar panels but it goes well beyond that. Electronic vehicle charging stations, etc., will be part of the mandate as well. So, we're excited about it. We were excited to announce our co-anchoring of that new fund that is sponsored by RET ventures, you know I think it's consistent with our past and the way we think about ESG.

Rich Hill
Analyst at Morgan Stanley

Great. Thanks, guys.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thanks, Rich.

Operator

Thank you. Our next question comes from the line of Nick Joseph with Citi. Please proceed with your questions.

Nick Joseph
Analyst at Smith Barney Citigroup

Thanks. You talked about the strong rent growth in demand in Northern California as you survey those incoming residents. Where are they moving from? Are there within the MSA, are they coming from kind of other areas of California? They'll coming from other areas of the country? What migration trends are you seeing maybe specific to Northern California?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Hi, Nick. It's Mike, and maybe Angela will want to make a comment. And -- and by the way hear Barb runs high around here -- to make that comment. But really it's -- it's I think opening up a number of different things. You know, the normal migration pattern typically has retirees with expensive California homes leaving. As you enter into a recessionary period, we certainly saw. And then normally that's those retiring workers moving out of California or replaced by younger workers that are coming into California to take higher-paying jobs in some of the opportunities in the tech companies. So, the younger workers were largely told to stay put until the tech companies opened up. And so now we are starting to see them return. In addition to that, there are some foreign migration that has -- that has picked up also. And we're starting to see more demand for corporate housing units, as these big tech companies, in terms of their training and onboarding activities, there is definitely a pickup in demand from corporate house -- for corporate housing. So, it's really across the board. We're seeing more normalization of our activities and are coming from a number of different areas.

Nick Joseph
Analyst at Smith Barney Citigroup

Thanks. And then maybe just on the transaction environment and I recognize every environment is different, but just based on your past experience, how are you thinking of asset pricing trending from here. Obviously, there's high rent growth but negative leverage with higher interest rates. So, in the past, as you've seen some of those inputs, what is that going to the transaction market-on a lagged basis?

Adam W. Berry
Executive Vice President and Chief Investment Officer at Essex Property Trust

Hey, Nick. This is Adam. So going forward, we don't see -- we don't see transaction value is changing a whole lot. I think Michael mentioned it in his opening comments. You are seeing some interest rate pressures obviously but -- but with the growth that we're seeing throughout our markets and with the amount of capital in the market chasing deals, we're really not seeing a dramatic move in pricing. For -- For deals that are kind of on the market right now, we're seeing somewhat less froth than what we've seen over the last, call it, six to nine months, but that's the -- that's that extra 5% the groups would move after the second best and final round that we're not seeing today. So. it really -- like I said, we're not seeing a dramatic shift in pricing would be important.

Nick Joseph
Analyst at Smith Barney Citigroup

Thanks.

Operator

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

Steve Sakwa
Analyst at Evercore ISI

Yeah, thanks. I guess, good morning. Still out there. Barb, I just wanted to try and clarify some things -- I'm a little confused. I know there a lot of numbers on delinquencies and bad debt. So, F'16, you you show you would had 2.2% in the first quarter. It dropped to 0.2% in April, but then I think I heard you say that delinquency, sorry -- delinquency -- gross delinquencies were 5% in April and that your guidance now incorporates 1.9%. So, I'm just sort of trying to put the gross and the nets together and really figure out how conservative, how aggressive you are on the delinquency front and what sort of upside maybe there is if the -- the rental assistance program, which is kind of burned off, lead to better collections, what kind of upside can we see?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Hi, Steve. Yeah, that's a great question. So what I was alluding to in our guidance, we've assumed 1.9% of scheduled rent and that's on net delinquency basis, so that would be after emergency rental assistance. That's for the full year which implies 2% in the back half of the year, and that would compare to the 2.2% in the first quarter in terms of net delinquencies on a cash basis. And then the other number I provided was the 5% on growth, because we do still have high underlying gross delinquencies. We're working through those, and we have seen a positive change over the last couple of months. For example, in January-February, we are at 6.5% and we've come down to 5%, and we believe that part of that is a function of the change in the law that occurred in April. That said, we still have a lot of work to do there, and we've only seen one month of data, so our guidance doesn't assume that that materially changes from here, especially with Alameda and LA county, where eviction protections remain in place. So, the combination of emergency rental assistance and gross delinquencies kind of gets us to our net 1.9% for the full year.

