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Essex Property Trust Inc
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Good day, and welcome to the Essex Property Trust Fourth Quarter 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the Company at this time.A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the Company's filings with the SEC.
It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall, you may begin.
Good morning, and welcome to our fourth quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A. Today, I will touch briefly on our full year results, expectations for 2023 and why we believe that our West Coast rental markets are positioned to outperform over the next several years. I will conclude with comments on the transaction market and the upcoming CEO transition.
Overall, 2022 was a positive year for Essex as we generated full year core FFO per share growth of 16.2%, our highest year-over-year increase in a decade and 9.3% above pre-COVID levels. We attribute these strong results to relentless execution by the Essex team, improved efficiencies from the implementation of our property collections model and the strong recovery in our West Coast markets for the better part of the year.
Our positive results were achieved despite the challenges associated with COVID-19 regulations in our markets. Our near-term results will remain impacted by elevated delinquency, which we estimate will represent a $0.60 per share drag on FFO in 2023 compared to our pre-COVID levels of delinquency.
Notwithstanding the impact of delinquency in 2023, we believe we are entering the final phase of these challenges and that our COVID-related headwinds will be behind us in 2024. For 2023, we reaffirm our 2% market rent growth expectation across the Essex markets as shown on Page S-17 of the supplemental package, which is predicated on consensus assumptions for a slowdown in the U.S. economy driven by higher interest rates.
Macroeconomic visibility is limited by a variety of factors, which translates into a wider-than-normal range of potential outcomes this year. Recent economic data highlights continued resiliency in the labor market with solid reports for job growth and unemployment claims even with elevated layoff announcements.
In Essex markets, preliminary job growth for December was 3.8%, and the recent unemployment rate was only 3.2%, both outperforming national averages. Looking ahead, layoff announcements and lower job openings among large tech companies signal a softer employment outlook for 2023, which we incorporated into our forecast assumptions shown on Page S-17.
Our primary challenge since early 2020 relates to the massive layoffs that occurred as a direct result of the government's response to the pandemic, which eliminated nearly 3 million jobs in California alone and force people out of densely populated areas in search of work. It has taken over two years to recover those jobs lost during the pandemic, and I'm pleased to say that the Essex markets have now fully recovered those losses. It is notable that each of the eight major metros in the Essex portfolio have now recovered from 98.8% to 100.9% of the jobs lost in the early part of the pandemic, leading us to believe that most of the slack in the housing supply-demand relationship from the pandemic no longer exists. We believe that this is a major milestone which should lead us back to our pre-pandemic growth profile once the economy stabilizes.
As with past economic slowdowns, a frequent concern involves the tech companies that dominate Northern California and Seattle with nearly daily reminders of tech layoffs amplified in the newspapers. The tech sector is often volatile yet over longer periods, the industry has reliably generated top paying jobs and wealth creation that are at the foundation of a strong rental growth.
A core strength of the tech industries is their ability to evolve in a cyclical process of reinvention, where the groundwork for new rounds of innovation are laid while the prior cycle is slowing. I am confident that this is what is occurring today.
Going back to the 1980s, Big Tech was focused on IBM PCs and R&D efforts to improve semiconductor manufacturing, and that phase ended with the recession in the early 1990s. Growth of the Internet and e-commerce soon emerged and then later boomed and busted capping the dot-com era from which many believe tech would never recover. Instead, a wave of social and mobile products emerged 20 years ago, including Facebook, YouTube and the iPad and iPhone, setting up a much larger and more profitable era of growth. Then following the Great Recession, cloud computing and machine learning added to the next period of rapid growth, both for new start-ups and for sector leaders like Amazon, Google and Microsoft.
And now despite a very similar set of concerns, many of you will have followed the explosive recent adoption of new AI products such as ChatGPT and DALL·E.Consistent with the transformative technologies of the past, the innovators and investors in artificial intelligence are overwhelmingly concentrated in our markets including OpenAI in San Francisco and Google Brain in Mountain View.
And despite a broad BC slowdown last year, funding for AI increased 70% and is now poised to grow vastly more in 2023. In a recent search of the leaving 100 start-ups in artificial intelligence, we found that more are headquartered in the Bay Area than in the entire rest of the United States. Thus, it is a combination of entrepreneurial spirit, financial capital and technical talent down on the West Coast as well as housing supply constraints that drives our expectation for the West Coast to generate superior rent growth over the long term.
Turning to the apartment investment markets. We continue to see muted deal volume in our West Coast markets as buyers and sellers seek to compromise on their expectations for property values and yields. A relatively small number of apartment sales indicate that property values and cap rates have not changed materially since last quarter, and cap rates generally are in the mid- to high 4% range for high-quality suburban apartments. At this point, we've seen pockets of distress mostly focused on owners subject to variable rate debt and maturing short-term loans. It's possible that an extended period of elevated interest rates and slower rent growth could create new opportunities to generate FFO and NAV per share. We sold 1 property in the fourth quarter, and we are working on other potential sales.
In conclusion, assuming my math is correct, this is my 115th consecutive conference call on behalf of Essex, which will be my last given my pending retirement as CEO at the end of March. I am incredibly grateful for the opportunity to be part of the highly skilled, disciplined and focused leadership team for this great company. I'm taking a step back with full confidence in Angela's ability to lead the Company along with her determined and like-minded team. Thank you all.
Finally, I have enjoyed working with so many of you in the investment community, and I thank you for your trust and support over many years. I remain confident that many great years for the Company are on the horizon.
With that, I'll turn the call over to Angela Kleiman.
Thank you, Mike. The evolution of Essex under your 37-year leadership has been remarkable. I and the senior team are grateful for your mentorship and we'll continue to diligently serve this company as we move forward.
