Essex Property Trust Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

Key Takeaways

  • Essex delivered a 8.3% increase in Q1 core FFO per share, beating midpoint guidance by $0.08 and raising full-year FFO guidance midpoint by $0.03.
  • West Coast markets showed 2.7% job growth with only 16% of tech layoffs in Essex’s markets and just ~60 bps of new housing stock expected in 2023, supporting healthy rent growth.
  • Ongoing enhancement of its operating platform—including a property collections model and upcoming maintenance optimization—has driven industry-leading controllable margins and low expense per unit.
  • In a market trading at mid-to-high 4% cap rates and 60–70% lower transaction volume, Essex sold a non-core asset and deployed proceeds into accretive stock repurchases, boosting NAV and FFO accretion.
  • With $1.5 billion in liquidity, limited variable-rate debt and no funding needs over the next 12 months, Essex maintains a strong balance sheet to pursue opportunistic investments.
AI Generated. May Contain Errors.
Earnings Conference Call
Essex Property Trust Q1 2023
00:00 / 00:00

There are 16 speakers on the call.

Operator

Day, and welcome to the Essex Property Trust First Quarter 2023 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 It is now my pleasure to introduce your host, Ms. Angela Kleinman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kliman. You may begin.

Speaker 1

Good morning. Thank you for joining Essex First Quarter Earnings Call. Barb Haak and Jessica Anderson will follow me with prepared remarks and Adam Barry is here for Q and A. We are pleased to report a solid Q1 that exceeded our initial expectations and that we are raising the midpoint of our FFO per share guidance for the full year. Barb and Jessica will provide more details on the quarter, while my comments will focus on our economic outlook, the opportunities within our platform And some perspectives on the apartment transaction market.

Speaker 1

Beginning with our outlook for the remainder of the year, we continue to anticipate modest economic growth in 2023 resulting from a more restrictive monetary policy, tempering job growth nationally. Our assumptions are detailed on Page 17 of our supplemental package. As we all know, the West Coast is home to some of the largest Companies to announce layoffs over the past 6 months. Even so, the West Coast Economies have proven resilient, Producing a solid job growth of 2.7% on a trailing 3 month basis through March. We believe there are 2 key factors Contributing to the durability of the underlying West Coast fundamentals.

Speaker 1

First, many of the layoff workers have quickly found new jobs. And second, the vast majority of the layoffs affected people who do not reside on the West Coast. For example, we continue to monitor warrant notices and of the largest companies to announce layoffs, Only 16% of the reductions have occurred in our markets. With the exception of a few specific submarkets, The overall labor market and demand for housing in the West Coast had a healthy start to the year. On the supply side, the outlook remains favorable with only about 60 basis points of total housing stock forecasted to deliver in 2023, The supply risk in our markets remain low.

Speaker 1

We expect that continued housing production challenges such as diminished labor force and high construction costs Should lead to relatively light apartment deliveries for the next several years in our markets. Thus, we do not need meaningful job growth to generate modest rent growth in 2023. Since none of us have control of the Fed or the economy, our team will remain focused on what we can control, which is the continued enhancement of our operating platform. We have been thoughtfully transforming our operating model for several years, which has resulted in one of the most efficient operating platforms in the industry. Relative to our peers, Essex has the highest controllable operating margins and one of the lowest average controllable expense per unit.

Speaker 1

While the rollout of our property Collution's model has contributed to this efficiency. We are only midway through implementation. Our next phase of expanding this Operating model to the maintenance function will maximize the workflow of our associates, including reducing task time and vendor costs. These advancements will enable incremental revenue growth to flow more efficiently to the bottom line, ultimately generating additional FFO per share and dividend growth throughout all economic cycles. Lastly, turning to investment activities.

Speaker 1

We're still seeing Institutional quality transactions occur from the mid to high 4% market cap rate with a deeper buyer pool towards the high end of this range. Keep in mind that the transaction market is still digesting higher interest rates as evidenced by a significant reduction volume of approximately 70% nationally and 60% in the West Coast in the Q1 compared to last year. In addition to the anemic volume, our cost of capital remains unattractive from an acquisitions perspective. Keep in mind that Essex has a long track record of creating value for our shareholders by arbitraging discrepancies The stock price and the underlying asset value. Once again, we demonstrated this strategy in the Q1, locking in significant FFO and NAV per share accretion for shareholders, which is the primary driver of raising our FFO guidance mentioned earlier.

Speaker 1

We continue to actively evaluate potential deals and are ready to act swiftly and thoughtfully when opportunities emerge. With that, I'll turn the call over to Barb Heck. Thanks, Angela.

Speaker 2

I'll begin with a few comments on our Q1 results and full year guidance, followed by an update on investment activity and the balance sheet. I'm pleased to report our Q1 core FFO per share grew 8.3% on a year over year basis, exceeding the midpoint of our guidance range by $0.08 The better than expected results are largely attributable Two factors that drove an outperformance in same property revenue growth. 1st, occupancy trended higher than we expected for the quarter And second, net delinquencies were better than forecasted as we received $1,300,000 in emergency rental assistance. As you may recall, we did not assume any rental assistance funds in our 2023 forecast. Overall, gross delinquency was 2.5 percent of schedule rents for the quarter, in line with our expectations.

