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spk07: Good day and welcome to the Essex Property Trust third quarter 2023 earnings conference call. As a reminder, today's conference call is being recorded. Statements made in 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. Further information about these risks can be found in the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman.
spk20: You may begin.
spk14: Good morning, and thank you for joining Essex Third Quarter Earnings Call. Barb Hack and Jessica Anderson will follow with prepared remarks, and Rylan Burns is here for Q&A. My comments today will focus on how we performed to date, our initial outlook for 2024, and a brief update on the investment markets. Overall, 2023 has unfolded generally in line with our expectations. We increased our same property revenue and NOI growth in the middle of the year, despite a challenging operating environment, with almost 2% of rent delinquents for the first nine months of the year. For context, this delinquency level is approximately five times our historical average. The unprecedented eviction protections enacted during COVID exacerbated by subsequent court delays has resulted in protracted exposure to non-paying tenants and uncertainty on timing of when we could recapture these units. That said, we made considerable progress reducing delinquency as a percentage of rent, which is now at 1.3% in October. This improvement has naturally resulted in a temporary tradeoff between rate growth and occupancy, but has proven to be an optimal strategy to maximize revenues as we make progress towards normalization in our markets. Looking ahead to 2024, we plan to publish a more comprehensive outlook for the West Coast in conjunction with our four-year guidance on our fourth quarter earnings call. For now, we have provided our initial 2024 supply outlook for our markets on S-17 of the supplemental, which forecasts total supply growth of only half a percent of total housing stock. Unlike many other U.S. markets, total housing supply in our markets is expected to remain at low levels, and we do not see a near-term catalyst for increasing housing supply growth in the Essex market. This supply landscape also minimizes our risk to job growth relative to other markets, especially if we encounter a softer demand environment and will be a tailwind for Essex when the economy accelerates. While muted supply is part of our thesis, we also see conditions that could drive demand for housing. First, after a year of retrenchment, layoff in the tech industry appears to be slowing and return to office is gaining momentum. with percent of remote job hiring at the largest tech companies now in the low single digits. Implying that once tech hiring resumes in a meaningful way, job growth will be highly concentrated near major employment centers. Second, it remains to be seen how the artificial intelligence industry will grow. We know that success in this industry will require immense scale and capital resources. And these types of companies are largely concentrated in the Bay Area and Seattle. Third, affordability, particularly in Northern California. Today, the Bay Area is as affordable as we've seen since we began tracking this data, and we expect this will provide a long runway for rent growth. In summary, the combination of this potential demand backdrop and a muted supply outlook gives us confidence that the West Coast was well positioned to outperform in the long run. Lastly, an update on the apartment investment markets. Deal activity slowed further in the third quarter as interest rates increased sharply in recent months, compressing prospective returns and resulting in many buyers remaining on the sidelines. We have seen several marketed deals not transact this year as sellers await a less volatile interest rate environment. There is little evidence to suggest transaction activity will pick up in the near term as bid-ask spread remains wide. We have navigated through many economic cycles, and our finance team has done an excellent job in fortifying the balance sheet, which positions Essex well for any environment. With that, I'll turn the call over to Barb.