My comments today will start with brief operational highlights of our fourth quarter performance followed by our current operating strategy and updates on key operational initiatives. Essex had a productive 2022, which included optimizing the strong leasing momentum heading into our peak leasing season, addressing delinquency and recapturing units from non-paying tenants while transforming our operating business model. These accomplishments are the results of the exceptionally hardworking operations and support teams thoughtfully executing our business strategy amidst highly dynamic market conditions. Great job, team.
Moving on to the fourth quarter. We shifted to an occupancy-focused strategy in late September in anticipation of softening demand and elevated move-outs related to eviction activity. The confluence of these factors created a challenging operating environment in the final months of 2022. Our switch to favoring occupancy helped us moderate the seasonal weakness and the elevated turnover caused by higher evictions. Excluding L.A. and Alameda Counties, I am pleased to report that we have made significant progress recapturing approximately 50% of delinquent units compared to one year ago. In addition, as we start the new year, demand fundamentals have improved in line with our expectations. Our net effective new lease rates troughed at the end of November, and we have been able to reduce concessions while gradually increasing new lease rates from December to January on a sequential basis.
In the near term, we will maintain our occupancy-focused strategy as we continue to make progress on eviction-related turnover. Our portfolio sits at a healthy 96.4% financial occupancy today, and we are well positioned to increase rents if demand exceeds our expectations.
Turning to key operations initiatives. We continue to make progress with our property collections operating model. Phase 1 is now complete, which centralized administrative and leasing functions, which combine nearby properties into onecentrally managed business unit. The efficiency benefit can be seen in our financial results with administrative expense growth of only 0.7% last year. And for 2023, we anticipate only a 3% increase despite inflationary pressures.
Phase 2 expands the same operating principles to the maintenance function.We expect numerous benefits, including savings from reduction in third-party vendor contracts in unit churn efficiencies. The maintenance collections pilot is progressing well and is expected to conclude midyear. At that point, we will provide additional details on the rollout.
Lastly, on the technology front, we continue to make excellent progress, most recently with the launch of our proprietary revenue management software. We have been developing this capability over the past two years and are excited for a platform with an integrated pricing and operating strategy tailored for the nuances in our markets.
This concludes my remarks, and I will now turn the call over to Barb Pak.
Thanks, Angela. Today, I will focus on our 2023 guidance, followed by comments on investments and the balance sheet. Our 2023 guidance assumes same-property revenue growth of 4% at the midpoint on a cash basis. Overall, we expect healthy top line growth and stable occupancy to be partially offset by 70 basis points of higher delinquency. The reason we believe delinquency will be higher than 2022 is due to uncertainty around the timing of evictions in all of our markets. In addition, we do not expect to receive much in the way of Emergency Rental Assistance as compared to $34 million we received last year on a same-store basis.
As it relates to operating expenses, we are forecasting a 5% increase at the midpoint, which is above our historical run rate. There are a couple of reasons for the higher-than-expected increase. First, controllable expenses are forecasted to increase 4%, which is driven by wage inflation and elevated eviction-related costs, partially offset by savings we achieved via the rollout of our property collections model last year.
Second, we are experiencing elevated cost pressures within utilities and insurance. In total, we expect same-property NOI growth of [3.6%] at the midpoint. In terms of core FFO, our midpoint assumes 1.6% growth. The primary reasons for the modest increase include higher interest expense and delinquency and lower structured finance income, which are outlined on Page 6 of the earnings release.In total, these items equate to a $0.57 per share headwind, representing nearly a 4% reduction to growth on a year-over-year basis.
Turning to investments. Given the challenging investment environment and our elevated cost of capital, we have not provided specific estimates for new acquisitions as it is difficult to generate accretion today given the significant disconnect between public and private market pricing. Given this disconnect, the best way to create value today is through asset sales and share buybacks or via preferred equity investments all of which we completed in 2022. It should be noted that we have a long track record of finding ways to create NAV and FFO per share in all environments, and we will maintain that discipline going forward, while at the same time, match funding our investments on a leverage-neutral basis.
As it relates to the structured finance portfolio, during the quarter, we completed a comprehensive review of our investments performing a wide range of sensitivity analysis on a variety of key metrics. The analysis confirmed the portfolio is performing as expected with the exception of two investments, both located within the Oakland submarket. One of the investments was redeemed in the fourth quarter, resulting in a $2 million impairment. For the other investment, we took a conservative approach given the uncertainty around fundamentals in Oakland due to high apartment deliveries, which is leading to an elevated concessionary environment. As a result, we stopped accruing on this investment during the fourth quarter, resulting in a $0.06 reduction to our 2023 guidance.
Overall, we have a long successful track record of investing in structured finance investments. Over the past 12 years, we have invested approximately $690 million in structured finance investments that have been fully redeemed, achieving a 13% average annual return for our shareholders.
Lastly, on to the balance sheet. During the quarter, we saw a continued improvement in our credit metrics with net debt-to-EBITDA returning to pre-COVID levels at a healthy 5.6x, with no debt maturing on our consolidated balance sheet until 2024, limited development funding needs and ample liquidity, our balance sheet remains in a strong position.
I will now turn the call back to the operator for questions.
[Operator Instructions] Our first question comes from the line of Nick Joseph with Citi.
First of all, congratulations again, Mike and Angela. Mike, I appreciate the comments on kind of the tech cycle and future thoughts there. But what gives you the comfort that the benefit for any recovery or the eventual recovery, I guess, in tech will accrue mostly to the West Coast markets like we've seen in the past versus maybe some of the more newer tech markets or Sun Belt markets given population and job growth trends that we've seen there?