Steve Sakwa
Analyst at Evercore ISI

And if you were just put the 5% gross in perspective, say pre-pandemic in 2018 or 2019, before all these issues. What is the gross delinquencies sort of look like, just to help frame the 5% number?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

It would be less than 1%, because remember our net delinquencies were 35 basis points, historically. So our gross delinquencies were less than 1%, on average the 5% is definitely very high.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Steve, let me throw out one other set of numbers. That is we're owed $76 million. I think that was in my script, of which we booked, I believe $4 million of that is it as revenue where accounts receivable. So we have a long way to go. A lot of collection -- potential collections out there. We just don't know when or how much given the most of it comes from the state rent relief program and it is impossible for us to predict when that's going to come in.

Rich Hill
Analyst at Morgan Stanley

Right. And I understand it's harder to kind of figure when you'll get it, but, okay -- so there is a fair amount of conservatism there that could lead to further upside. I guess, Mike and I know you're not big on the development side, but just how are you thinking about new development opportunities, if at all. And are you seeing any changes in land prices are more opportunities coming your way. And how do return sort of pencil given the big inflation we've seen but also the starting to improve rent growth picture?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yes, Steve. I mean -- I'm going to turn that over to Adam here in a second, but I will say that in the recent past we press released a couple of development deals, one in Seattle and one in Northern California and that it doesn't speak to our pipeline. So with that, I'll turn it over to Adam to about to -- to talk the about development.

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Yes, Steve. We're not seeing -- I'm not seeing a huge increase in deals coming out on the development side. Those that we've seen, they trade in the Bay Area the crude oil price has definitely gone up. They are generally solving to a low fours gap which -- that does not provide the spread that we need in order to justify the risk associated with development deals.

We probably have seen more tertiary markets increase their potential for -- into development deals. And that really hasn't been as much our focus either. So, generally, we have, as Mike mentioned, we press released the last last year end in the Bay Area. And we have a couple in the pipeline that we're working through, but we are staying selective and disciplined as to what kind of spread necessary for these deals.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

One additional note what Adam talks about a forecast, he's saying today that's un-trended for cap. So, we compare an acquisition yield today against a development yield today. So, it's not trended, just FYI.

Rich Hill
Analyst at Morgan Stanley

Great. Thanks. That's it from me.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thanks, Steve.

Operator

Thank you. Our next question's coming from the line of Jeff Spector with Bank of America. Please proceed with your question.

Jeff Spector
Analyst at Bank of America

Great, thank you. My first question, Mike, is on your supply comments. I believe you said that for 2023 supply will be down, I think you said maybe 11% and I was and I'm sorry if I am saying the wrong percent. Please correct me. I'm just curious how confident you are at this point on 2023. And has that changed in the last couple of months? Has it always been the expectation been lower in 2023, similarly, let's say, a few months ago or something changed?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yes. Hi, Jeff. Actually these numbers didn't change a lot from last quarter and that overall reduction in 2023 was minus 15% made up of minus 54% in the Bay Area. So, I mean, pretty flat in Southern California and up a little bit in Seattle. So, I think what's happened here is that, you know, in the early phases of COVID, people pulled back on development. And so we're starting to see the impact of that now couple of years later. And so I think that there will be a low period for development starts and then we'll see what happens in that further along in the cycle. But in my prepared remarks, I noted that the deliveries -- we've actually had the peak deliveries in Q1, Q2 2002. So they moderate a little bit towards the end of -- for the rest of the year, and the next six months. And the next year, again, down 15%. So that's the trajectory, and we do our own fundamental analysis on this. So we actually have people look at deals and see where they stand. And so we're a lot more accurate than some of the other data that you see out there. Not that some of these can change their construction delays, etc., that happen, but I think our numbers are spot on with respect to what's coming out us.

Jeff Spector
Analyst at Bank of America

Great, thank you. And then just a follow up, Mike, on some of the comments about San Francisco and the return-to-work. It's interesting. It seems to be one of the only markets we're really the return-to-work has been a catalyst for apartment demand. A lot of other cities are most have seen that strong demand without company, let's say, forcing people back to work. And I guess, I'm a more of [Technical Issue] I guess to me that it feels a bit negative like why is that, is that a problem longer term? I guess how would you counter that? Like, at the end of it, why is that a positive. I know it's a positive because you're seeing people come in on the return-to-work. But I guess, what are your thoughts on that?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