spk17: Thanks, Angela. Today, I will discuss our third quarter results along with investments and the balance sheet. Starting with our third quarter performance, I'm pleased to report that core FFO per share for the quarter came in three cents ahead of our midpoint. The outperformance was driven by slightly higher revenues, other income, and lower G&A expenses, partially offset by higher operating expenses. Most of the beat in the third quarter is timing related. As such, we are reiterating the midpoints of our full year core FFO per share and same property revenue, expense, and NOI growth. As it relates to operating expenses, 2023 has been elevated compared to our historical run rate, given above average increases in repairs and maintenance costs and insurance. This was partially offset by real estate taxes, which increased by only 1% due to the favorable outcome we received in Seattle. As we look to 2024, we expect operating expenses will remain elevated primarily driven by non-controllable items such as insurance and utilities. In addition, the tax benefit we received in Washington this year is not expected to repeat in 2024. However, it should be noted that we have done a good job over the past four years improving the operating efficiency of the platform, which has led to modest increase in our controllable expenses. Since 2019, our controllable expenses have increased around 2.75% annually. despite elevated inflationary pressures and higher costs related to our delinquent units during this period. This favorable outcome is primarily driven by the rollout of phase one of our property collections model. As always, we are continuously looking for ways to improve efficiencies within the platform in order to optimize our cost structure. Turning to investments. For the year, we expect preferred equity redemptions to be around $70 million as we anticipate being fully repaid on a $40 million investment in the fourth quarter. As we look to 2024, we expect redemptions within our preferred equity book to be around $100 million. While we are actively looking for new deals to replace these investments, there could be a timing mismatch in terms of when we get repaid and when we can reinvest. We are finding there are still significant capital sources eager to invest in this portion of the capital stack, While at the same time, projects with reasonable return expectations are becoming harder to find. We will remain disciplined in this environment, leaning on our deep network on the West Coast to source deals at attractive risk-adjusted returns. Turning to capital markets and the balance sheet. In July, we closed $298 million in 10-year secured loans at a fixed rate of 5.08%. The proceeds will be used to repay our 2024 consolidated maturities. We were proactive in refinancing our debt early in today's volatile rate environment, locking in favorable financing ahead of the recent acceleration in treasury yields. As such, the company is well positioned with minimal financing needs over the next 18 months. We are pleased that our net debt to EBITDA ratio continues to trend lower and stands at 5.5 times today, as compared to 5.8 times one year ago. With over $1.6 billion in liquidity, the balance sheet remains a source of strength. I'll now turn the call over to Jessica Anderson.
spk16: Thanks, Barb. My comments today will cover our recent operating results and strategy, followed by an update on our delinquency progress and regional highlights. Operating results were solid for the quarter, including same property revenue growth of 3.2% on a year-over-year basis. We experienced a normal peak leasing season across all markets. Market rents peaked in August at 6% growth year-to-date compared to December 2022, and have subsequently moderated by 10 basis points in September, which is consistent with typical seasonality. While we took advantage of opportunities to push rents during peak season, we shifted back to an occupancy-focused strategy midway through the third quarter as we began to recapture a larger volume of units from non-paying tenants. This shift in strategy tempered our blended tradeout rates in Q3, which were similar to Q2 at 2.1%. Renewal growth rates were healthy at 3% in Q3 and 5.3% in October, boosting our blended tradeout rates while new lease growth was muted at 1.2% for Q3, reflecting new lease incentives to backfill recently vacated non-paying units. Eviction-related move-outs increased in September, allowing for improvement in delinquency as a percentage of rents to 1.9% in September and even further improvement in October to 1.3%. Several of our markets, such as Santa Clara, San Mateo, and San Diego, have returned to delinquency levels close to the long-term run rate. Los Angeles and Alameda counties remain elevated, but significant progress is also being made in these areas after protections expired earlier in the year. As Angela mentioned, the improvement in delinquency will result in a temporary tradeoff with new lease growth and occupancy, which can be seen in our preliminary October numbers. But we view this progress as a positive for the company. Consistent with our approach all year, we remain nimble and will shift our strategy as necessary to maximize revenue in any operating environment. Finally, I want to thank the Essex team for their diligent efforts this past quarter. They've been a major driver of the improvement we've achieved. Moving on to regional specific commentary. Beginning with Seattle, this market has performed as expected this year. Lended net effective rent growth averaged 0.5% for the quarter, improving 70 basis points from Q2. Despite nominal trade-out growth, demand fundamentals were solid in Q3, and I am pleased with the recovery of this market after a slow start to the year. Market rents in this region were the first to peak in July, on par with a typical year, and we anticipate a normal seasonal moderation, although higher levels of supply deliveries in the fourth quarter may have an impact on pricing. Turning to Northern California, Blended net effective rent growth averaged 1.4% for the quarter consistent with Q2. Market rents peaked in late August, later than normal, an indicator of solid fundamentals in this market. Santa Clara was our top performing market for the quarter as outlined on page S9 of the supplemental. The ongoing return to office along with corporate housing activity contributed to these positive quarterly results. San Francisco and Oakland CBD, which account for a small portion of our NLI, have lagged the regional average. Oakland continues to be impacted by supply, which is expected to continue into 2024. Lastly, Southern California continues to be our top performing region, led by San Diego. Market rents in Southern California were last to peak in mid-September, and blended net effective rates remain resilient at 3.7%, despite the headwinds in Los Angeles, our market most impacted by delinquency. In October, delinquency in Los Angeles was at 4.6%, reflecting a 2.1% improvement since the start of the year. We anticipate making continued progress on delinquency in Los Angeles, and as such, we expect rents and occupancy in this area to be more volatile in the near term. In summary, we are encouraged by the improvement we are seeing on the delinquency front and expect continued progress heading into next year. As we conclude the balance of the year, we remain focused on preserving occupancy and positioning the portfolio favorably heading into 2024. I will now turn the call back to the operator for questions.