Speaker 2

Given the favorable first quarter results, We are currently running 30 basis points ahead of our full year midpoint for same property revenue growth. However, Given the macroeconomic uncertainty and the timing of recapturing delinquent units, which remains uncertain, we are holding off on changing our same property guidance range until we get further into the peak leasing season. As for core FFO, we are raising our full year midpoint by $0.03 per share, primarily related to accretion from stock repurchases completed in the Q1 and higher other income. Turning to our stock repurchases and investments. During the quarter, we sold a 61 year old student housing community located in a non core market.

Speaker 2

The proceeds were used to buy back the stock on a leverage neutral basis in order to arbitrage a significant disconnect between public and private market pricing. This is another example of how Essex seeks to create value in all environments, while at the same time improving our portfolio. As it relates to our preferred equity book, we had little activity to report this quarter. However, for the full year, we still about $100,000,000 of early redemption. Our sponsors are able to take advantage of the available financing via Fannie Mae and HUD to redeem it thoroughly.

Speaker 2

We believe the additional sources of financing is one of the many benefits to being in the multifamily sector, which has over time helped keep cap rates low. Overall, we remain comfortable with our preferred equity portfolio, especially given how diversified it is both geographically on the West And in terms of the average deal size. Finally, on to the balance sheet. We plan to pay off our upcoming 2023 unsecured bonds that mature May 1 with the proceeds from the $300,000,000 delayed draw term loan, which closed last year. As such, we have no funding needs over the next 12 months.

Speaker 2

With $1,500,000,000 in liquidity, limited variable rate debt exposure And access to a variety of capital sources, our balance sheet remains in a strong position. I will now turn the call to Jessica Anderson.

Speaker 3

Thanks Barb. I'll begin my comments today by providing color on our recent operating results and strategy followed by regional commentary. I was pleased with our operating results from the Q1, including a same property revenue increase of 7.6% year over year. As Barb mentioned, one core factor driving these results was the successful execution of our occupancy strategy that resulted in a solid 96 In anticipation of elevated turnover from evictions. During the Q1, we made progress recapturing units from nonpaying tenants And we experienced the highest volume of eviction related move outs to date.

Speaker 3

The number of long term delinquent residents has declined by 65 from our peak over a year ago, excluding Los Angeles and Alameda County. Additionally, a notable milestone in the first quarter was the ending of the eviction moratoriums in the City and County of Los Angeles, where approximately half of our delinquency resides. Given backlogged eviction courts, it will take many months to recapture these units, but steady progress throughout 2023 is expected. I am very proud of the team and appreciate the tremendous amount of work that has gone into recapturing, turning and releasing units. Thank you, team.

Speaker 3

Great job. Throughout the Q1, we saw positive demand indicators for the portfolio. Lead volume, which reflects the number of Additionally, concession usage has declined from approximately 2 weeks free in the 4th quarter to a half a week free in the first quarter. We are experiencing a relatively normal ramp up to the peak leasing season. Net effective blended rates accelerated through Q1 averaging 2.9% for the quarter and ended with March at 3.8%, although they moderated in April.

Speaker 3

This was due to a temporary increase in leasing incentives to offset a period of heavy eviction volume. While April averaged 96 0.4% occupied, we are at 96.9% today and well positioned to absorb additional turnover while still increasing rents as demand allows. Moving on to regional specific commentary. In the Pacific Northwest, our most seasonal market, blended net effective rents were up 30 basis points in the first quarter compared to 1 year ago. The elevated supply in the downtown submarket is weighing on our regional performance.

Speaker 3

The supply outlook for Seattle is comparable to 2022 and similarly a more challenging second half of the year is expected. In Northern California, blended net effective rents improved to 2.6% in the Q1 year over year. We're seeing strength in the San Jose submarket offset by supply driven weakness in Oakland. The supply outlook for Northern California remains relatively muted, which will benefit our ability to push rents, presuming job growth continues to outpace the recently announced layoff. Finally, in Southern California, blended net effective rents were up 5% in the Q1 as demand remained solid.

Speaker 3

All regions have fared well to start the year, including Los Angeles. As I mentioned earlier, we're expecting elevated turnover in this region driven by eviction. In general, our supply outlook in Southern California is very manageable and outside of pockets of supply in submarkets As a reminder, 2023 has started off slightly better than expected. Demand for apartments has been solid. We continue to make progress with evictions and our occupancy focused strategy positions us well.

Speaker 3

We are cautiously optimistic as we head into the peak leasing season, but also acknowledge the macroeconomic uncertainty that could influence apartment demand through the balance this year. 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. Our first question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.

Speaker 4

Great, thanks. Appreciate some of the commentary on the markets and the tech job exposure. I guess, If you were to quantify some of the impact to markets, whether it's parts of Oakland, Downtown Seattle, Any other more difficult markets right now within the portfolio? How would you come up with that as a percentage of the total company?