My initial thought goes back to the first chapter of COVID which the city is basically shut down. They shut down all the restaurants restaurant, they shut down hotels, all the leisure, all the service jobs were pretty much eliminated. And so, if you're one of those people who generally is not a high wage earner, what are you going to do? You just lost your job and you don't have any certainty about getting another one, because basically everything shut down in the city. So, those people all left. And so now what you're starting to see is the demand for those services really didn't change all that much, but you got to bring all those workers back in order to reengage in those businesses. And so I think that's what's happening. So this was not a voluntary choice. People had to stay in the cities and pursue their livelihood, they were effectively forced out. So, as the cities recover -- and again, we have some concerns about cities given de-fund the police movements, etc., homelessness. And -- but as the cities recover, we think that there is good upside. And It is entirely due to real demand for travel, for services, for restaurants, for hotels, etc. So, we don't view it as artificial at all. We view it as a policy choice largely that cause the deep hole, and now we're just recovery into a natural place.

Jeff Spector
Analyst at Bank of America

Okay, great. Thank you. See you at NAREIT.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yes.

Operator

Thank you. Our next questions comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Hey. Good morning out there. So, two questions. Mike, in Northern California, with the city reopening and jobs coming back, are you seeing more of the renters flood back to San Francisco? The city, or are you seeing more come back to the burbs because they want the extra space? Or what sort of the dynamic? Just trying to see where you're seeing more of the demand as people come back to the market to the region.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Well, maybe Angela will add to that because I don't have anything that tells me on a more granular basis exactly what's happening. I do think that suburbia has done better in virtually all cases. And the cities -- the concern in the cities is so, the thing I mentioned before, homeless and etc., but also there is more supply in the cities. Like, for example, almost all the supply in Los Angeles, sort the greatest percent of supply increase in loss analysis in the CBD. Same with San Diego. And kind of same throughout. So, it's really the confluence of both more suppliers in the cities and the demand is maybe a little bit delayed from the suburban markets. And the suburban markets generally don't have nearly the extent of the problems that there are the cities. So, they are recovering faster and doing very well.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Hey, Alex. If it helps, just a few data points on what Mike just said. It's Angela here. When we're looking at the sequential net effective new leases -- net effective new leases, the fast performing are San Mateo and Santa Clara. Those are the two top ones. So that is evidence of the strength of the suburban in Northern California.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Okay. The second question is on the delinquencies. And I appreciate your color to one of the previous analysts' questions. But how soon can you guys get aggressive and start turning tenants residents over to the credit agencies start docking their credit reports? Just how soon can you guys take a quicker hand, or quicker tougher hand? And then two. If the state is hanging all these people's rent, where is the -- I mean, that sounds like a big moral hazard that the people know next time they don't have to pay rent. So, it's like it seems to just set up for another repeat of this, is there any sort of guard against that? Or are we just setting ourselves up to that. I guess it's a two-parter. One, when can you reports the credit agencies? And two, it seems to be setting up for another of the state is going to pay all this background.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Hey, Alex. It's Angela here. Maybe I'll start with the -- that the tenant behavior first, and Mike may want to talk about more a hazard. It's his favorite topic. In terms of how aggressively we can push on that front, there are couple of -- there are couple of factors. One is that we still have eviction protection in place for L.A. and Alameda County. And so that will lead to work itself. And that's -- that goes to the legislative issues right? As far as our ability to collect going forward, keep in mind that the protection -- delinquencies protection remain for any delinquency that occurred during the period before September 2021. So, we're really talking about April delinquency. So on the new April delinquency, we can take action outside of L.A., of course, and Alameda. And so, it's a whole process that involves going through evaluation of putting people in payment plans, leading with our tenants on -- how to manage through this period of time. And so we do at this point have the ability to report to the credit agency everywhere. It's really how we want to go about it. That will make the most sense to be able to maximize our collections effort.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Okay. Mike, did you want to add?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Maybe add. Again back to where is the delinquency? It's in L.A. County and Alameda County. And then the other part which is state law statewide, which effectively says if you have a rental relief application outstanding, the courts will not hear an eviction case through June 30th. And so, these are still reasons why we can't do the things we would ordinarily do at this point. But the good news is, I think that all of these programs appear to be getting close to their end and then we'll pretty soon have a good idea of where we stand.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Thank you.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thank you, Alex.

Operator

Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.

Austin Wurschmidt
Analyst at KeyBanc

Great. Thanks and hello everybody. So, Barb. If I heard you correctly, the same-store revenue guidance increase was really two parts, neither which seem to include any change to your projections for market rents or occupancy through the balance of the year. So, I was curious where our market rent -- where is market rent growth year-to-date across the portfolio relative to the I think it was 7.7% projection you assumed for this year.