spk07: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. We ask that you please limit to one question and one follow-up. You may also press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Austin Worshmut with KeyBank. Please proceed with your question.
spk06: Great. Thank you. Jessica, you highlighted that you'd shifted your strategy from pushing new lease rate growth to growing occupancy, due in part to the elevated move outs of nonpaying tenants. But from what I recall, the guidance assumed both an improvement in cash delinquency and reacceleration in new lease rate growth toward that high 2% range in the back half of the year. So I guess I'm just curious if anything else changed from a demand perspective that also contributed to that shift in sort of operating strategy.
spk16: Well, just to emphasize, we are on track for the year. And as mentioned in my prepared remarks, there is essentially a trade-out. We did expect delinquency to stay elevated above the 1.3% that we reported for October. So that is lower than we had planned, although we had experienced the trade-out with occupancy and our new lease trade-out rate. So as far as demand goes, All the markets are performing as expected as we move into the seasonal slow period, and we're encouraged by recapturing the nonpaying units because it will position us well as we head into 2024.
spk06: Got it. That's helpful. And then can you just remind me, I know you guys report financial occupancy, but does that capture cash delinquency, or is that figure more a reflection of gross potential rent? Thank you. Thanks.
spk16: Financial occupancy does not include delinquency.
spk20: Understood. Appreciate it. Our next question comes from Eric Wolf with Citi.
spk07: Please proceed with your question.
spk18: Hey, thanks. Just curious what you think drove the decline in delinquencies in October, sort of specifically versus, say, two months ago or even a couple months ago when some of your peers started seeing it. And do you think that the improvement is sustainable going forward?
spk16: Hi, Eric. This is Jessica. Well, we're definitely encouraged by the improvement that we've seen in October, and there's several factors that are contributing to that. The first is for all of our areas outside of Los Angeles and Alameda, protections expired in July last year. And at the time, we were reporting that evictions were taking in the range of 10 to 12 months and some longer. And so now that we're a year plus into those areas, we are seeing a lot of those units have made their way through the system and in the move outs that we're experiencing. As far as Los Angeles and Alameda go, those protections expired earlier in the year. And those tenants are realizing that there are no more protections. There is no more emergency rental assistance. So overall, the tenant sentiment has changed, and there's a greater sense of urgency. So we are seeing increased move-outs as tenants are realizing this. And as far as forward-looking, you know, one month certainly doesn't make a trend, and we've seen some choppiness in delinquency as we've worked through it the last couple of years. But we're certainly encouraged by our recent results, and we're going to be monitoring that closely, and we'll have more information on our fourth quarter earnings call.
spk18: All right, that's helpful. And I guess it leads to my second question, which is around the, you know, you're dropping through new lease rates to increase occupancy of the non-paying tenants. I guess how long would you sort of expect that process to take? And would you expect new lease rates to sort of go back up to that sort of 2.8% that you discussed on the last call? Or should renewals have to come down? Because I think you also talked about renewals tending to follow new lease. So just trying to understand, you know, how long new lease rates will you depress and if we should also expect renewals to come down to follow them.
spk16: All right, let me tackle that. I'll tackle new leases and then renewals. So as far as what we can expect for new lease rates through the quarter, I expect those to remain muted. We have come into a period of easier comps, but since we've increased incentives to backfill these units, that's going to mask some of that progress. And overall, we view that as a positive. I think it's neutral. over the short term with only a couple of months left in the year, but a positive, you know, as we look to 2024, because essentially we have people occupying units that are not paying rent. And so if that unit becomes vacant, it's now vacancy, but essentially that's a neutral trade-out. And we're offering concessions to refill, backfill these units as quickly as possible. And at that point, you have somebody occupying the unit that will be paying full market rent in the near term. So it sets us up favorably for 2024. And with regards to renewals, Renewals is where you're seeing our comps show up. Renewals are insulated from some of the choppiness of the day-to-day pricing strategy as we've increased incentives to backfill these units. But what you're seeing in October is essentially 50-50 gross rent growth and then also concession burn-off in that 5.3%. And I expect for the quarter, renewals will be pretty consistent. We've sent them out around 5%. And we'll monitor conditions closely. We may negotiate those a little bit, but expect those to be fairly consistent through Q4. Got it.