Speaker 1

Yes. Hey, Nick, it's Angela here. Good question. On the on our portfolio composition, big picture, we have about 20% of exposure in Seattle and 40% in Northern California and 40% in Southern California. And so when we look at the overall portfolio composition, We're actually pretty comfortable at where everything is sitting and our results have delivered, especially in Q1, the way we had anticipated.

Speaker 1

Now there are pockets of softness. For example, I think you heard about Downtown Seattle and certain pockets in Downtown LA. And so, Downtown L. A. For example, is about 2% of our portfolio.

Speaker 1

And so in aggregate, it's not so meaningful that gives us pause. And as you can see by our Q1 results, that it's we're generally trending well here.

Speaker 4

Great. That's helpful. And then just a second question is, I know you talked a little bit about the tracking ahead of Same store revenue growth guidance right now. I guess, in terms of what some of the you could talk a little bit more about some of the offsets that could Prevent the guidance raise in the second quarter. I don't know if it's the delinquent units coming back to market and how they get leased.

Speaker 4

And then separately on the economic forecast, it sounds like the job losses are Playing out better than expected year to date and many cases large tech has already come out with their announcement. Maybe talk a little bit more about the decision to not change some of the economic forecast as well. Thanks.

Speaker 1

Yes. It's Angela here again. Good question. And it's something we debated because you as you know, in Q1, jobs Did track better than what we expected. Having said that, I do think that visibility this year is just more limited And past years because it's because of Fed's position, right?

Speaker 1

And the next Fed meeting isn't until May 1. And so we are anticipating a mild recession and that is a factor and that's nationwide, of course, it's not Essex. And you're right. With the tech layoffs, especially looking at the war notices, we have we saw that peak in January And appears to be trending down, but it's just too early to really have clear visibility on where the economy is headed. And Barb will talk about guidance.

Speaker 2

Hi, Nick. Yes, I would say on the guidance piece, delinquency obviously It's something that's still a little bit uncertain to predict in terms of getting units back. As Jessica mentioned, LA Alameda Just are coming out of their eviction moratorias. And so, the timing on when we're going to get those units back is uncertain. And so that's a factor.

Speaker 2

And we also want to get a little further into the peak leasing season given the uncertainty that Angela just mentioned, and then we'll do a full re forecast for the Q2. But The Q1 was very strong for us and we feel pretty good going into the Q2.

Operator

Our next question comes from the line of Eric Wolf with Citi. Please proceed with your question.

Speaker 5

Thanks. I guess with respect to the stock repurchases, is there an internal limit sort of in the short term or Long term or just as long as you're able to sell assets and then buy back your stock at a reasonable discount, you'll just keep going.

Speaker 2

Hi, this is Barb. We're going to match fund asset sales with And so we're going to be cognizant of it. We're going to be mindful of the balance sheet, liquidity and maintain our strong balance sheet structure. And so if not, We're just going to do it to do it. We want to make sure that we're thoughtful about doing it.

Speaker 2

And what we did in the Q1 is we sold an asset that's non core. It actually doesn't fit with our new operating model. We got a very attractive price for it and then we're able to take it and redeploy it and Buy back the stock and create a lot of value that way. So we're going to be very thoughtful going forward.

Speaker 5

Right, right. And I guess What I was trying to understand is just if you're able to sell $200,000,000 or able to sell $300,000,000 successfully, you'd be willing to repurchase $300,000,000 or is there just sort of a certain point where from a G and A perspective and sticking other sort of considerations into account, it's just Not as efficient for you to keep selling assets and buy back stock. And then I guess to sort of add on to that question, for your internal NAV, are you using The cap rates that you see transacting your markets, or sort of making adjustments about for where it should be based on debt costs? Because I think The fear is that it's a pretty thin transaction market right now, so the cap rates we're seeing may not be sort of reflective of where things could transact if they had to.

Speaker 2

Yes, our NAV is based off of Adam and I sit down and we talk about where transactions are happening and Where we think we can sell our assets today and based off of what is happening and negotiations that are going on behind the scenes. And so we feel like we have a good pulse The market we have sold assets over the last several years and proven out the value for the portfolio. And so That is the process on the NAV side and we're very comfortable transacting and selling and then buying back the stock.

Speaker 5

Okay. Thank you.

Operator

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

Speaker 6

Thanks. Good morning. I guess maybe for Jessica, I was hoping you could speak a little bit to The blended rates that you talked about, I think in April, you said maybe there were some impact from the eviction. So I'm just hoping to If you could quantify that, because I think amongst all your peers, you might be the only one that showed a decline in April. So just trying to get a sense of the magnitude of that and Maybe what your expectations are for May June?

Speaker 3

Hi, Steve. Yes, the overall those numbers those Blended numbers that we're looking at, those are net effective trade out numbers. And so I think it's important to point out, As I mentioned in my prepared remarks that through March, so they grew sequentially throughout the quarter. So April really reflected a point in time pricing strategy, rather than underlying market fundamentals. And we've With the evictions, we're working through quite a few and they do come to us in a steady stream, but we do anticipate that there might be Some concentrations from time to time.