Well, thank you for the congratulations. I appreciate it. I think tech is just growing in terms of its share of the overall employment base. So we expect tech to grow throughout the United States and certainly wouldn't exclude the Sun Belt. But I think that as with the past, most of the cutting-edge technology and the people that are really driving innovation will be located as they have been in the past here on the West Coast. So that gives us a great deal of comfort. And I went through that relatively long description of my career here and what tech has done really because of that because we've seen it reinvent itself so many times over and over again. And I would have a hard time believing that, that is anywhere close to being at an end.
And -- and finally, I guess I would add that the prospects and the importance of AI to almost any -- every application from businesses to consumers, et cetera. is pretty extraordinary. So I think this is going to continue onward. And I think that we'll be right in the center of that innovation here on the West Coast.
Yes. AI innovation is pretty exciting. And then just on the structured finance program, I guess two questions. Just number one, for the asset in Oakland that you're not accruing income. Can you walk through how that potentially could play out going forward in terms of your role there? And then it sounds like you're in an analysis across everything and everything -- all the other are performing as expected. But are there any on the watch list or potentially maybe could become issues?
Hi, Nick.It's Barb. Yes, we did a comprehensive review. And on the rest of the portfolio, we don't have any other assets that are on the watch list. Keep in mind, we leaned-in heavily in 2020 and prior when cap rates were higher, NOI has grown significantly since we started this portfolio. And so none of the other properties screened high on the capital stack.
The one in Oakland is really a function of the high concessionary environment right now. Net effective rents are lower, NOI is lower than how we underwrote it. And so we're higher in the stack than what we'd like to be. So that's why we took a conservative approach to stop accruing. We have constant dialogue with the sponsor and they're very engaged in our participating rating checks as needed. And so we don't see any other fall out at this time from that asset.
Our next question comes from the line of Anthony Paolone with JPMorgan.
Thank you. And add my well wishes and congrats to you, Mike, as well. First question is I think last quarter and at NAREIT, you talked about a week of free rent, I think, in Seattle, in a couple of weeks in San Francisco. And just wondering where those numbers sit today? And whether or not you feel like you've seen the effect of all the layoffs that have really been announced since the fall?
It's Angela here. On the concessions, we have seen it essentially taper off throughout the portfolio since December, which is basically I've mentioned earlier that our portfolio trough late November and it significantly improved as an overall average in the fourth quarter, particularly in December. We were running about two weeks concessions. And right now, it's a portfolio average, we're running less than a week. So that gives you an indication of directionally how things have improved pretty quickly.
Okay. And then just one follow-up for Barb. You gave us the bad debt, like the per share drag and the 70 basis points on growth. But if I look at the fourth quarter, it was 1.1%, I think,is there a way to express it in those terms in terms of where your expectations are for 2023?
Yes, Tony. For 2023, we're expecting bad debt as a percent of schedule rent to be 2%. Now keep in mind, we don't expect any Emergency Rental Assistance in 2023 as compared to the $34 million we received on a same-store basis in 2022. And so that's why the net number is going to increase. We were at 1.3% in 2022, and it's going to 2%. Now the underlying gross delinquency is improving because we are able to evict. It's just taking longer than we had initially expected, but we are making progress on that front, as Angela mentioned in her script.
Our next question comes from the line of Wes Golladay with Robert W. Baird.
Good morning, everyone, and congrats again, Mike. I'm curious how the supply pressure changed throughout the year? And at what point did you start to push rate?
Wes, thank you for the congrats. I appreciate that. In terms of supply pressure, there are pots of supply in a few places. We noted Oakland earlier, I think there are multiple lease-ups in Oakland, which are really having the effect of pushing down price. Seattle has more supply deliveries this year and especially the fourth quarter because it's generally a seasonally weak period, and Seattle tends to be weaker than the California markets, primarily because demand goes to zero in the fourth quarter or close to zero, and Seattle has more supply of apartments.
But going forward, the supply picture looks like it's declining. And this is a result of obviously lack of rent growth for the last few years. So the ability to produce housing at an accretive level is pretty challenged, and we see that in our preferred equity book as well. And so I think it's going to be -- we're going to be in a period where there's relatively not a lot of supply. And if we get any demand, we'll be in good shape.
Got it. And then just curious, what happened to all these people that are evicted, if you have a new tenant coming in, say, in June, will you know if they were a nonpayer if they're a prior apartment? Or is just everyone going to swap non-paying tenants?
Well, on the tenants renting front, we have a pretty robust process there. Having said that, we, of course, will do credit checks and that will let us know if they are not -- or they have any prior debt that needs to be paid. And so that's our best indicator on that front.
Okay. So that would be a relatively timely event. I guess there's like the ties that are not paying -- it's already in the books for you as a delinquent tenant?
Right, right. And in fact, even for us, for tenants who have left, we have -- we immediately have updated the credit report as well on our end. And there is, of course, ongoing report on ongoing debt. So there are various resources that we can use and we have used.
Next question comes from the line of Austin Wurschmidt with KeyBanc.
I wanted to revisit the delinquency. I think last quarter, you referenced L.A. County was, I believe, 40% of the overall delinquency. What is that figure today? And then I'm curious on the $0.60 per share, what is the annualized run rate that you'll be running at or that you're assuming by the fourth quarter of 2023?
I'll just touch on the delinquency population.It’s Angela here. In the past, L.A. is about 40%, and it's ticked up to about 50% L.A. delinquency, and that doesn't surprise us given the eviction moratorium has not been lifted. We had expected L.A. to continue to accrue under the delinquency basis. However, the good news is that the new tenants coming in, we're not seeing those tenants [indiscernible] prior tenants.
And then Austin, this is Barb. On the $0.60 that Mike referred to, that is compared to our pre-COVID historical run rate for not only the revenue piece, but also the expense piece because we have elevated eviction and turnover costs associated with the delinquency. And so it's both pieces.