spk20: Thank you.
spk07: Our next question comes from Nick Ulico with Scotiabank. Please proceed with your question.
spk12: Hey, it's Daniel Turkerico with Nick. Thanks for taking the question. First question is on market rank growth thoughts for next year. With the 0.5% supply growth you gave in the sub, just curious what sort of demand environment would drive negative market rank growth next year, given that supply backdrop? Just looking to sensitize possible outcomes.
spk14: Yeah, that's a good question. It's Angela here. One of the reasons why we held off on publishing our macro outlook is because we listen to our investors' feedback to better understand the value of publishing that outlook, because that ultimately impacts our view on market rent growth. And we have decided not to change – I mean, to change our approach to – so we would provide the outlook early next year so it aligns better with the timing and the release of our guidance. And so, you know, so I wanted to give you that backdrop, but ultimately – the market fundamentals really are going to be impacted by a couple of factors. And we start with looking at the third-party macroeconomist forecast, which is still evolving. And we've not seen anyone with a robust outlook, but it is too early to predict. What we will say is that Essex is in a better position relative to other markets due to low supply that you mentioned earlier, which of course reduces the risk to rent growth and, of course, having some potential upside when it comes to future demand. And so, those are all the different moving pieces that we are evaluating at this time.
spk12: No, that's good. Thanks for that, Angela. And the next question would be on, you know, just your different regions. You know, SoCal has been your strongest, but curious if you could see that gap to Northern California and Seattle remaining or or maybe converging next year? And any thoughts on the puts and takes there? Thank you.
spk14: Well, I think, you know, Northern California is our steady eddy market. And it has a profile, employment profile that's similar to that of the U.S. but with higher level of professional services. So the demand remains constant. And Northern California, We do expect that recovery will come. Of course, the timing is the question, right? And so ultimately, it should outperform, if nothing, for the sake of it's still in the recovery mode. And so that's how we're thinking about the two regions.
spk02: Great. Thanks for the time.
spk07: Our next question comes from Steve Sagwa with Evercore. Please proceed with your question.
spk19: Yeah, thanks. First, Jessica, could you provide a kind of a loss to lease and an earn-in figure for the portfolio?
spk16: Sure. As far as loss to lease goes, at the end of September, we were looking at roughly 1.5%, which is consistent with periods pre-COVID, the three-year average pre-COVID. And as far as earning goes, typically in the past, we look at using roughly 50%, maybe a little bit more of that loss to lease number, which gets us to roughly 70 or 100 basis points. And then we'll look at whatever our market rent forecast is for the year and take 50% of that. And it's still early and we'll be evaluating that and providing more information on our fourth quarter. We do see some other building blocks as far as earn-in for next year with some other income initiatives as well that will contribute to revenue growth as well next year.
spk19: Great, thanks. And then maybe just on the investment side, I guess, I think Barb might have talked about some repayment of some of the preferred investments. I guess just what are you seeing in the marketplace today? from either developers or other investors who might be in trouble from a financing perspective.
spk01: Hi, Steve. Ryland here. We are still seeing a few opportunities. I would say, you know, just a little historical context. The majority of our deals up until last year were development-based. This year, it's been a mix, I would say, about 50-50 between development and stabilized recaps. And I anticipate next year we're going to see more opportunities for stabilized properties that are seeking recaps. We've seen several deals in the past couple of years with above 50% leverage and very low interest rates capped or swapped that will roll in the next few years at a very different interest rate environment. So with Limited NOI growth we've seen in several of our markets. We think there are going to be opportunities to put some capital to work.
spk19: Great. Thanks.
spk20: That's it for me.
spk07: Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your question.
spk00: Yeah. Hey, guys. Appreciate that your markets have lower supply than a lot of other markets out there across the country. We're just kind of curious on what you're seeing as far as demand goes in San Francisco and Seattle. And then, Mimi, what do we need to see to kind of see an acceleration of that demand in those markets?