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

I'll take the first part, and then I'll let Mike and Angela take the second part. So, in terms of the same-store guidance raise, so 50 basis points of the raise was due to delinquency, another 30 basis points was due to lower concessions and higher net effective rents, and then the balance is due to higher rubs. And then in terms of where we are in terms of market rents--

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Yeah, I'm happy to cover that. It's Angela here. On the market rents, we are tracking pretty much in line in Northern California and Seattle. And keep in mind, we had anticipated that Northern California recovery would be quite strong. And so that is consistent with our expectation. Southern California is outperforming. It is tracking ahead. The -- and so we are in the middle of -- in the midst of -- we're looking at our modeling assumptions and we'll provide a mid-year update. Having said that, keep in mind that when we're looking at leasing spreads, year-over-year leasing spreads, we will have the -- it will be strong -- the strongest in the first half, because last year around this time we still had negative leasing spreads. In fact that negative leasing spreads won't continue through the second quarter. We didn't turn until July. And so for those reasons, with the year-over-year comparable, we need to evaluate the magnitude of what that means.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

And maybe one final piece, and that is, we'll be looking at S-17 and our rent forecast, our economic rent forecast on S-17, and the net--net is we're ahead. And we generally don't do that every quarter. We do it biannually. So we'll be looking at that from next quarter.

Austin Wurschmidt
Analyst at KeyBanc

Yeah, all very helpful. And just to clarify, Barb, on the 35 basis points, you mentioned a couple of items there. But I thought I heard you say in the prepared remarks that was mainly driven by first quarter performance. And so, not necessarily that you've assumed that the -- even though it's decelerating in the back half of the year, but that growth will be higher than what was assumed in your original projection. Is that correct?

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

I said It was driven by, yeah, strong first quarter results and then better net delinquency collection. So, we -- like I said we factored in 30 basis point improvement in concessions and higher net effective rents for our full year guidance, and then 50 basis points on delinquency, Those are the bulk of the same-store guidance raise.

Austin Wurschmidt
Analyst at KeyBanc

Got it. Okay, that's helpful. And then, Mike, you've provided a lot of data and data points on the demand-supply ratio and set up for the recovery on the West Coast and how these markets have historically outperformed in an upturn. But obviously, amidst sort of some cross-currents today and concerns about a recession on the horizon, so just curious how that impacts your view about the trajectory of the recovery on the West Coast.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Well, I will. I'll start by citing the fearful of Barb comment that we already noted. But we feel good about conditions and where we stand. So just recovering the things that were shut down during the pandemic, now that again all of the mandates for most of them have been removed and it feels like we're in a better state, I think -- I think that that's most of it and it feels like we have a lot of catching up to do, and we're at the front end of that -- that process. We're obviously late to the dance, and -- but we feel good about where we stand and expect to continue to perform well.

Austin Wurschmidt
Analyst at KeyBanc

Right. Thank you for the thoughts.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thanks.

Operator

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

John Kim
Analyst at BMO Capital Markets

Thanks. Good morning. I just wanted to ask you for an update on where you're sending out renewals for May and June. And what's your ability to achieve high renewal rates that may approach the new lease growth rate of 22%?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

So on the -- you're asking about the renewal -- renewals that we're sending out for the second quarter, right?

John Kim
Analyst at BMO Capital Markets

Correct.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Just want to clarify. Okay. I would assume, yes. Okay. So, on the renewal, towards company-wise we're setting it about -- slightly above 11%, and the distribution is actually not that -- not a huge variance. SoCal at about 10.5% and Northern California close to 12%, and Seattle close to 13%. So those are the -- the averages. In terms of our confidence level, given where we're seeing the activities and the demand, we are quite confident that these are achievable rates.

John Kim
Analyst at BMO Capital Markets

So if that continues in the second quarter, what's implied in your guidance of 8.6% same-store revenue for the second half of the year. I know, Angela, you've mentioned that there are tougher comps that you're approaching. But at the same time, the last lease went up to 99%. You have the market rent forecasted of 7.7%. What you would expect to happen in the third and fourth quarter?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Right. No, that's a good question. So first quarter, our same store was 6.5%. We do expect that to gradually increase from a revenue perspective because that is essentially is a lag effect, right, between revenues and economic grants. So, as market rents taper off, the revenues is following, but it continue to increase, so there is that catch-up effect.

John Kim
Analyst at BMO Capital Markets

And so what's implied in your guidance currently? For backup...