What we are expecting in the back half of the year is our delinquency.Our gross delinquency will be around 1.5% for the second half of the year, 2% for the full year. So we do expect to make progress, but given the timing on these evictions is very difficult to predict at this point. We don't expect to be to our normalized run rate by the end of the year.
That's fair. Just trying to understand what sort of the earnings power going into 2024 is, but we'll haveto revisit that later this year. Second question, you referenced your shift to favouring occupancy late last year. And you highlighted some month-over-month improvement from December to January. I guess what would it take for you guys to pivot towards going back to pushing rate? And would that mean that the 5.5% renewal rate growth that you are at in January could stabilize or even reaccelerate from here or would the benefit accret more towards new lease rates?
That's a good question. In terms of the occupancy strategy, and when we would shift, it's going to be a little bit different in each of the markets. So for example, we actually are seeing great strength in our Southern California portfolio. However, we are running a little bit higher occupancy in anticipation of the eviction and the opportunities to vacate non-paying units that's coming our way. So we're building that not because we're seeing a market softness issue, it's more of a strategic play to ensure that we are well positioned. And so for example, in places like Seattle, which is, as we noted, highly seasonal, when we see demand come back as it typically does during peak leasing season. We would expect that we should be able to switch back to favoring rent growth, especially now that we've been able to reduce our concessions in a meaningful way.
And is it safe to assume that Northern California has a similar setup as Seattle in terms of some seasonality, maybe and the opportunity being to be able to push a little bit harder as we come out of the seasonal low, if you will?
Yes, that makes sense. And the one caveat is, of course, the supply conversation that we talked earlier, right? So for example, places like Oakland that will continue to probably take a little bit longer, because of the supply. But in areas where we are not trying to manage through pockets of supply, there are some good opportunities there.
Our next question comes from the line of Steve Sakwa with Evercore.
Mike, offer my congratulations as well to you and to Angela on the transition. I guess the question, when you think about the cadence and timing of revenue growth, can you maybe just talk about how you think that progresses throughout the year and maybe what the first half looks like versus the second half? I realize there are some shifts in the delinquency numbers that Barb just spoke about. But when you kind of look at that sort of midpoint, say, 4% on a CAC basis, how heavy is that in the first half? And I guess, how light is that in the second half?
Yes, Steve, it's Barb. I would say the first half we expect to be higher than the second half. We're about 5% in the first half. The first quarter will probably be north of that, and then it will trend down throughout the year with 3% on average in the second half of the year. And that's really a function of the year-over-year comps because last year, while rents accelerated, it didn't fully hit our revenue growth line.And so, we expect to capture that this year. First half will be higher than the second half.
Okay. And you talked a lot about -- well, I guess, let me just say on occupancy for kind of the second question. But when you think about some of the potential soft points that Mike talked about in tech, I guess how are you thinking about maybe some of the potential occupancy loss in either Seattle or San Francisco or what have you baked in, I guess, specifically for the Bay Area and Seattle from an occupancy perspective?
So from an occupancy perspective, we're not running at a whole lot different than prior periods. The one caveat is really more focused on Southern California particularly L.A. because we're anticipating some vacancies there from eviction. So for example, we saw the similar headwind in Northern California in the fourth quarter, and we anticipated that. So we employ the same strategy. So it's really more focused on some of these unique situation as we come out of COVID related legislation really to position us for better growth.
And Mike, do you want to talk about employment?
Yes. Let me just add one more quick thing. Steve, a big question here is what is going to happen to the pace of employment. As I noted in the prepared remarks, job growth has been really strong. However, maybe some of the layoffs or the warm notices haven't actually showed up in job growth yet. So our expectation for the year -- just to remind everyone, on S-17 was for minus 2% -- 0.2% job growth for the U.S. And so, we're going to be watching job growth over the next several months. But it seems like we are running stronger than we expected, certainly with respect to January's job growth number. And if that continues, then you get to a point where maybe our U.S. job growth estimate on S-17 is too conservative. So we'll watch that closely.
Next question comes from the line of Alexander Goldfarb with Piper Sandler.
Good morning out there and just joining in. Mike, congratulations on your tenure,on your last earnings call; and Angela, best on taking the helm next quarter. So two questions. First, maybe just sticking with that job rebound, Mike, you had mentioned early on in COVID when everything in California was shut down, a lot of the service industries, those jobs literally had a fleet because they were closed down. They could work whereas a lot of tech people could work from home.
As you talked about that really strong job rebound in December in the benefit, California has recovered all of its jobs. How would you rate -- when we see these headlines of the layoffs versus it sounds like there is pretty good job growth. Is it more of the job growth coming from the service jobs and maybe that's what you're seeing more demand in your apartments? Or as you look at your resident mix profile, you're like, look, our resident mix profile today is really no different than it was back in 2019.
Yes, Alex. I think things are normalizing from the pandemic period. And -- but I would say, yes, we are recovering leisure, hospitality and other service jobs at a very high rate, and that continues onward. And -- but it appears to be normalizing. But also the tech job growth during the pandemic was incredibly strong. And we think that some of the more recent tech announcements are just sort of giving back a small portion of the job gains that occurred during the pandemic. So we don't even considered tech to be all that weak at this point in time. I think it's just transitioning from what it was and taking the next step or the next chapter of things.
So overall, we think jobs are on the right track. Again, our S-17 was based on the consensus estimates of all the big economists in the U.S. and it's possible, and it almost seems like whatever weakness we might have is be a pushback because we're stronger earlier, which would probably be a net benefit for this year if that continues. And so we'll be paying close attention to that.
And I want to maybe go into the -- two more things actually. One is the warn notices, and we had our data analytics team do an analysis of the major, the largest layoffs announced and what portion of them are in California and Washington versus the total. So this is Amazon, Google, Meta, Microsoft, Salesforce and Cisco. They globally have 1.6 million employees and the layoff rate is about 4% or 64,000 announced layoffs.