spk14: Hey, it's Angela here. I think, you know, on the demand side for Northern California, we do want to acknowledge that it remains soft. But I do think that, you know, we got two things happening. One is from a year-over-year comp perspective. You know, September was still quite robust last year because that was before the tech sectors began their retrenchment. And at this point, what we're seeing is that that has stabilized. And so that's definitely a good indicator. As far as other indications, you know, we look at, of course, unemployment claims that remain stable and worn notices. It's back to pre-COVID levels. So that all points to that the market is functioning as it should. In terms of looking forward, you know, we do think that the technology sector, the hiring needs to return in a more robust way. It's, you know, this is what it looks like is that they're going through kind of the tail end of the retrenchment. And so we do see light at the end of the tunnel from that perspective. And of course, you know, having the remote or the remote job hiring, which is now, you know, in 8% versus it was 25% last year. And of course, 100% during COVID. that need to continue to decline, and which we expect that to happen. And then, of course, the last piece is really the international migration, which has been quite muted as a result of COVID and, of course, the various retrenchment. And so with those three elements, those are all potential upside for our markets.
spk00: Okay. Appreciate that, Keller. And then maybe just one quick one, and apologies if I missed this, but What does your guide assume for the rest of the year as far as new lease rate growth goes?
spk17: Hi, Josh. It's Barb. So there isn't a specific number that we need to achieve to hit the fourth quarter guidance. It's going to be a variety of factors. As Jessica mentioned, we got back a lot of units from nonpaying tenants. It has had an impact to our occupancy, but there's a tradeoff there. So there's a variety of factors that will play into the fourth quarter guidance, and there's not a specific rent growth number that we need to achieve because all the other factors play into it.
spk20: Okay.
spk07: Okay.
spk20: Thanks.
spk07: Our next question comes from Jamie Feldman with Wells Fargo. Please proceed with your question.
spk09: Great. Thank you. Can you talk about for the occupancy first initiative in the first half, do you think that sets you up for potential acceleration next year?
spk02: Hi, Jamie. This is Jessica.
spk16: Can you clarify your question? We're talking the first half of 2023? Correct. The occupancy acceleration?
spk09: Yeah, I'm just thinking about what the year-over-year comps could be in the next year. Where did you push harder in the first half of 23 that you may get the benefit? It might be harder to have the comps for the first half of 24, both on occupancy by market and also by rent.
spk16: Yes, I understand what you're saying. Year-to-date occupancy, I believe we're sitting about 96.5%, and right now we've floated down to 95.9%, but again, there's a trade-out, so it's revenue neutral over the short term. potentially positive as we head into 2024. So where we're heading right now with occupancy, it's hard to peg exactly where we'll end the year. As I mentioned, we remain focused on occupancy and back-selling units. It's a seasonally slow period. So it's uncertain how much progress we'll be able to make with occupancy over the short term. So with that said, as we head into the year, we certainly could be lower than last year, but stable is what my expectation is from an occupancy perspective. But there's other components that will add to a favorable revenue outcome as we see our delinquency come down. And as far as occupancy by area, I mean, generally speaking, we're seeing our stronger occupancies in Orange County, San Diego, Ventura. Seattle's performing quite well now and having quite a stable seasonal slowdown, particularly when compared to last year. is sitting around 96 percent Los Angeles is 95 for and I would expect that market to be particularly impacted with a lower occupancy but again an upside on the delinquency front in the Bay Area is also sitting sitting around 96 percent does that answer your question yeah that's helpful thank you and then I guess just switching gears
spk09: to the investment potential. I mean, you mentioned Oakland. I mean, some of these sub-markets that do have more supply, I mean, would you want to expand there if you saw better opportunities or better pricing?
spk01: Hey, Jamie, Ryland here. I'd say we are open to any good investment opportunity subject to the conditions that are presented to us. At a high level, as we've talked about, we are relatively bullish on the prospect for Northern California on the next several years. And I think Angela has reiterated several of her reasons for that case. Brad Heffernan, Oakland will be challenged for the next year or two, given the supply that's went out there, so it would have to be a pretty compelling investment opportunity, but it's we are open and eagerly looking for opportunities in all of our core markets.
spk20: Brad Heffernan, Okay, all right thanks for Alan.
spk07: Brad Heffernan, Our next question comes from Brad heffern with rbc please proceed with your question.
spk04: Hey, everybody. Can you talk about some of the return to office mandates you've been watching, like we saw with Meta in September? And has there been a noticeable impact in leasing activity on the ground from those?