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

In terms of rent growth or...? I'm trying to understand what you're asking for.

John Kim
Analyst at BMO Capital Markets

The effective lease...

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

I don't have that in front me.

John Kim
Analyst at BMO Capital Markets

The effective lease growth....

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Effective lease growth, I don't have that in front of me. I have to follow up with you after. It's consistent that we haven't changed our full year outlook on S-17 in terms of market rent growth. So, there hasn't been a change to that assumption as of right now. We're revisiting that.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

And, John, maybe as it relates to -- John, as it relates to S-17, keep in mind that if we get -- if we get it sooner, it doesn't necessarily mean that we're going to get what we got sooner. And in addition, we're going to get what we thought were going to get. So, there could be just -- it happen faster than we thought. And so keep that in mind. That's why we want to make sure that we wait for kind of a full review of S-17 before we start kicking it apart, if that makes sense.

John Kim
Analyst at BMO Capital Markets

It does. Thank you.

Operator

Thank you. Our next questions comes from the line of Nick Yulico with Scotiabank. Please proceed with your questions.

Nicholas Yulico
Analyst at Scotiabank

Thanks. I just wanted to go back to the delinquency number. The $76 million, which is the cumulative number, and I know previously -- I didn't see an update on this, but in terms of the reimbursement that you've already applied for and haven't received that number back in March was, I think, $59 million, Is that still the number? Or is that changed?

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Hi, Nick. It's Barb. So that number is $64 million as of last week, of which half relates to our current residents and half relates to landlord-initiated applications on behalf of pass residents.

Nicholas Yulico
Analyst at Scotiabank

Okay.

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

The latter group is the one that the resident -- the former resident has to engage, which is obviously more uncertain if how long be able to collect that.

Nicholas Yulico
Analyst at Scotiabank

Okay, helpful. And then in terms of the guidance then, how should we think about that $64 million? Is any of that factored into full year guidance collecting that money?

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Yes. What's implied is effectively the first group, the resident -- the current resident applications. We have high confidence we'll get the vast majority of that. And given the programs now ended in terms of applying for new applications, we think that that will come in this year.

Nicholas Yulico
Analyst at Scotiabank

Okay. So that half of it...

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Yes. It will not be same-store though, because that's for our total portfolio, including joint venture properties, and so a portion of that will be same-store.

Nicholas Yulico
Analyst at Scotiabank

Okay but about half of it we should think about. And then because I know the number, the number's like over a $1 of FFO per share. So, we should think about half of that is in the full-year guidance this year and maybe half could fall in still, or maybe next year depending on that pace of what we........

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Correct. So the other half is uncertain, and we're seeking alternative ways to recoup that money, but at the timing is very ascertain on that portion.

Nicholas Yulico
Analyst at Scotiabank

Excellent. Thank you, Barb. Very helpful.

Operator

Thank you. Next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Brad Heffern
Analyst at RBC Capital Markets

Yes, thanks. So, in the prepared comments, you mentioned the three co-investments that are expected to be paid off in 2023 now versus 2022 previously. Is that a headwind that's just moving into 2023? Or does the macro environment lead to fewer redemptions and better reinvestment opportunities overall and that some of the headwinds that we've seen lately are abating?

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Hi, Brad. This is Barb. So, the three prop -- or the three investments that were push, it's really a function of the interest rate environment today and where these properties are going to be in lease-up. Keep in mind in 2021, given the low interest rate environment, developers were able to take out financing before they were fully leased up. And given the higher interest rate environment and debt service coverage ratios, we don't see that happening anymore. And so that's really a function of what caused us to be pushed. Nothing -- the properties aren't behind on schedule or anything like that. Is just a change in the environment that's occurred from an interest rate perspective.

Brad Heffern
Analyst at RBC Capital Markets

Okay. And are you seeing any additional reinvestment opportunities just given I imagine the financing side of things is more difficult now than it was a few months ago?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Brad, we -- I think that we will see more. Again, we have this lag after COVID, when construction starts turn downward, and I suspect that we will see a lot of those deals come back and that will create more demand for the preferred equity program. So, I think that will right -- that's in the process of rightsizing itself as well.

Brad Heffern
Analyst at RBC Capital Markets

Okay. Thank you.

Operator

Thank you. Our next questions comes from the line of Richie Anderson with SMBC. Please proceed with your questions.

Richard Anderson
Analyst at SMBC Nikko Securities America

Hi. Thanks. Good morning out there.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yes.

