Essex Property Trust Inc (ESS) — Q4 2022 Earnings Call Transcript

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 forced 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 leading 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 one 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 operational 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 one centrally 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 and 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 by 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.

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?

Thank you for the congratulations. I really appreciate it. Tech is continuing to expand its share of the overall employment landscape, and we anticipate growth throughout the United States, including the Sun Belt. However, similar to the past, the forefront of cutting-edge technology and the people driving innovation are likely to remain on the West Coast. This realization gives us a lot of confidence. I described my career and the evolution of tech because it has consistently reinvented itself, and I believe that process is far from over. Additionally, the role of AI is becoming remarkably important across various applications, from businesses to consumers. I believe this trend will keep progressing, and we will be at the heart of that innovation on the West Coast.

Yes, AI innovation is quite exciting. Regarding the structured finance program, I have two questions. First, for the asset in Oakland where you're not accruing income, could you explain how that might develop in the future concerning your role there? Additionally, it seems like you're conducting an analysis of everything, and all the other assets are performing as expected. However, are there any that are on a watch list or could potentially 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 fallout at this time from that asset.

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 troughed 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 scheduled 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.

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?

Thank you for the congratulations, Wes. I appreciate that. Regarding supply pressure, we are seeing some issues in a few locations. We previously mentioned Oakland, where several lease-ups are impacting prices negatively. This year, Seattle is experiencing more apartment deliveries, particularly in the fourth quarter, which is typically a weaker period, and it tends to underperform compared to California markets due to a significant drop in demand during that time. However, looking ahead, the supply outlook appears to be declining. This decline is largely due to years of stagnant rent growth, making it increasingly difficult to produce housing at profitable levels. We observe this trend in our preferred equity investments as well. Consequently, we anticipate a period with relatively limited supply, and if we see any demand, we will be in a favorable position.

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?

On the tenants renting front, we have a very thorough process in place. We will conduct credit checks, which will help us determine if they have any prior debt that needs to be settled. This is our best way of assessing the situation.

Okay. So that would be a relatively timely event. I guess there are delinquent tenants already recorded for you.

We have updated the credit report for any tenants who have left, and we continue to monitor ongoing debt. We have various resources that we can utilize and have already employed.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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?

Thank you for the congratulations, Wes. I appreciate it. Regarding supply pressure, there are certain areas where supply is an issue. We previously mentioned Oakland; there are several lease-ups there that are significantly lowering prices. Seattle is experiencing more supply deliveries this year, particularly in the fourth quarter, which is typically a weak period, and Seattle generally performs worse than the California markets due to demand dropping close to zero in the fourth quarter. Seattle has an increased supply of apartments, but looking ahead, the supply situation appears to be decreasing. This decline is mainly due to the lack of rent growth over the past few years, making it difficult to produce housing at a profitable level, which we also see reflected in our preferred equity portfolio. Therefore, we are likely entering a period with limited supply, and any increase in demand would put us in a favorable position.

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?

On the tenant rental side, we have a strong process in place. We conduct credit checks to determine if there are any outstanding debts that need to be settled. This serves as our primary indicator in this area.

Okay. So that would be a relatively timely event. I guess there are some tenants in delinquency already accounted for in your records.

We have promptly updated the credit report for tenants who have left, and we continue to monitor ongoing debt. We have various resources at our disposal that we utilize.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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, I appreciate the congratulations. Regarding supply pressure, there are some areas experiencing it. We mentioned Oakland earlier; there are several lease-ups there that are pushing prices down. Seattle is seeing more apartment supply coming in this year, especially in the fourth quarter, a typically weaker season for the region compared to California where demand drops significantly. Seattle's apartment supply is increasing. However, looking ahead, the overall supply situation appears to be decreasing, primarily due to minimal rent growth over the past few years, which has made it challenging to produce housing at a profitable level. We observe this trend in our preferred equity portfolio as well. Therefore, we are likely entering a phase with limited supply. If we experience any demand, we will be in a favorable position.

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?

We have a solid process for vetting tenants. We conduct credit checks to determine if they have any outstanding debts that need to be settled, which serves as our primary gauge in this area.

That would be a relatively timely event. I assume there are some tenants who are not paying, and that situation is already recorded for you as a delinquent tenant.

We have updated the credit report for tenants who have left, and we also continue to monitor any ongoing debt. We have various resources that we utilize for this purpose.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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?