spk14: Yeah. Hey, it's Angela here. The return to office mandate that we've seen so far, it's been a good sign that it's sticking. So what I mean by that is last year when the tech employers announced they had to make some adjustments. They had said, oh, three days, and then they moved back to two days, and they were still hiring remotely. This year, what we're seeing is that the remote hiring has stopped. And in fact, it's become policy. And of course, the return to office has been gaining momentum. It's difficult to point exactly to our financial lease rates because we're in the middle of working through the evictions and delinquency issue, and that's taking precedence. So there's a lot of noise in that. Certainly we expect that that's been a benefit, but to point to an exact number, it's not as straightforward as possible at this point.
spk04: Okay, understood. And then concessions have come up a few times on the call. I'm just curious if you could walk through the individual markets and just give the average concessions that you're offering right now.
spk16: This is Jessica. Yes, as far as concessions go, what we're offering across the portfolio is an average of one week free, and I anticipate that may go up. We'll monitor the non-paying units as they come in and adjust as needed to manage our new lease velocity. As far as by market, we have the largest volume of concessions concentrated in pockets. Southern California is is still generally just a few days outside of Los Angeles. And we're seeing larger concessions in Los Angeles, the Bay Area. And then Seattle, surprisingly, is only a few days at this point. As I mentioned a few minutes ago, it's been a very stable seasonal slowdown in that market.
spk20: Okay. Thank you.
spk07: Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question.
spk13: Hey, guys. Thanks for the time. Just a couple of questions on kind of a couple of different demand drivers you guys have touched on in the past. I think one would just be, you know, some of the kind of the in-migration to your markets, right? And, you know, that can be overseas tech workers. um visas other kind of immigration factors um which one's maybe kind of walk through that uh because there's a lot of focus on the outward migration so maybe just kind of thinking about the in migration to your markets um and then the other kind of demand driver question is is just on kind of the the end of the writer strike actor strike if that you know what potential impacts that that could have um on your business
spk14: Hey, Adam. It's Angela here. Good question on the in-migration. You know, the data on that front is not as readily available, but what we've been tracking is really the move-ins. And as I mentioned, you know, last year we saw a good uptick, and I think part of that relates to really a recovery. And since then, it's been steady. And so the in-migration data is into our markets from outside of California and Washington have generally remained steady. The piece that we're still missing actually is the international migration part of it. And I do think that that will return and just not as immediate at this point. And as far as the hospitality industry, it's very telling that when we look at the drivers of job growth in the third quarter, it's mainly education and health care and other services, hospitality and leisure was very muted. And we do think that that's partly attributed to the strike. And so we do think that that could be a potential demand catalyst as well.
spk20: Great. Thanks. I'll leave it there. Appreciate the time.
spk07: Our next question comes from Wes Galladay with Bayer. Please proceed with your question.
spk11: Hi, everyone. You mentioned getting, I think, repaid on $100 million extra in the structured finance. Do you have a timing estimate on that? Is there any chance you extend that? And then when looking at the entire structured finance book, is there any geographic concentration?
spk02: Hi, Wes. It's Barb.
spk17: You know, I think for now you could assume mid-year on the $100 million is probably a safe assumption. I think we have some in the first half of the year and some in the back half of the year, so mid-year assumption is good there. And then in terms of geographic concentration, our portfolio is actually – It mirrors our actual portfolio in terms of our investments. So about 40% in Northern California, 40% in Southern California, and 20% in Seattle is how the portfolio aligns in terms of where it's located geographically.
spk20: Great. That's all for me.
spk07: Our next question comes from John Kim with BMO Capital Markets. Please proceed with your question.
spk10: Thank you. On the 5.3% renewal rate growth achieved in October, can you break that down between how much of that was rate growth versus concession burn-off from a year ago?
spk16: Hi, John. It's Jessica. Yes, it's roughly 50-50. So we're seeing about 2.5 to 2.8 or so in rate growth, and then the rest is concession burn-off.
spk10: So when you compare the concessions that you mentioned earlier that you're offering versus a year ago, is it additive to renewal rate growth going forward?
spk16: Where we sit right now it is additive. So last year we were at roughly two weeks pretty consistently across Q4 and right now we're sitting at a week. Like I said earlier we may increase the volume of concessions in the amount but we'll monitor that but as of right now that's a positive.
spk10: Okay. Has there been an update on the gross delinquency outlook for the second half of this year? It was last at 1.9%. I think you're basically there, including October. Has that changed at all?