Speaker 3

And so that's what's really driven our occupancy focused strategy. And you really saw that play out with our April Occupancy number, we had slowed it down, after seeing a concentration in March to 96.4%. But ultimately, When we think about as far as the markets and how they're progressing through the seasonal ramp up and the strength there, We really look at our market rents, which is essentially the our gross recently achieved leases. And since the beginning of the year, we have seen our market rates grow sequentially through April In all of our markets. And so those net effective trade outs and of course incorporate concessions and again really reflects a point in time.

Speaker 3

So we saw really great activity, in April, and we were roughly 1 week free As far as concessions go, and we've since pulled back to only a couple of days today on average. And breakdown by market, we're actually sitting at 97% in Seattle, 97% in Northern California And then 96.8 percent today. So ultimately, you're pulling back on the concessions. There might be a little bit of a spillover into May, And we expect the trade out rates to reaccelerate from here and then also market rents to continue to grow.

Speaker 6

Thanks. And then I guess maybe as a follow-up, just to get a little more color on Seattle. I mean, some of your peers had Maybe a bit more weakness and spoke to the weakness specifically in Downtown Seattle. I know that you have probably more Eastside exposure, but Just any thoughts around Seattle in particular? And does Amazon's kind of May 1 return to office policy Have any influence or have you seen any influence from that?

Speaker 6

Or do you think people were sort of already back in the Seattle market? Or do you think there's a wave of people to come back to the market

Speaker 3

I think, yes, overall for Seattle, I mean, we have a pretty conservative outlook for Seattle, this And as I mentioned, I think it will be more challenging in the back half as we experience more supply. And we've been experiencing that really for the last 6 months. But interestingly, yes, in April, we did see quite A bit of movement from a leasing velocity perspective. So I do feel like that May 1 return to mandatory return to office, 3 days a week for Amazon Potentially had an impact for us. And as far as strength goes, I mean, anytime you introduce leasing incentives or adjust your rates, How the market responds and the leasing velocity you're able to get is really telling.

Speaker 3

And so we weren't necessarily Targeting 97% in Seattle, so that really goes just to show that there is some underlying strength there. And so I think Amazon did play out. But again, we have a pretty conservative outlook and we're certainly seeing the impacts of demand with the diminishing of the hiring with Amazon and Microsoft Last year having July, August 30,000 open positions that essentially disappeared in a matter of a month or 2. And then, obviously, We have the supply factors. We have both things working against us.

Speaker 3

But encouraged and I think Seattle is on track with our expectations for the year.

Operator

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

Speaker 6

Great. Thank you. Sort of going back to the stock buyback conversation, I guess, and sort of the sources and uses or match Funding any future repurchases, are you guys currently marketing any additional non core assets today?

Speaker 7

Hey, Austin, this is Adam. Apologies. So at the moment, We are not actively marketing anything. We're always, opportunistically looking at potential for disposing of assets that That's how that came about. But currently, no, not marketing anything right now.

Operator

Got it. And then just going back to

Speaker 6

guidance a little bit, I mean, you mentioned a couple of components of driving the same store revenue outperformance in the Q1. First, Which is obviously a non recurring item in the ERAP payments. Have you received any additional ERAP payments in the second quarter? And then second, With the dip in April, I guess, how is April trending relative to plan? Is it Offsetting some of the benefit you had in 1Q or is April occupancy and rents also trending ahead of plan?

Speaker 6

Thank you.

Speaker 2

This is Barb. On the emergency rental assistance payments, in April, we had $100,000 in our same store portfolio, so Nothing material, and that is disclosed in our supplemental. And then in terms of factors In the April guidance, so one thing I would say is that, for delinquency, we did assume the first half of the year would be In the mid-two percent range, 2.5 percent and then the back half, we expect it to continue to trend down to close to 1.5% 2% for the full year. We're on plan with delinquency in April and then occupancy at 96.4 is generally in line with plan as well.

Speaker 8

Great. Thank you. I was hoping to shift gears to the expense side. Can you talk about just the key line items and There's been a lot of volatility for insurance for people and taxes. Just kind of what gives you conviction on your current Outlook for the different expense lines and where do you think maybe there might be some risk either the upside or downside on the growth rates?

Speaker 2

Yes, this is Barbara again. So on the expense side, I think the biggest variability we're seeing is really Maintenance and repairs because of, we have more turnover. We had some more flood damage this quarter. So that We've already done our insurance renewal for the year, so that line is pretty big. We don't expect any surprises from here on out.

Speaker 2

It is up 20%, but that's going to be the number for the year. And then on the tax side, we do have the benefit of Prop 13 and so Which is 80% of our tax base. And so that is pretty well known. We'll know Seattle taxes here in the second quarter And then really have that drilled in. And so for us, the variability on our expenses is mostly just tied to R and M.

Speaker 2

And then utilities, the one thing on utilities is it can be variable. We did We've put in place some gas hedges, which has helped us on the utility expense side. And so it's Cut it to a more moderate level, all else being equal.

Speaker 8

Okay. Thanks, Barb. And then, Orange County seems to have come through this quarter pretty well across most portfolios, including yours. Can you just talk more about what's going on in that submarket specifically?