Richard Anderson
Analyst at SMBC Nikko Securities America

Mike, I don't know if you remember, a long time ago, I talked to you about a mood ring. Do you remember that conversation?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yes, I do. I do as a matter of fact..

Richard Anderson
Analyst at SMBC Nikko Securities America

And I want to ask you about your near-term mood ring for San Francisco on a little -- or a Bay Area a little bit different format. Given S-17, I know you're going to update it, but right now it's the leader. Northern California is the leader in terms of market rent growth we've gone through that and ad nauseam to this point. But you also reported first quarter same-store revenue in Northern California was laggard of the three regions. Should we -- if we sort of extrapolate what you're thinking rent -- market rent growth-wise into your portfolio, shouldn't this just flip in the coming quarters in terms of the composition of same-store revenue growth in 2022, where Northern California should really become the leader in the back half relative to the other regions? Or am I thinking about that wrong?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Well, Angela will maybe have some comments. But to your mood ring thing, so I actually, because of you know what a mood ring is, and I have different colors, that I have in my mind because of you. So, I never forget. So, Brad would have to be the right color for us. I mean, I think that we feel good, energized, etc., and...

Richard Anderson
Analyst at SMBC Nikko Securities America

No, no, red is the wrong color. You would think blue, black, green.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

[Speech Overlap] mood ring thing energizes red. Incited and adventurous are red so...

Richard Anderson
Analyst at SMBC Nikko Securities America

Okay.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Well, that you feel -- whatever you want. I have the wrong mood ring app, I guess. But no, we --- think we feel -- we're feeling good about things. And Northern California long term is our number one market, I think it's a number one market in America. In terms of long-term CAGR rent growth, it's fallen well behind the curve in this case. And in this world, because, you know, rents are always feathered at some level to income levels, it's really important that they move together. On the income side, we're still seeing some recovery happening there. So, I don't think that you could just grow forever, unless incomes are growing very rapidly. And one number that I was told by the group here is that our incomes or move-ins are up something like 15%, which is pretty darn good. It makes us feel better about the rents we are charging, especially in Southern California. So things look good. I expect Northern California to really pick it up here, and it will become once again as it has for the long term, our number one market is what I would guess.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

And Richard, it's Angela here. Thanks for making my point for me, which is, in the second half, we do see that flip. We do see Northern California rent growth will then outperform Southern California rent growth.

Richard Anderson
Analyst at SMBC Nikko Securities America

Okay. And then the second question from me is, we talk a lot about services coming back in restaurants and in hotels and all that, but also reemployment -- or to reuse of office buildings with tech. Is it not true that hybrid office would be a better model for you rather than five days a week only because where you guys are located primarily outside of San Francisco. So, maybe a 2- or 3-day-a-week type of model would be good for your portfolio, relatively speaking, because people might be able to put up with a longer commute for a variety of reasons in that area, but just because they don't have to go in the office every single day. Is that the right way to think of it? Or is there any kind of return-to -office work for you and you're not going to really going to dig into too much more of the detail beyond that?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yes. No, I think you're thinking about it the right way. I think that because of the hybrid workforce, and I think everyone including the tech workers, and actually Essex as a company, most of them are pursuing a hybrid model of some kind that require some tethering into an office, and we're actually no different from that, obviously. And so I think what the effect of that is, is that it makes the downtown which have all the office buildings, a little less desirable and it probably adds, them we've talked about this before, another ring or let's say another 10 miles out from where we would have drawn our line, because our portfolio is planned around the key job notes and a commute pattern to those job notes. So now we will expand that a bit. And good example is we we've been buying in San Diego County some of the areas that are farther from the major job nodes. And but that will be true of Northern California and Seattle as well. So, I think it does push out the computable space, and therefore, expands our geography accordingly.

Richard Anderson
Analyst at SMBC Nikko Securities America

Great. Thanks very much.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thank you.

Operator

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

John Pawlowski
Analyst at Green Street

Thanks. And just had one question and then I'll let somebody else jump on. The revenue enhancing capex spend this year, $100 million is a big number. Can you just remind us what are the -- what are the drivers. What is you actually spending money on? And then how do your kind of expected returns, IRRs compare versus alternatives out of buying real estate or buying back stock?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