In the California, Washington market, the employees of those companies in these markets are about 335,000 people, and there's about 10,000 layoffs. So the percentage of layoff is lower actually in California and Washington as compared to the broader enterprise. So I think that is important.
And finally, it's interesting, the unemployment rates are so low. San Francisco, 2.2%, in San Jose, 2.4% and everyone under the U.S. average, except for Los Angeles, which is at 4.5%, no doubt that's because people are drawing benefits and able to stay in our apartment subject to the eviction moratorium.
Okay. And then the second question is just getting back to the delinquencies, I think you guys have highlighted obviously L.A. and Oakland. Is that the bulk of what's driving delinquencies this year? And then as a consequence, especially in L.A. with the good cause of eviction, should we assume that you guys will look to pair your exposure to L.A. County?
Yes, let me talk about that and Angela or someone else may have a comment. But the two really difficult eviction moratoria are in Alameda County, which is Oakland and L.A., L.A. City expired. However, L.A. County extended to March 31. Actually, L.A. City was a really horrible ordinance. L.A. County is not nearly as restrictive. For example, it only applies to 80% median income tenants, for example. And so there's a little bit of relief in L.A.
And in terms of exiting L.A., I think that, that is -- it depends. I mean, we will exit -- enter and exit markets as we deem necessary using a much broader set of criteria for supply-demand analysis, rent growth expectations, cap rates, et cetera. And so that will drive that discussion as well as jobs and some of these other issues.
Yes, Alex, on the delinquent unit front, L.A. and Alameda are the bulk of our delinquent units over 60% our delinquent units long term greater than three months or in LA Alameda. And so that's a factor as well as the slowdown in the court, courts are really bogged down. It's taking longer to vice in our other markets, and that is a factor as well in the '23 guidance to recapture those units.
Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.
Mike, last quarter, you said that the 2% rent growth forecast seemed pretty dire at the time, and it was more based on what the Fed was doing and projections from economists and what you're actually seeing on the ground. I know you reiterated the 2%, but your commentary around employment seems to suggest that you still think it's a somewhat pessimistic outlook. Am I interpreting that right?
I think Angela and Barb will kick me if I do anything that I say anything that's inconsistent with our published position. I mean the reality is, I don't know. And in the comments I referred to a range of outcomes that's broader than historically we've been able to triangulate in the past for most of the past, the relationship of supply and demand much more -- much better than we can this year.
So, there are more moving pieces and given that inherent uncertainty, I still think that is within the range of potential outcomes. But again, we'll be watching job growth and more notices and all those various items for better visibility. Notably, a warm notice out there may not have hit the layoff part of the reported job growth. So, there's a lag there. And so it's a little bit unfair to comment on that until we see how that plays out.
Okay. Fair enough. And then non-revenue-generating CapEx seemed elevated in the fourth quarter. And I think the 2022 total was up about 40% year-over-year. What's driving that? And can you give any expectation for where '23 will shake out?
Sure. It's Angela here. The -- I think it may be helpful to just talk about how we look at CapEx because looking at a one-year number can be misleading. Our CapEx program is for each property on a 10-year plan. And so, on years where there is a large improvement that we made in replacement, for example, it's going to show up and it's going to look lumpy. So -- but having said that, in 2022, we also had to catch up from the -- when we paused the activities in 2020. So for example, pre-COVID, we're running closer to about $1,700 per door. And in 2020, we were down to like $1,300. So, over 20% increase.
And so you play that forward a couple of years later, there is that lag effect. So that's what you're seeing as well. If you look at a, say, 10-year average, our CapEx per door is pretty similar to where our peers are. Now we do have a little older portfolio on average. So, it naturally we should run a slightly higher CapEx per door. So that's -- sorry for the long winter answer, but there's just a little bit more to it than just one number per year. And next year, we're evaluating the expectations you have also inflation. So, it's probably going to be similar to 2023, I mean 2022, but like I said, over a period of time, over a long period of time, it should revert to a long-term average.
Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
Congrats to everyone. I wanted to ask about the pricing of Anavia, which seemed better than expected given the interest rate environment. Any commentary you could provide on this pricing if it's reflective of other asset sales that you're working on? And sort of on a related topic, the matching tax in L.A., what do you think that's going to have the impact that we'll have on both the transaction market near term and pricing?
Sure. John, this is Adam. So, beginning with Anavia. Anavia was, I'd say, an opportunistic sale to -- there was a very specific buyer and which -- that's reflected in the pricing. Generally speaking, we're seeing cap rates kind of trading in the market in the mid- to high fours. So Anavia, I'd say, outperform that by a bit again just because this very specific situation.
Regarding the mansion tax in L.A., so we've seen a slight elevated potential transaction volume in L.A. due to the mansion tax coming into effect April 1. For the most part, I think most of those deals probably won't trade just given they were all on very short runways and pricing expectations just doesn't seem like they are being met.
Going forward, I think we've seen this in Washington when they their transfer tax up. It actually did not affect transaction volume generally at all. I think the one thing that may be an outcome of the L.A. management tax is, it could potentially hinder development within Los Angeles, any significant headwind to development returns, especially from merchant builders, that's just going to affect their back end and make it that much harder to build.
Okay. My second question is just a follow-up on delinquencies. It looks like it's going to be $40 million on a gross basis this year. How does that compare to last year? We estimated at about $57 million just based on your disclosure. I just wanted to make sure that was accurate. And as part of that, can the ERA surprise to the upside, there's not much baked in guidance?
John, I may have to follow up with you on those numbers. I want to get back to my office and have the model in front of me. So I don't know if I want to quote the numbers here on the call. In terms of ERA, that would be upside if we were to collect some, but we've exhausted most of that so that we don't expect much in the way of ERA.