Speaker 3

Yes. As far as Orange County goes, it has performed well for the last couple of years. We were seeing good trade Numbers, good leasing velocity, it's really stable as far as the supply outlook. There's nothing noteworthy there as well. So Overall, Orange County is pretty stable as a lot of our Southern California markets.

Speaker 3

San Diego is similar as well.

Operator

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

Speaker 7

Thank you. Barb, can you just elaborate a little bit more on the real estate taxes? You had the rare decline And taxes, and I think you mentioned last quarter you're budgeting a 4.25% increase. And given realty taxes are the largest components OpEx and insurance came in pretty much where you expected. Is there the likelihood of Your expense guidance going down during the year.

Speaker 2

Yes, John. So on the tax It really deals with the comp issue from the Q1 of last year. So in Seattle, if you recall, We did have a favorable surprise last year where our real estate taxes went down 4%. We didn't know that until the Q2. The Q1 of last year was our budget and what we assume taxes would be.

Speaker 2

And so it was way too high. And so we're comping off of a really easy comp and that's why you see the Negative 1.6 on the tax line. We, like I said a few minutes ago, we'll know where Seattle taxes come In the Q2 when we paid the bills and so that's still TBD. We're still assuming 4.25% overall for the tax line for this year.

Speaker 7

But anyway, my second question is on your mezz opportunities. It seems like with regional banks having issues, That could be a part of the capital stack where you could see more opportunities at higher yields. And I'm wondering if that's the case and how you would Stack that up versus time backs. Hi, John, this is Adam. So over the last couple of months, we've seen, I would say, a slight uptick And possible opportunities come in the mezz and pref world.

Speaker 7

As you said, some of the lending sources out there have either There are legacy development deals that have been out there a while. There are some new, actually existing deals that we're seeing as well. But again, this process Takes a long time and several months. And so we're assessing a number of new opportunities, but very too early to tell how many of them translate Actual deals, but we'll always we'll continue to look at potential options of when we have liquidity, whether that's through dispositions or redemptions, what the best use of that capital is.

Operator

Our next question comes from the line of Brad Hefford with RBC. Please proceed with your question.

Speaker 7

Yes. Hi, everybody. Thanks. So the big tech layoffs have already been touched on, but I'm wondering what effect, if any, do

Speaker 1

With the SVB failure that occurred recently, we did not see any impact to our portfolio. And so but looking forward, obviously, we don't know what can happen, but we do know that The parent has filed for bankruptcy, but a subsidiary, which is FCBB has the Fed stepped in and then it's been sold. And so we certainly don't expect further disruption from that. And just looking at some anecdotal information, Looking at the 30 plus companies in our real estate technology ventures, there is no impact there either. So as it relates to kind of that broad banking sector, it could it may play into more a Broad economy conversation and for those that's one of those reasons that we are forecasting a mild recession in our Current expectations.

Operator

Okay, got it. Thanks for that.

Speaker 7

And then maybe for Barb, another one on the guide. The increase of the guide was smaller than the beat versus the 1st quarter midpoint guide. I know you mentioned Most things are outperforming and then you had to repurchase it well as well, but it seems like there was some sort of offset for the rest of the year, second quarter, So can you talk about what that is?

Speaker 2

Yes. So the vast majority of the beat in the Q1 was really Tied to same store revenue growth and we didn't change our revenue outlook. And so that is not carried forward through in the guidance. So that was $0.07 of the $0.08 beat. The reason we changed our guidance was, the stock repurchase, which will carry forward, that's $0.03 And then we also have higher other income, mostly tied to better rates on our cash management platform and how we're managing our cash And our marketable securities and then partially offset by lower Co investment tied to preferred equity redemptions and the timing of those redemptions.

Speaker 2

So that's what was updated in the guidance. Same store will be revisited here in the second quarter.

Speaker 9

Okay. Thank you.

Operator

Our next question comes from the line of Adam Kraemer with Morgan Stanley. Please proceed with your question.

Speaker 10

Hey, guys. Thanks for the question. Just wanted to ask about, look, I know we touched on kind of tech and SVB. Maybe asking that same question a little bit differently, which is just on Severance packages, I know some of the early layoffs last year, maybe some even kind of later in the year, have longer severance packages, right? And so maybe you wouldn't kind of see Change resident behavior right away.

Speaker 10

Wondering if maybe some time has passed since then, I'm seeing kind of any difference In resident behavior, kind of given the severance packages that may be expiring now?

Speaker 1

Yes. It's Angela here. The severance packages Can range up to 3 months. Having said that, given bulk of the layoff announcements that occurred back in January, And tenants' behavior, they tend to make decisions, say, 45 days to 60 days in advance of a major event. We what our expectation is that we've seen that that plays through our portfolio.

Speaker 1

We've digested that already. And once again, I kind of want to point to the job growth numbers, as a good indicator. But the other good indicator is the initial unemployment claims in California and Washington and to date they still remain below the 15 year average. So that's another Good data point there.

Speaker 10

That's great. That's all super helpful. So Maybe a follow-up, I think you guys have done a really good job of kind of bringing us into your minds when it comes to kind of managing occupancy versus pushing I think both in this call and in prior calls, maybe just kind of on a go forward basis, walk us through kind of that trade off, right? I know you mentioned Inflation is now lower than they were earlier in April. Walk us through maybe just kind of how you're thinking about that trade off now given kind of The demand screen today, right, how are you thinking about kind of managing occupancy versus pushing rents?

