The operator welcomes listeners to the Essex Property Trust Fourth Quarter 2023 Earnings Conference Call and reminds them that the call is being recorded. The company's president and CEO, Angela Kleiman, will discuss the highlights of their 2023 performance, expectations for 2024, and their investment strategy. 2023 was a solid year for Essex, with a 4.4% same-property revenue growth and a reduction in delinquency rates. The company also exceeded their original guidance for core FFO per share.

In the fourth quarter, the company implemented an occupancy focused strategy and recovered delinquent units. This led to a temporary decrease in net effective new lease rates. However, renewal rates increased, resulting in positive blended rates. Leasing activities in the markets are steady, with an improvement in new lease rates and a decrease in concession usage. The company expects the US economy and job growth to normalize in 2024, with modest market rent growth on the West Coast. Factors such as inflation and the Fed's actions could potentially lead to a more positive outcome.

The economy is expected to gain momentum and hiring of skilled workers may increase due to lower cost of capital. Technology companies are implementing layoffs but are also redirecting resources towards artificial intelligence projects. Low housing supply and favorable affordability are expected to drive rent growth in the company's markets. Transaction volume in the investment market was low in 2023 due to market volatility, but interest rates have declined and the company does not anticipate a significant increase in deal volume in the near future.

The lenders have been accommodating to sponsors extending debt maturities and there are few sellers in the market. There is less certainty in the transaction market, creating an opportunity for Essex to generate value through external growth. The company's disciplined approach to capital allocation, strong balance sheet, and market expertise are expected to drive long-term value. The key assumptions for the 2024 guidance include below average rent growth, a gradual improvement in delinquency, and higher operating expenses due to insurance costs. Southern California is expected to have the highest revenue growth, while Seattle will be flat.

The company is forecasting a 30% increase in insurance costs, which will add 1.4% to their total same-property expenses. They are focused on managing controllable expenses and expect a 3% increase primarily due to higher wages. Same-property NOI growth is expected to be 60 basis points and core FFO per share growth to be flat, with over 1% higher growth if not for two items related to their preferred equity platform. The company has a strong balance sheet and minimal financing needs in the next 12 months, with over $1.6 billion in liquidity. They remain optimistic about investment opportunities.

During the question-and-answer session, an analyst asks about the company's assumptions for new and renewal lease rate growth compared to the 1.25% market rent growth assumed. The company's Chief Financial Officer, Barb Pak, responds that they are assuming 1.25% for both new and renewal leases, with renewals expected to be slightly above that at 1.75%. She also explains that renewal growth will be higher in the first half of the year and then decrease in the second half, and that the tight spread between new and renewal lease rates is due to a burn-off of concessions. The analyst also asks for a breakdown of the impact of occupancy change and concessions on market rent growth.

The company expects concessions and occupancy to have a minimal impact on their forecast this year. Delinquencies in January have increased, but this is a common trend after the holiday season. The company is monitoring the situation closely. The company takes a cautious approach when evaluating their pref book and is prepared for potential write-offs.

The speaker discusses the factors that are considered when looking at their preferred book, including the current market conditions, maturity of investments, and the actions of their sponsors. They have fully evaluated the current market conditions and are monitoring a few assets, but overall the book is performing as expected. In January, there was a 150 basis point improvement in new lease rate growth, with the largest driver being concession burn-off in Northern California. The speaker also mentions the potential for recycling capital from future preferred equity redemptions into acquisitions or other uses.

Angela Kleiman discusses the optimism surrounding the growing opportunity set in the market today. She explains that their preferred equity book was intended to complement their development pipeline during a period of low yields and interest rates. However, with the current market conditions, they see more upside potential in focusing on simple acquisitions. The company will continue to grow, but the preferred equity book may decrease as they shift their focus. This is due to the strong fundamentals in their markets, including low supply, improved affordability, and potential for demand growth.

The speaker discusses the potential for growth in the market based on the composition of companies and investment deployments in the area. They mention that seven out of the ten largest companies are located in the market and that there is potential for acceleration once the economy shifts to a growth economy. They also mention joint venture partners and the potential for opportunities in the next year or two. In response to a question about rent growth in Northern California, the speaker notes that they have seen signs of improvement in the market, but their forecast is still based on the overall market outlook and potential dampening effects from the amount of supply in the Oakland area.

The speaker discusses the 1.25% market rent composition, stating that Southern California leads the portfolio and Seattle is a close second, while Northern California is below the average due to Oakland. They also mention the concession burn-off and renewals, stating that it is currently 50/50 but will become less so in Q1. They have sent out renewals for February and March at a rate of 3-3.5%, and it will continue to progress that way unless there were heavy concession usage last year. The questioner compliments the updated S-17 and asks about the preferred equity book, wondering where their investments sit in the capital stack.

Barb Pak discusses how the company values its assets and how they underwrite them. They have a comprehensive model and consider various factors such as transaction activity, exit strategy, equity shortfalls, debt maturities, and interest reserves. They have stopped accrual on two assets in Northern California and are closely monitoring others, but overall, they feel good about the rest of the book. They have not had to take back an asset and have found solutions for any issues. In the fourth quarter, they put two assets on non-accrual, but they were not required to pay current.