The one thing I would keep in mind though, is we do have $90 million uncollected bad debt cumulative since the start of COVID. We only have a $3.4 million accounts receivable balance. We think we'll collect more than $3.4 million. It's just a timing of when we're going to collect that. So that is upside to the numbers. It's just -- we don't have that baked into our forecast given the inherent nature of when we're going to collect that. But that's really the upside is on that front more so than even ERA, I would say.
Okay. Just -- I'll follow up with you off-line, but that $57 million we calculated from the change in cumulative plus the ERA you received last year, but I'll follow up offline.
Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.
Sorry if I missed it, but did you guys say we're sending out new and renewal notices today?
It's Angela here. No, we haven't talked about that. Our new and renewals are sending out somewhere between say, 4% to 5% depending on the market. So this is for very March. But keep in mind that does get negotiated. So if we're sending a renewal, say, north of 5%, we assume maybe 100 basis points negotiation depending on when and in some of these markets, we're sending out well in advance. So for example, Seattle, it goes out six months in advance. So hopefully, that gives you a better sense of the range of outcomes.
Okay. Yes. No, that's helpful. And then Fiber, I wanted to touch base on -- you mentioned prediction costs and same-store expenses and I guess those from being elevated. I guess how are those showing up in same-store expenses? And then if you kind of normalize for those, what would your same-store expense look like?
Yes. So, eviction costs show up in our administrative line. And obviously, we have elevated turnover as well, and that's in the R&M line. So it's in both lines. So, I would say in total relative to our historical average. Our controllables are forecasted to be 4% this year, but without the elevated eviction and turnover costs, we think we'd be closer to 3%. So it's about 100 basis points impact to the controllable line item for the year.
Okay. That's awesome.
Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
First question is just in terms of when you're looking at some of your data on move-outs, maybe you could talk about how that's trending in terms of reasons for move-outs, job losses versus rents being too high or even move out to other regions?
It's Angela here. That's interesting because we keep expecting big shifts coming out of COVID under the move-out reasons. And moving out to buy home really still hasn't changed from long-term average. I think because the cost of housing here is just a lot less affordable job transfers or other reasons, pretty darn similar and to our historical averages. And so, we have not seen any material change on move-out.
Okay. And then just other question is on move-ins. Whether you're seeing any benefit from return to office, which has been a little bit of a slower process in some markets on the West Coast. I mean are you seeing any benefit from that in recent months, whether it's specific cities in the portfolio or even from your move-in data, if you are seeing any instances of people relocating back into your markets because we're now required to be in some sort of hybrid job in an office in your markets increasingly. And I'll just as well, congrats Angela and Mike as well.
Congrats and once again, another good question on the in-migration. It's -- so I have mentioned that in the third quarter, we saw a pretty big uptick on the immigration to our market, 30% to 35% on average between Northern and Southern California. And of course, part of that is attributed to return to office. We have seen that trend continue in the fourth quarter. But keep in mind, fourth quarter is typically just a low demand period.
So it's really difficult for us to be a particular trend. The only thing I can tell you is that compared to the first quarter, the in-migration is still better marginally, we're not talking huge numbers from that perspective, once again, fourth quarter is just a tough time to trying to get an indication of that. Mike, do you have anything you want to add?
Yes. I just wanted to maybe add, we do some work, again, data analytics team that deals with micro com-patterns. And I guess I want to make a comment that it seems to be normalizing as well. Again, you had that mass exodus early on in the pandemic. And we been making progress and just back to the point where we've effectively placed all those jobs, but the places where people are coming from and going to, again, using LinkedIn data, not our own data appear to be pretty similar to what they were in the past.
So generally speaking, the migration pattern here is we give people from the large Eastern and Midwestern metros. And actually, more recently, Dallas and Atlanta are on that list of incoming in the top and the place where people go, typically, people will retire, sell their house in California, their expensive house a new part of their retirement plan. And so, they go to a less expensive West Coast cities, notably Phoenix, Denver, Las Vegas.
Appreciate that, Mike. Any plans to move or you stay in California?
I'm staying and I'm looking forward to spending some time with the grandkids and that type of stuff. And I'm still going to be around, if Angela will have me, a role to be determined. So I love the Company and love what I do here. So not ready to completely check in this whole thing is really driven by Angela being ready, and that's what's important. And so do a great job. I'm very confident.
Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.
And congrats again. Look, I just wanted to ask about, obviously, tech markets overall, right, where you guys are located, but maybe just kind of specifically, the tech exposure among your tenant base, if you have that number. Look, I get that they're kind of secondary, secondary tech jobs and secondary exposures to kind of tech jobs within your markets, but maybe just kind of explicitly tenants who are employed by tech employers if you kind of have that percentage for your residents.
Yes, that's a good question. What we do is we track the top six because everything else is just too fungible on that number. So currently, we're about 7% of our tenant base is linked -- directly linked to the top six tech companies. And of course, it's much more concentrated in Northern California and Seattle relatively speaking. But that's a very manageable base. And of course, in certain assets or properties are -- that has a much closer proximity to the headquarters, the percentage will be disproportionately higher.
And how does that 7% kind of compared to maybe pre-COVID or last year historical average types of numbers?
Not a big change. We tend to kind of run between, say, 5% to 7%, and it kind of hovers around there?
Got it. That's really helpful. And maybe just switching gears, wondering kind of the new versus renewal trends new lease kind of modestly negative and then kind of still in the 5% range for renewals for January, look, I think conceptually, if I understand correctly, if that trend kind of continues maybe would form kind of a game lease. So wondering maybe your thoughts on that, if you could kind of see that happening or maybe kind of renewal and new converge over time and kind of that gain to lease is informed?