I'll talk about the capex program first and -- as far as the redevelopment spend and also just straightforward capex spend, under redevelopment side, we are targeting 8% to 10% cash on cash yields, and this is consistent with pre-COVID levels. And it's primary because we're seeing the demand in our market and the rent growth to support this program. Now the elevated level that you may be referring to when it comes to the capex per door, I think that's what you're referring to itself, It's really driven by two factors. One one is, of course, the material cost increased, but the other one is a catch-up. And so during the COVID period, we of course were very careful and ran much meaner from a capex perspective, both in terms of just trying to minimize contact and also being sensitive to what we can achieve on the top line. And because of that our normal capex per door of somewhere around $1,750 dropped down to almost below $1,400. And so that -- there is a catch up that just need to happen normally. And then, John, this is Barb. In terms of where to put capital, obviously redevelopment at 8% to 10% returns are obviously our best use of cash proceeds today relative to buying an asset in the mid-threes or even buying back the stock. So it's just hard to put a lot of money to work. Remember, you're -- you've got an occupied building and you can only put so many dollars to work. So there is a capital constraint at how much we can put to work there, but we think that is the best alternative source of capital outside of preferred equity, which we've discussed in the past.

John Pawlowski
Analyst at Green Street

Okay, thanks for the time.

Operator

Thank you. Our next questions comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Neil Malkin
Analyst at Capital One Securities

Hi everyone, good afternoon. Thank you for taking the question I was current little over now. So I'll be quick. First one, on the ESG, our RET fund, the one -- the Climate Change Fund, just curious about how you guys -- when you're talking about that with your either border internally in Investment Committee, I guess, what are you guys trying to achieve given that China and India are by far the biggest polluters and emitters of carbon in the world.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

It's a good comment, and I -- I'm not going to make any comments about China or India. But I would say that, again, we saw, as I mentioned earlier, we see good opportunities to invest in our own portfolio and make it better. And by better, I mean producer return on investment that makes sense. And we see the cost of electricity, trash removal, water issues, etc. has been longer-term issues for all of us. And if we can solve some of those issues and get to payback by lowering our bills, etc, then so be it. We think it -- we think it makes good sense. And initially we had, I know RET Ventures was thinking about that as part of their existing fund, and in fact had made a number of investments out of their main fund in ESG. And a couple of them are super important. One of them is, we have SEC requirements, so a company called Measurable was one of the REIT investments, before this new fund. And it helps us organize our data in getting ready for the SEC requirements that are coming down the road. So, there are a lot of important reasons why we should be doing this, and we see a lot of opportunity out there, And it's not just investing money, it's actually getting a return on your investment.

Neil Malkin
Analyst at Capital One Securities

Appreciate that, Mike. Last one, real quick, maybe Adam for you or anyone really. But your stock price is pretty much right around all-time high. I know that I think the typical model is stock price up, issue equity and buy stuff, Stock price up, sell assets, JV stuff. Maybe just talk about the -- I think maybe something touched on before, the acquisition pipeline around -- in your markets, potentially maybe some suburban locations, etc. Has that picked up recently? It's kind of the things you're looking at and or potentially maybe in the West Coast, any commentary on how you think the rest of the year is going to shake out on the acquisition side, obviously in the phase of higher debt costs? Thanks.

Adam W. Berry
Executive Vice President and Chief Investment Officer at Essex Property Trust

So, Neil, this is Adam. As to what's going to come later in the year, It's hard to say. Over the end of Q4 and early Q1, the volume generally on the market was pretty low. There is a -- there is a pretty significant decline in overall transaction volume quarter-over-quarter. There is quite a bit on the market today. As I noted before, over this last six to nice months, we really didn't partake in the frenzy that was happening in those best and best final rounds. We're always constantly assessing what's on the market and where we see more growth going forward, And so we're looking at those deals. We're not going to be in the low threes. And so if there is any sort of adjustment or if we see an opportunity that comes up, and we did see a few of those and that we closed on in early Q4 and early this quarter, then we will jump in those windows.

Neil Malkin
Analyst at Capital One Securities

Okay. So just seems like it's going to be a little bit harder to kind of do the types of things you did maybe in years past when your stock price was up and you're heavily acquisitive. It seems like that Maybe had to look a little tougher hurdle now to just given cap rates and overall cost of capital. Is that fair?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Yeah, that's fair. I mean if you take the cap rates that Adam was talking about and you compare them to the company, you've plan to the company, you will find that issuing stock is something we really shouldn't do. And so we have not done that and tried to use our co-investment platform to fund most of the deals. And obviously, having positive leverage i.e. cap rates over debt cost was a -- it helps a lot when it comes to deal making. And so we're no longer in that world. And so there is a bit of an impediment on the deal side caused by negative leverage, once again.