Speaker 3

Hi, Adam. This is Jessica. Yes, so, we're progressing through the peak leasing season and of course, we're always going to be opportunistic with a focus on maximizing revenue. I think overall with our outlook for the year, I think we'll probably The bulk of the year focused on occupancy based on we know we're going to continue to have to work through evictions, but also rent growth is moderating. And when you think about, as far as rate growth, anytime you're turning an apartment, you're experiencing And just like we pulled back concessions at the end of April and leaving us well positioned for the peak growth period that typically occurs in Q2,

Operator

comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Speaker 11

Hey, good morning. Good morning out there. So two questions. First, just going back to Silicon Valley, let me ask the question this way. You guys mentioned that you anticipate the $100,000,000 of debt deferred equity being taken out this year and that The owners of those properties have capital options in Fannie and Freddie.

Speaker 11

So are you saying that What's going on in banking and where we see people lenders pulling back from real estate loans, that's having no impact On your debt and preferred equity portfolio or is it just this $100,000,000 that you're slated for being taken out is fine, but Broader speaking, there are bank fallouts to the debt and preferred equity business.

Speaker 2

Hi, Alex, it's Barb. What I was speaking to is that There is no capital available in the multifamily space. I know in other sectors, it has definitely pulled back. And I definitely think the banks have pulled back. But the government financing is still available.

Speaker 2

Life insurance companies are stepping in, and I think you're seeing Other lenders step in. And in our preferred book, keep in mind the deals that we're getting taken out of, And they were underwritten 2019, 2020, a long time ago when cap rates weren't And so we can get fully taken out. And so I think they're Good situation for us. And we haven't seen any real issues within our own portfolio. It doesn't mean that it's not happening elsewhere.

Speaker 2

But in terms of the

Speaker 11

The second question is going back to supply. It sounded like the only market that was an issue is Seattle, and I'm assuming that's Seattle Downtown, not the suburbs. But in general, as you look at your portfolio into next year and the year after, do you see Supply coming down everywhere like Northern Cal is clearly that's been a pullback. But do you see any area where there's going to be A deluge of supply that's going to deliver next year or as you look across your portfolio, whatever this sort of is the peak and Next year should be less supply across your markets.

Speaker 1

Hey, Alex, it's Angela here. It's a good question Trying to figure out looking ahead what's happening here. In terms of our portfolio, just big picture starting This year compared to last year, overall supply is slightly down, but the vast majority as you pointed out is Northern California is down over percent. And Southern California is up slightly about 14% and the bulk of it is in the downtown L. A.

Speaker 1

And then some of these other West LA, certain other markets. But overall, of course, that supply number is quite muted. As we look forward to 2024, what we're seeing preliminarily And so not a huge drop off, but similar level. But keep in mind, we're already operating at a pretty darn low level, Right. I mean, total supply as a percentage of total stock is only 60 basis points.

Speaker 1

And so we do foresee that to continue, especially given the environment of much more challenging Labor force available and higher construction costs. And lastly, rents in the northern region Haven't moved significantly past pre COVID. So Northern California is still slightly below pre COVID level. And so it didn't surprise us that Southern California has picked up slightly this year. And I think you kind of see that throughout the country where you have significant rent growth, that's where Supply will occur.

Speaker 1

So that's the big picture for overall this year and next year similar levels and it's going In our markets.

Speaker 11

Okay. So just to clarify, Seattle, it is just Downtown Seattle that's the issue, right?

Speaker 1

Seattle overall is slightly down, but Downtown is up.

Speaker 11

Okay. Thank you. Thank you.

Operator

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

Speaker 9

Hi, good morning. Going back to the share buybacks, do you have a number of assets or a dollar number in terms of non core that you would sell? And If you were to get offers on core assets at those 4 to high-four cap rates, would you opportunistically sell those to buyback stock accretively?

Speaker 7

So on the first hi, I think this is Adam. The first part of your question, do we have a list of non core Assets, the answer is yes. And we're constantly having discussions and going through those to see Where they could potentially sell and what we could do with the proceeds. As to the amount with which we can buy stock back, there are challenges Always with dispositions, there's always the different ramifications of tax gains, Prop 13, so all of those are taken into account when we assess what we can do with those proceeds. There's also Another tool in the shed is to use 1031 exchanges to exchange out of non core assets into markets that we think will overall Affect the portfolio in a positive way.

Speaker 9

Thanks. And maybe more broadly, it sounds like you're a bit more I'm optimistic on kind of the West Coast markets recovering this year despite the layoff activity. Does this make you does it just reinforce your view on the West Coast as the best Use of capital the best place to invest or would you still consider maybe diversifying into the East Coast or Sunbelt as we've talked before about in prior calls?

Speaker 1

Yes. Hi, it's Angela here. On the diversification question, we're Spanning outside of West Coast, it is something that we have been disciplined about evaluating. And so that just a basic discipline has not changed. We're going to continue to monitor those markets and look for opportunities.