Yes, A couple of things. I just want to give you a little background first on the new lease rates. That, of course, is heavily impacted by our concessionary strategy, which is related to our occupancy strategy. And so part of that is not as much a market issue versus a strategy issue, and of course, that is something that we shift quickly away from the concessionary environment in January.
And so, I don't want you to think that this is something permanent here to stay. And so -- but ultimately, with the renewal rate in an environment where new leases are on our S-16 expected to be about 2%, there is going to be a convergence of new lease and renewal rates and it'll probably take this full year to have that play out.
Really appreciate it.
Next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
My first question is when is FX current exposure to corporate housing? And then how do we reconcile the impact of job losses with a return to the office?
I'm sorry. Can you repeat the first part on corporate housing?
What is your current exposure to corporate housing?
Corporate exposure. Got it. Got it. So our current exposure is about 3%. And what's interesting about that number is during COVID, it actually went down to zero. And so we've been building that up. So last year, it was around -- got up to about 2.5%. Now keep in mind, in Seattle, it's going to move around because they -- it's a temporary nature, right? It comes in pretty heavy during the seasonal peak around July, and that can ramp the portfolio up to 7% and then goes back down around October as they leave. So, there's inherent -- there's an inherent cyclicality to that tenant basis.
Got it. And my second question relates to the regulatory environment. Obviously, the markets that you operate and have gotten increasingly difficult -- increasingly difficult, whether it's rent controlled, Prop. 13, Seattle and Washington State potentially becoming an issue. So maybe can you walk through kind of your updated thoughts around this? And then whether you would look to diversify your portfolio over time, just given some -- given the more challenging operating environment?
Yes. No, that's a great question, and I'll handle that one. Yes, we have been maybe a little bit surprised just how aggressive some of these actions are. We have a pretty strong advocacy effort that is driven by CAA in California and the local -- one of the local groups up in the Washington area.
And so, we spend a lot of time working with those organizations and trying to advocate against those policies. Almost always those policies are sold on the basis of being good for the housing industry. And when, of course, we all know that, in fact, is exactly 100% wrong. It's the exact opposite. So, unfortunately, it's something that we have to deal with, and it is concerning to us and we spend a lot of time on it.
The proposal in Washington is still very early on in the process. It's in the house, and it hasn't come out of committees. And as a result of that, I think there's still a long way to go. Again, we will be monitoring that. And -- but all of these different proposals tend to make California less appealing to a landlord and increase the risk of that occurring.
So, to your point about other markets, I think I want to reiterate what I said before, which is we are tracking more markets now, 25 major metros across the country. We are looking for specific things. The things that essentially attracted us to California 30 years ago, let's say, and trying to rank those markets in terms of appeal and whether they can compete with the California markets. And we have some interest in some of them.
I don't want to get into great detail at this point in time. But as I've said before, and I think actually, this last couple of quarters has played this out why this is important, it's about timing, and it's about making a shift at the appropriate time when our cost of capital is appealing, and we can enter at a point where we can feel like rent growth is going to continue in any of the markets across the country, including our market, San Diego, notably, Orange County, et cetera, if you get 30% to 40% rent increases, you're going to have a lot of supply that we'll hit.
And you just can't keep growing. There has to be some change. The markets become unaffordable. The average person can't afford the rent in that location that causes people to move further out to find more affordable housing. The markets, in a certain sense, have a self-correcting mechanism in them. And this has always been the case. It's true here, it's true everywhere. And so we're going to thoughtfully make that decision at the appropriate time. Does that help?
No, that was really helpful. Congratulations, everyone.
Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.
Adam, I wanted to follow up on your transaction market comments. Just curious, how you see the depth of the bid at the cap rates you throw out there. It'd be brought a substantial number of assets to the market, do you think they would trade in those then to high four cap rates you suggest?
We're still seeing a gap between the bid and the ask. But we are we are seeing, I'd say, a muted volume of deals going down in that mid- to high 4s. So yes, if we got back to, I'd say, kind of normal volume, I think that's where we shake out today.
Okay. Just so, I understand those cap rates, are those kind of initial buyer cap rates? Or are those your disposition yields?
Well, so for Anavia specifically, what we quoted in the statement was disposition yield. What I'm saying the mid to high 4s, that's more of a buyer cap rate.
Okay. Last question for me. Just Angela, curious for your thoughts on just the topic of just COVID impacts fully reversing. So as COVID in the rearview mirror, would you expect market rents in any of your Southern California markets that have seen huge cumulative rent growth to actually see absolute declines in market rents over the next few years?
Keep in mind that market rent growth is a function of demand and supply. And so at this point, even looking out the next couple of years, supply is still relatively muted in Southern California and pre-COVID environment Southern California have performed really well. And so Southern California has similar employer base as the broad U.S. market. That's why we like it. It's less volatile, but it has a higher level of professional services, so better earning power. And for that reason, Southern California continues to be stable. And so, we wouldn't expect that because of COVID, absent the fact it's going to just suddenly fall apart.
Our next question comes from the line of Anthony Powell of Barclays. Please proceed with your question.
Just a question on the impact of return to work on the outlook in the -- on the West Coast. A lot of the technology firms have announced the office space rationalization, office space sales, could that be a headwind for rent growth in the next couple of years even if you have higher job growth, fewer people are in the cities because they're doing more hybrid work as these firms kind of reduce their footprint?
Yes. Anthony, it's Mike here. Most of our portfolio actually is suburban in nature. So we have relatively little in cities -- and but we're thinking that return to office is something that will slowly evolve -- and there will be -- maybe we go from an average of two days a week in the office to three days a week in the office. And that will all -- anything that is more office-centric will pull people closer to our apartment community. So that would be a positive impact in our view.