Neil Malkin
Analyst at Capital One Securities

Thank you, guys.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thanks.

Operator

Thank you. Our next questions comes from the line of Chandni Luthra with Goldman Sachs. Please proceed with your questions.

Chandni Luthra
Analyst at The Goldman Sachs Group

Hi, good afternoon. Thank you for taking my questions. If you could perhaps give some more insight into the connections operating model. I know you have it lined up to be rolled out fully across the portfolio by the end of 2022. And then I think you have the digital platform improvement next year. So, is there a way to quantify any marginal cost-benefits? And then how do you think all that sort of, you know, culminating together from a timing standpoint?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Hi, it's Angela here, I think you're asking about how we look at or how we evaluate the success of our property collections operating model.

Chandni Luthra
Analyst at The Goldman Sachs Group

Yeah. I mean...

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Okay. Okay.

Chandni Luthra
Analyst at The Goldman Sachs Group

Yeah, exactly. Basically, from a number standpoint. I know you've given that ratio of 45:1 from 40, which was very helpful. But how does that kind of translates into the P&L down the line? What's sort of benefit as you think about running our models?

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Sure, sure. So, we think about the benefit in three key ways. First is our customer interactions. And we can look at that by the retention rate. And the second one is operating efficiency, and that is the 40:1 ratio, that I talked about that we now improved to 43:1 in terms of units to employees. And ultimately what that means for the financial impact, and that's the third key metric. And so when I talk -- referred to the 100 to 200 basis points of margin improvement, when we implemented San Diego and Orange County, that translated to about $15 million of benefit to NOI. And we have realized that savings when we're only about one-third way through our implementation back then. So the expectation is that going forward, once we complete the rollout -- now keep in mind, we also have a digital platform rollout that's embedded in all of the cost savings. But upon completion, and this is several years out, we would expect an additional 200 to 300 basis points of margin improvement. The trick here is, or the challenge is trying to figure out how -- it's not a dollar for dollar, when we -- when I talked about the $15 million stake, we were not under such extreme inflationary pressure today. And so, there will be offsets which will go towards helping us to manage our controllable expenses.

Chandni Luthra
Analyst at The Goldman Sachs Group

Got it. Thank you. That's all from me.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thank you. Our next questions comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Yes, hi. Just want to follow back on the delinquencies. I just want to understand something. The rent payments the state is making for this $76 million of delinquencies. Is the state making all of that or the half of that? I think it's half of that that you mentioned by former residents that you said those residents have to initiate is that -- it sounds like the whole $76 million may not get paid back. It sounds like only the existing residents get paid by the state. Otherwise, the former residents have to do it on their own. Is that the correct understanding, or did I misunderstand?

Barb Pak
Executive Vice President and Chief Financial Officer at Essex Property Trust

Hi, Alex. its Barb. So, the total that we've applied for a $64 million as of today, the cumulative delinquency that Mike alluded to is $76 million. So there is a delta there. And then of the $64 million in applications, it's made up of two components -- our existing residents, which is half, and then past residents. Now we've applied on behalf of those past residents. Those past residents have to engage in the process for us to get our money, if they don't engage, then the application doesn't move forward. And that's why I'm saying, it's a little bit uncertain in terms of whether the past resident will engage and whether will collect that, that portion of the emergency rental assistance.

Alexander Goldfarb
Analyst at Piper Sandler Companies

And what's the incentive for them to engage?

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Well, they get their -- they get their rent pay.

Adam W. Berry
Executive Vice President and Chief Investment Officer at Essex Property Trust

Keep in mind, Alex, we can't -- the landlord, just not a landmark program. It's a tenant program. And they have to have a COVID-related hardship, so they have to certify as to the hardship, basically. And so we can't do it by ourselves. So -- but it's really their reimbursement paying us off, and their incentive is they're going to owe some money if they don't process the application.

Angela Kleiman
Senior Executive Vice President and Chief Operating Officer at Essex Property Trust

Yes, Alex. it's Angela here. And that includes the impact to their credit report, because we can and we actually have reported on our past residents. But also there are other means for us to try to connect with them, which is we can go through the small claims court. There are other means. And so it is actually to there benefit to engage with us and get this assistance from the state.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Okay, okay. Thank you for the follow-up. I appreciate it.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to management for any closing comments.

Michael Schall
President and Chief Executive Officer at Essex Property Trust

Thank you. And thanks everyone for joining our call today. We are looking forward to NAREIT and hopefully we will see many of you there. Have a great day. Thank you.

Operator

[Operator Closing Remark]

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