Speaker 1

But back to your original point, I think you hit the nail on the head, especially as it relates to Northern California. A couple of things going for our markets, right? We have the lowest supply deliveries and especially in Northern California supply is down 22%. We're just starting to rebound in terms of job growth, getting jobs numbers getting back to pre COVID levels and market rents still below With gradual improvements, we're in the best affordability position from a rent to income Perspective in the Northern region below a long term average. And so that would point to all the best growth prospects.

Speaker 1

And on the just broad has been improving gradually as well. And so you put together all those pieces to point to that Where we want to deploy our dollar, where we see the most upside ahead of us, it's in the West Coast.

Speaker 9

All right. Thank you.

Operator

Our next question comes from the line of Wes Golladay with Robert W. Baird. Please proceed with your question.

Speaker 12

Hey, everyone. I just want to get your view on maybe starting developments with the hopes of delivering into a better part of the cycle?

Speaker 7

Hi, Wes. This is Adam. It's the development landscape today challenging for a number of reasons. Angela just pointed to a few of them. With a challenging labor market, construction costs have remained elevated.

Speaker 7

And so when solving for a call it 20% premium over where market cap rates are, It just basically will lead to a lower land price than land owners are willing to go. So Sure, we would love to be delivering into a lesser supply market, but right now, it's just the development deals just don't console.

Speaker 12

Got it. And can you remind us, don't you have a few covered land placed or did you get rid of those?

Speaker 7

We do, yes. And those are still generating Active revenue and with some we're pursuing entitlements in the meantime, so parallel processing and others have just longer term lease

Speaker 12

Okay. And then, could you talk about maybe the demand from people that are currently have a H-1B visa? Do you view it as maybe A potential positive with more people getting visas or with tech layoffs, maybe you might lose a few people?

Speaker 1

We actually see the international part to be A tailwind for us because it's just starting. And so I think it's no surprise that Historically, California has a net out migration if you only look at domestic numbers. In fact, 17 out of the last 20 years, it's net out migration domestically. And even during those periods, we had meaningful rent growth acceleration. So the international component is what drives migration to become positive for California And that virtually disappeared.

Speaker 1

I mean, it was 0 during COVID. And so that is just starting to come back. And so we are hopeful That will be additive to the demographics piece.

Operator

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

Speaker 13

Good afternoon. Thanks a lot for taking my question. My question is about migration. How is demand from customers How has demand been from customers currently living outside Essex's market? And how does that compare with normal?

Speaker 13

And then also the other side,

Speaker 1

Migration in from outside of Essex markets, we are generally just domestically speaking, of course. We're generally back to pre COVID levels. And so that's a good thing. And with Of course, with the international, we do see that's where the tailwind is. As far as the out migration piece, When we look at the migration numbers, we look at it on a net basis.

Speaker 1

And so we're continuing to see gradual improvements.

Speaker 13

Got it. And my follow-up, we've talked a lot about tech layoffs, but have you seen any

Speaker 1

Of course, the usual move out to purchase a home that's below the long term average, move out for jobs, New jobs or transfers or loss on that one bucket and in totality is Generally in line with historical norms. And so what I think is happening is what we're seeing, which is that The job losses are being quickly absorbed and benefited by that gradual in migration On a net basis.

Operator

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

Speaker 14

Sorry, I was on mute. Sorry about that. Could you give us any thoughts around the RealPage issue? Any changes you're making to your operating platform considering this dynamic? And then how are you thinking about the rolled up cost actions?

Speaker 1

Hey, Shaundi, it's Angela here. We actually have been reducing our Usage of RealPage as we develop our new revenue management system over the past several years. And so we started as well before the RealPage lawsuit for the reasons that Jessica mentioned earlier. So we believe that their claim is without Any merit and we're very confident about our defense prospects.

Speaker 14

Great. And as a follow-up, and sorry if I missed this, but what was gross delinquency in the Q1? I believe net was 2.1. And then as we sort of think about delinquencies improving faster than expected with L. A.

Speaker 14

Eviction moratorium Going away and the process becoming easier, could there be upside to that 2% growth delinquency number that you laid out earlier?

Speaker 2

Hi, Shandy, it's Barb. So in the Q1, gross delinquencies were 2.5% versus the reported number of 2.1%, so 40 basis point improvement tied to emergency rental assistance. And then for the outlook for the year, the 2%, we're still holding to it. I think LA and Alameda have just come off. It's really going to depend on how quickly the court on these evictions is taking 6 Plus months right now.

Speaker 2

And so, that really is going to depend how quickly either people go through the whole eviction process or whether they just skip. And that's a little unknown at this point. I think in the next few months, we'll have a better visibility on that.

Speaker 14

Great. Thank you for the detail.

Operator

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

Speaker 8

Thanks. Maybe just a follow-up question to that bad debt topic. Barb, just one question on the longer Term bad debt profile of your markets based off the current trajectory of gross delinquencies and just the payment behaviors that you're seeing among tenants. Do you think when the dust settles, bad debt actually settles out at a structurally higher level versus pre pandemic behavior? And if not, when's your best guess on when bad debt does get back to pre pandemic levels?