And so at this point in time, because people have moved further from the offices and that has cause us to readjust sort of our template for looking for potential acquisitions and other things. But over time, I think that all of us, including, I'd say, here at Essex, we have some of the same issues that we're better off. We're more productive. We make better decisions when we're together as a management group -- senior leadership group and super important to the overall results of the Company. So we think that return to office will be ultimately a tailwind.
Maybe one more in terms of just been on buybacks, you made some good promise there last year. Do you think if fire-sell starts to agree that you can maybe increase the buyback amount year-over-year as you sell more assets?
Yes. This is Barb. We'll assess that based on deal volume and whether we can create NAV and FFO per share. It's hard for me to tell you right now that we can do that in this environment. But it is something that we're cognizant of we have shown that we can run the machine and reverse many times over many different cycles. And so we'll be willing to do that if the right opportunities present themselves.
Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.
And my congratulations on a fantastic career and all the best of your next chapter and best of luck Angela. So I just had a couple of follow-up questions left here on our list. I guess, first, I want to go back to expenses. Barb, I think you mentioned controllable expenses, you're expecting to be at 4% this year as part of the 5% guide, which I think is higher than a lot of us expected. So maybe can you go through a bit more of the building blocks of that 5% expense growth and maybe if there is any contrast versus say, Seattle, which doesn't have the Prop 13 benefit that California does? And if there is any benefit from the rollout of the property collections platform you mentioned earlier? Thanks.
Yes, Haendel, on the expense growth, the 5%, really the biggest driver of that is non-controllables. That's up 5.5% to 6%. And really, the key factors are in utilities, were up 10% this year. We do expect high single-digit increases next year. Insurance is expected to be up 20% next year, is a very difficult insurance market. And then on real estate taxes, we've budgeted a 4.25% increase and that's really being driven by Seattle reverting more to our historical norms. So, those are the key building blocks on the non-controllable piece.
On the controllable piece, 4% at the midpoint, and we do expect admin to be up only 3%. Once again, we do have elevated eviction costs in that line, which is masking some of the benefits from the rollout of the central services or the property collections model that we rolled out last year that centralized some of those functions. So, it's masking it a little bit this year. But overall, that should give you the major building blocks for why we have a little bit elevated expense growth.
No, that's helpful. I appreciate that. But just so we're clear, how much impact in a more normalized environment would that property collections platform have?
Well, so I said the eviction costs are about a 1% impact to controllable. So that's the factor you can use is it would be 1% lower.
Appreciate it. What's the assumption built into the guide for turnover this year and year-end occupancy?
Occupancy, we've assumed is stable year-over-year, so flat, no change there. And then in terms of turnover, we did see elevated turnover in the fourth quarter. And given the eviction headwinds that we expect to face in getting the delinquent units back, we do expect turnover to be a little bit more elevated than historical norms. But it's good because then we get tenants in that are paying rent. So, we think that's actually a good thing.
Okay. That's all for me.
Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
I just want to go back to a comment you made earlier in the call about distressed acquisitions, distressed acquisition opportunities coming up with some owners with floating rate debt. Can you talk more about what you're seeing, the magnitude? And do you think that's going to be something that pros as an opportunity set?
Jamie, this is Adam. So we haven't seen much of that to date. We are -- it's more on the structured finance platform where we're seeing more opportunities on existing deals with maturing debt or with expiring rate caps. We do think this will accelerate into the year and provide potentially more opportunities like I said, probably more focused on the truck and finance platform versus acquisitions, but looking at it from everyday.
Okay. And then I guess, sticking with structured finance, the impairments you took, how should we think about that, the risk profile of those investments versus the rest of the book or even deals going forward? Like was that just kind of at the higher end of your risk profile? Or the market conditions really just change that quickly that led to the impairments?
Yes, I would say it's the latter. We didn't change our underwriting on that investment. We didn't go out wider on the risk spectrum or the curve. It really is a function of the Oakland market highly concessionary the developer wanted to sell, and we ultimately agreed to the sale. Now keep in mind, we actually made money on our investment for shareholders. We invested $11.5 million in this project, and we got redeemed $14 million.
So, we made 7% annually for our shareholders, the coupon was 10%. So, we didn't quite earn what we thought we were going to earn, but we thought it was in the best interest of shareholders to take their money back and redeploy elsewhere. And so, we didn't lose money. And I think it is a unique function of that market. Right now, given I think there's 16 lease-ups in the market right now.
Okay. And then finally, just thinking about the -- just in terms of the moratoriums, like how much of that is actually baked into your guidance, the upside, potential upside from LA and Alameda County?
Well, what we have in our guidance is we do assume that gross delinquency will continue to trend down throughout the year as we are able to recapture our delinquent units. So right now, we have about 3% of our units are delinquent. That's down from 5% at the start of the year of 2022. And we expect that to continue to trend down. By the back half of the year, we expect to be in the 1.5 or lower range for the second half of the year. So, it is a function of the guidance. We do -- we have baked that in, that we'll get more of our units back this year.
Okay. But in terms of the revenue upside, you also have that in really -- I'm just thinking if maybe they get extended past March 31. Is that a downside risk to the guidance or no?
I don't -- we don't see that as being a downside risk because keep in mind what Mike said earlier about L.A. County, which is the new eviction moratorium is actually more strict than L.A. City was. And so, we don't see that being a hindrance to us. In addition, we are making progress. It's just -- it's taking a little longer than we expected. So, we don't see that as a significant downside at this point.
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Thank you, operator. I want to thank everyone for joining us today. Hope to see many of you at the Citi conference, and we definitely appreciate all the well-wishing for Angela and me.
I want to note that it's been an absolute honor to work with so many of you. And so have a great day. Thank you for joining.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at the time and have a wonderful day.