spk17: Hi, John. It's Barb. We didn't make any changes to our guidance for the full year. We believe we're on target for that. There may be puts and takes, and if delinquency does come in favorable, there may be a tradeoff with occupancy. And so, net-net, we're in line with our full-year guidance. Okay.
spk20: Thank you.
spk07: Our next question comes from John Polaski with Green Street. Please proceed with your question.
spk05: Good morning. Thanks for the time. Barb, I have a question about the potential deferred repair and maintenance and CapEx costs that might be in the portfolio today associated with delinquent tenants. Could you give us an order of magnitude of the total amount of dollars you think that needs to get spent over the coming years on these units? I'm just trying to get a sense of whether we're early innings and seeing the costs flow through from evictions, or you've already worked through most of it.
spk14: Hey, John, it's Angela here. Let me give you just a high-level answer to that because, frankly, what we're seeing is the turnover as it relates to delinquent tenants has not, the higher level of CapEx is not material relative to in the past when we have, you know, delinquent tenants. Some actually have just decided to leave. And so the turnover is just a natural turn. And there's going to be, you know, bad actors from time to time. But once again, it's at a comparable rate as pre-COVID. And so that's why, you know, there isn't a number that Barb can point to. Our CapEx at this point is really more driven by other activities like storm damage. And, you know, as far as eviction is concerned, it's a higher volume, but it's not greater damage because of eviction.
spk05: Okay. maybe shifting over to the private market, and I joined the call a few minutes late, so apologies if I missed this, but Rylan, I'm curious where you think market clearing cap rates are right now in the kind of urban cores of San Fran and San Jose. I imagine they're pretty close to redlined right now, so I'm just curious what type of pricing do you think buyers and sellers might agree on pricing in the kind of urban high-rise environment in San Fran and San Jose?
spk01: Hi, John. I appreciate the question. I hesitate to give you a specific number because, as you are well aware, when there's not any transactions, it's very difficult to pinpoint where buyers are. I also, you know, would take some pause with the idea of a red line, you know, a whole city. We are still seeing, or we've seen some transactions occur year to date. And, you know, the buyer profile is different than what we've typically seen. I think you're seeing some family office buyers who are coming and looking at the basis versus replacement costs that are still continuing to transact in some of these submarkets that you mentioned. So obviously a challenged market fundamentally over the past year or two, but as those turn, I suspect you're going to see people, investors come back in. And so I'll leave it at that without giving you a specific number, but hopefully that color is helpful.
spk05: Yeah, no, it definitely is. Maybe one follow-up. Just curious, I know you've been tilting more suburban in the last few years. What pricing becomes interesting to you to go back into these urban markets that have not really healed from COVID? What kind of range of cap rates would you be willing to be a buyer at?
spk01: Thanks, John. Another good question. As you know, we force-rank our 30-plus sub-markets and forecast the rent growth for five years forward-looking based on our fundamental analysis. the cap rates have to accommodate for a higher IRR based on those rent growth estimates. So there is a price at which we would be willing to invest in these submarkets. I will say given the performance we've seen over the past several years with the suburban strongly outperforming and where we're looking at supply for the next few years, I would think on average incremental dollars will go towards IRR. our portfolio investments that look similar to what our portfolio makes currently is demonstrating. But there is a price, and we're turning over every rock and looking for opportunities, and I'm optimistic we're going to see more in the next few years.
spk20: Okay. Thanks for the time.
spk07: Our next question comes from Connor Mitchell with Piper Sandler. Please proceed with your question.
spk03: Hey, thanks for the time. Just wanted to follow up on some of the in-migration discussion. Would you be able to kind of give a weighting or the amount of impact that you're expecting from international migration, maybe compared to historical figures, whether that's, you know, 10% of the growth compared to the current return to office we're looking for? Like, how much of an impact do you think that could have versus the other demand factors looking forward?
spk14: Yeah, hey Connor, it's Angela here. That's a good question. The one thing I can point you to is California historically has a negative net in migration, so 17 out of the last 20 years, even during years when we have significant growth. And so, but once you factor in international, net migration becomes positive. As far as the exact percentage, That's influenced by a lot of factors. You know, it's influenced by, of course, supply and the demand and where the macro economy generally is. And of course, it's influenced by the affordability ratio. So I don't think I could do you justice by making a straight line from migration number to an absolute percentage of increases.