The company has some debt refinancing's coming up and they are monitoring their other debts based on current market conditions. The market outlook for their portfolio is positive, with weak areas in Seattle and Oakland but strong areas in the Bay Area and Southern California. The only potential headwind is the timing of delinquency processing, which has been improving but remains a risk for the company.

Barb Pak of the company responds to a question from Jamie Feldman of Wells Fargo about the impact of insurance on the company. Pak explains that the property and earthquake insurance renewal in December has resulted in a 30% increase, and the company also utilizes a captive to minimize insurance premiums. The recent storms have not had a significant impact on the number, but the future impact is undetermined. The company has not experienced any major storm damage. Feldman asks about the company's captive exposure and Pak explains that it is difficult to quantify, but more and more REITs are utilizing captives.

The speaker, Angela Kleiman, discusses the difficulty in quantifying benchmarks for REITs looking at captives. She suggests finding a better way to provide context and Barb Pak adds that they have had a captive for decades with a substantial amount of money sitting on their balance sheet. Jamie Feldman asks if they have grown their exposure in recent years and Barb Pak explains that they have not taken on significant risk. The next question is from Adam Kramer who asks about the new versus renewal spread and what the historical spread has been between new and renewals. Angela Kleiman responds.

The relationship between renewal and new lease rates is driven by the prior year's new lease rate, and it is a lagging effect. There is no specific number that can be used as a benchmark for trending purposes. With the potential for more proceeds from pref equity, the company may consider exploring other markets outside of the West Coast, but they have a disciplined approach when evaluating markets and consider relative value.

The speaker explains that the market has a lot of potential for growth due to factors such as recovery, demand from large companies, and low supply. They also mention that they are sending out lease renewals at higher rates, but this will likely decrease in the second quarter. The same-store revenue range is affected by factors such as blends and occupancy assumptions.

The speaker discusses the factors that could impact the company's performance, including delinquency and market rent growth. They mention that the balance on the two non-accrual investments is $25 million each and that $20 million of noncore G&A charges are related to political contributions. They also address the low rent growth and attribute it to markets with heavy supply and the dominance of service sector jobs in job growth.

In the paragraph, Barb Pak discusses the composition of job growth and the impact on their portfolio, as well as the supply of properties in California and Seattle. She also mentions their quarterly process of remarking the values in their preferred equity book and ensuring their dollar basis is safe. She is unable to provide a rough average loan to value in their prep book, but states that they do a thorough scrub and feel comfortable with the book. Lastly, she is asked about their success in collecting past written off rent from tenants who have moved out.

Barb Pak and Angela Kleiman are discussing the company's ability to collect on past due rent and how it affects their monthly collections. They mention their conservative approach to accounting for bad debt and how it impacts their ability to hit credit scores and collect from delinquent tenants. They expect this to be a recurring part of their income, but it will only be a small portion. They also mention their market rent forecast for the year, which is lower than last year due to the economy. However, they have not seen an increase in move-outs due to job losses.

The speaker discusses the change in job mix over the past year, noting that high-quality jobs have not been added and that this trend is not expected to change in the current economic climate. They also mention an impairment in a preferred asset, clarifying that the investment is still held but has been impaired due to a projected lack of full valuation by the end of the loan's maturity. The speaker believes in the long-term potential of the asset and is actively working with the sponsor on a refinance. They are unable to determine the likelihood of putting more capital into the project or taking ownership of the asset at this time. Another caller asks for clarification on the impairment and the potential for further investment in the project.

Michael Goldsmith asks about demand trends and rent control in Essex's markets. Jessica Anderson responds that demand is increasing as expected and correlates with sequential rent growth. There have been no significant changes in the rent control environment, and the company is not concerned about it in an environment with low market rent growth. There is a proposition to repeal Costa-Hawkins, but it is not expected to have a major impact.

Barb Pak discusses the swing factor of getting back delinquent units and the potential impact on the rental market. She explains that while the delinquency rate may decrease, occupancy may also decrease and rent growth may be impacted. However, in the long-term, this is beneficial for the company.

The temporary headwind for Essex is that if they get units back during a low demand period, they will have to offer concessions to backfill them. This will have less impact on occupancy and rent growth if the units are returned during peak leasing season. Rich Anderson asks why there would be a negative impact if the units were not paying rent, and Angela Kleiman explains that the guidance assumes an improvement in delinquency, so they need to convert some zeros into a positive number to reach the midpoint. Rich also asks about any potential distressed situations in the rent-regulated areas, and Rylan Burns responds that they are not seeing any significant opportunities at this time.

The speaker is responding to a question about the $134 million in receivables and explains that they are pursuing every avenue to collect the money, but it depends on when the tenants need their credit. They are also asked about getting units back during a low demand period and the speaker explains that it is difficult to predict when they will get the units back, but normally they can pre-lease them before the tenant vacates.

The speaker discusses plans for a turnover and marketing efforts, as well as the challenges posed by evictions and uncertainty regarding tenant return. They also address the issue of delinquency and assure that there has not been an increase in fraud. The speaker then mentions the potential for future investment opportunities.

The speaker is discussing their company's approach to capital allocation between urban core and suburban assets in their core markets. They mention that they are paying attention to all potential investments and are open to acquiring assets near their existing ones. They primarily focus on their suburban footprint but will consider opportunities in their broader markets.

This summary was generated with AI and may contain some inaccuracies.