Speaker 2

Yes, John. It's a great question, something we talk about internally a lot. We historically have been at 35 basis points pre COVID. We believe we will ultimately get back there, because there won't be any loss to protect Tenants, like there was during COVID, which allow tenants to have this behavior. And so now that we're coming out of All of the moratoriums, I think the City of Oakland is the only one that really remains.

Speaker 2

We think we will get back there, but it's going to take until into 2024 To get there and it won't be for the full year of 2024, it's going to take into that year because of the eviction process and how long it's taking. But Structurally, we don't believe that there will be a fundamental shift in delinquency and our long term trends will go up, because of COVID.

Speaker 8

Okay. In your unregulated submarkets within the portfolio, has bad debt reverted fully back to pre COVID levels?

Speaker 2

I don't think we've gone back fully to pre COVID In our other markets, as Jessica said in the call or in our prepared comments that We've gotten over 60% of our long term delinquent residents out over the past Since the start of 2022, so we're making good progress, but we're not fully back to where we should be at this point.

Speaker 8

Okay. And then last question for me is more of a regional question, for Angela or Jessica. If you start the clock today, which region do you think will generate the highest and lowest revenue growth in the next 2 or 3 years, Seattle, Northern California or Southern California?

Speaker 1

Well, it's Angela here. I'll start and Jessica, welcome to add. In terms of the upside or the most revenue growth, we definitely see Northern California Being at the top of that list, followed by Seattle and then Southern California and both for With Northern California because of as I said earlier, the job growth is just getting back to pre COVID levels. Market rents are still below pre COVID, but it has been gradually improving. It has the lowest level of supply deliveries relative to our other Portfolio and the best affordability position.

Speaker 1

And so that for those reasons, it's ranked number 1. And Seattle for similar reasons, but it does have a higher supply. And then it's more volatile or more seasonal. And so which means so with Southern California coming in last, not because we Don't like it. It's just because it's just done so well.

Speaker 1

I mean, it's 15% in some cases 20%, 30% rent growth about pre COVID. And we're starting to see some supply pressure, which It's still in check relative to the rest the U. S, but relative to our markets, It's starting to creep up. And so that's the order of the ranking. Jessica?

Speaker 3

I have nothing to add.

Speaker 1

Agreed. Okay, good. I agree.

Operator

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

Speaker 8

Hey, it's Barry Lou on the line for Kendall St. Just. I just wanted to have a quick follow-up on the regulatory question. So I was wondering if you could provide any color on the 8.5 1,000,000 in legal settlement added back to your core FFO. Wondering if that's from one big settlement and if there's any piece of that, that will trickle into future quarters.

Speaker 9

Thank you.

Speaker 2

Yes, this is Barb. It was primarily related to a legal settlement for Construction defect at one of our properties and there's no carry forward on that. Just a one time item that occurred in the Q1. It was paid in cash,

Operator

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

Speaker 11

Yes. Thanks for the time, everyone. Just wanted to touch base on the new revenue management software you rolled out at the start of the year. Just curious to kind of hear your experiences as you're using that now and how it's trying to inverse your expectations and just Maybe just the capabilities versus your old software.

Speaker 3

Hi, this is Jessica. Yes, things are going very well. We're very pleased With the platform thus far and we have a long development pipeline for that Revenue Management System. So all is going well. I mean, a couple of benefits to point out, that we're looking at is it's In alignment, it allows us to price at a portfolio level with our property collections model versus the commercially available systems you're often pricing at The property level.

Speaker 3

And then second, we also see as far as long term development, the ability to optimize Our amenities, so when you look at like our average rent is $2,600 and a good $200 of that It's actually fixed amenity values. And again, with your commercially available system, that portion of the rent is not optimized. So if you look at that on an annual basis, what that is for us, it's over $100,000,000 that's not optimized. So that's one opportunity, we also see moving forward with the So there's a few value add opportunities, to give you a couple of examples.

Speaker 11

Okay. Thanks, Jessica. Maybe just One follow-up on that. What exactly do you mean by like price of the portfolio level and like what's the benefit So having it done that well?

Speaker 3

Well, when you're looking at we have a high geographic concentration. And so when Pricing properties individually, sometimes you can be kind of cannibalizing yourself, based on the occupancy position at a property. And so when you're looking at an entire portfolio collectively, 1 bedrooms, 2 bedrooms, ultimately you can maximize revenue through a more stable

Operator

Our next question Please proceed with your question.

Speaker 15

Hi. Thanks for taking my question. Just one on the job market. To the extent that Job growth has fully recovered to pre COVID, more notices are below average and that laid off people are finding jobs quickly again. Do you have a sense of what industries people are getting hired to?

Speaker 1

Yes. In our markets, well, in the Northern regions is of course more tech Centric, but in Southern California, it's more service driven. These are in hospitality. It's much more diversified mirrors That of the U. S.

Speaker 1

Broad economy with more professional services and of course higher income levels.

Speaker 15

Are the is the tech hiring from the ones that are also laying off or is it more diversified?

Speaker 1

It's more diversified.

Speaker 15

Got it. Thank you.

Operator

There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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