spk03: Yeah, of course. And then just another question. You've talked about the secured financing a little bit. So after you issued the secured debt earlier this year, recently, just wondering if you could give an update on how the unsecured market is looking now versus the secured market and whether there's been any narrowing of the spreads. The unsecured market has improved a little bit since then. Thanks.
spk17: Yeah, this is Barb. So on the unsecured bond market, you know, for us today, we would probably be in the high 6% range to do a 10-year unsecured bond offering. And if we were to go do a secured loan, 10-year secured loan like we did, I think we're in the, you know, around a mid-6. So there has been a little bit of a narrowing from when we originally did our unsecured our secured loan back in July, but, you know, there hasn't been a lot of transactions on secure bond market as well. And so it's a little unknown at this time, but we feel good about where we executed and, you know, our capital needs for next year. We don't have a lot of capital needs next year.
spk20: Appreciate the color. Thank you.
spk07: Our next question comes from Handel St. Just with Mizuho. Please proceed with your question.
spk08: Hey, guys. A couple quick ones from me. First, Andrew, I guess I'm curious on your perspective on, there's an article in the New York Times the other day, and it called, California called SLAM San Francisco for egregious barriers to housing, I think was the header. So I'm curious if you have any thoughts on this, certainly the idea of low barrier to entry, low supply in California is the key part of the thesis there. So I'm curious if there's any updated perspective reviews on the barriers to building, if there's any changes that are being contemplated that could be real, and how that could impact the marketplace.
spk14: Thanks. Hey. Angela here. It's a good question. I think, you know, we've all seen the acute housing shortage in California. And despite Governor Newsom's efforts to enact you know, multiple legislations to spur housing production, it just has not moved the needle in a meaningful way. And, you know, you may recall that he campaigned on building 3.5 million homes by 2025. And as part of that, there were numerous legislation passed and even recently a few more passed. But that barrier continues because there's a cost barrier As part of legislation, they enacted requiring prevailing wages. There's environmental protections. And so it just is very challenging. And so I go back to that original goal of 3.5 million homes to be built by 2025. Currently, they're on track and have issued about 450,000 permits. So now units built, and we're two years away. So that gives you the magnitude of how we view supply and why we do believe that it will remain favorable. And when we look at the permit data, it still remains very low as well.
spk08: Got it. Thank you for that. And then one more. I believe earlier you mentioned that concessions in San Francisco broadly in your portfolio average one week. I was hoping you could bifurcate that a bit further, maybe San Francisco proper versus down in the peninsula. Thank you.
spk16: Hello, this is Jessica. I don't have that information in front of me. I mean, San Francisco is such a small market for us with just 1,000 units and a couple of large buildings. But like I said, as far as what we're currently offering, I would say roughly one week free with a little bit more. in pockets of the bay area like san jose oakland is supply impacted so we have higher concessions there seattle very minimal concessions all of southern california outside of los angeles minimal concessions thank you our final question is from linda sai with jeffries please proceed with your question
spk15: Hi, thanks for taking my question. Over the next 12 months, across which markets would you expect the highest rent growth, and how much faster might growth be in these markets versus your portfolio average?
spk14: Hi, it's Angela here. We do expect our northern region to outpace the southern region, and so particularly in Northern California and Seattle, and for different reasons. Northern California, much lower supply, and, of course, will have a benefit ultimately from the tech hiring when they come. And Seattle, it's been our strongest job growth market, but Seattle also has a higher level of supply, about two times of that of California as a percentage, so about 1% of stock versus half a percent. Having said that, both of these markets, particularly in northern region, are rebounding. And of course, Northern California, as I mentioned before, has a much better affordability metric. And so for those reasons, we do expect the northern region to outperform the southern region.
spk15: And then just one quick follow up on expenses. Given the commentary about higher utility insurance costs in 24 Do you see more markets where this is more pronounced versus others?
spk02: Yes, this is Barb.
spk17: Now, on the insurance front, it's just a broad, it's actually a national issue, not an Essex, Pacific, or West Coast issue. We're just seeing a lot of pressure on insurance costs, and we expect that to continue. It's been an issue in 23. We expected an issue in 24. And then on the utilities front, You know, we're up about 6% year to date, and we do expect that utility pressures will continue to be above inflationary levels near term, despite, you know, all of the ESG efforts we're putting into place. And so those two will cause expense growth to be elevated next year.
spk20: Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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