Thank you for the congratulations, Wes. I appreciate it. Regarding supply pressure, there are certain areas experiencing some supply issues. We mentioned Oakland earlier, where multiple lease-ups are contributing to price reductions. Seattle is seeing more supply deliveries this year, particularly in the fourth quarter, which is typically a weak season, and demand tends to drop significantly during this period, especially compared to the California markets. Seattle has an increased supply of apartments. However, looking ahead, the supply situation appears to be improving as it has decreased. This is largely due to the lack of rent growth over recent years, making it challenging to produce housing profitably. We also observe this trend in our preferred equity investments. Consequently, we anticipate a period with limited supply, and any increase in demand would put us in a favorable position.

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?

On the tenant rental side, we have a strong process in place. We will conduct credit checks to identify any previous debts that need to be settled. This serves as our best indication in this area.

Okay. So that would be a relatively timely event. I guess there are some tenants who are not paying, and it's already noted in your records as delinquent tenants?

Right, right. In fact, for tenants who have left, we have updated the credit report on our end right away. There is also a continuous report on ongoing debt. We can and have utilized various resources.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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?

Thank you for the congratulations, Wes. I appreciate it. Regarding supply pressure, there are some areas experiencing supply constraints. We previously mentioned Oakland, where multiple lease-ups are driving prices down. This year, Seattle is seeing more supply deliveries, especially in the fourth quarter, which is typically a slower time, and it's generally weaker than the California markets since demand nearly vanishes in the fourth quarter. Seattle has a higher availability of apartments. However, the outlook for supply seems to be diminishing moving forward due to the lack of rent growth over the past few years. This has made it quite challenging to produce housing at a profitable level, which is evident in our preferred equity portfolio as well. Therefore, it seems we will be in a situation with relatively little supply, and if we do see any demand, we should be in a favorable position.

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?

On the tenants renting front, we have a solid process in place. We will conduct credit checks to determine if they have any outstanding debt that needs to be settled. This is our primary indicator in this area.

Okay. So that would be a relatively timely event. I guess there are some tenants who are not paying, and it's already noted as a delinquent tenant.

We have promptly updated the credit report for tenants who have left, and we continue to monitor any ongoing debt. We have access to various resources that we utilize in this process.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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 congratulations. I appreciate it. Regarding supply pressure, there are several areas experiencing it. We mentioned Oakland earlier, where multiple lease-ups are impacting prices downward. Seattle is seeing more supply deliveries this year, especially in the fourth quarter, which is typically a weaker season, and it generally performs worse than California markets since demand nearly vanishes in that period. Seattle has an increased number of apartments available. Looking ahead, however, the supply situation appears to be decreasing due to the lack of rent growth over the past few years. This has made it challenging to produce housing at a profitable level, which is reflected in our preferred equity investments as well. Therefore, we anticipate being in a phase with relatively low supply, and if demand increases, we will be in a favorable situation.

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?

On the tenant rental side, we have a solid process in place. We will conduct credit checks to determine if there are any outstanding debts that need to be addressed. This serves as our primary indicator in this area.

Okay. So that would be a relatively timely event. I guess the ties that are not paying are already recorded as delinquent tenants.

We have promptly updated the credit report for tenants who have left, and we continually monitor their ongoing debt. We utilize various resources to manage this situation effectively.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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?

Thank you for the congratulations, Wes. I appreciate it. Regarding supply pressure, there are some areas experiencing it. We mentioned Oakland earlier; there are several lease-ups there that are affecting prices negatively. Seattle is seeing more supply deliveries this year, particularly in the fourth quarter, which is usually a weaker season, and it typically underperforms compared to California markets because demand almost disappears in the fourth quarter. Seattle has an increased supply of apartments. However, looking ahead, we expect the supply situation to improve due to a lack of rent growth in recent years. This challenge in producing housing at a profitable level is also evident in our preferred equity portfolio. Therefore, we anticipate a period of limited supply, and if we see any demand, we should be in a favorable position.

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?

We have a strong process in place for screening tenants who want to rent. We conduct credit checks to determine if they have any unpaid debts. This is our most reliable indicator in this situation.

Okay. So that would be a relatively timely event. I guess there are some tenants who are not paying, and it's already recognized in your records as a delinquent tenant?

We have updated the credit reports for tenants who have left and we are continuously monitoring outstanding debt. We have various resources at our disposal that we have utilized.

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. was 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 transferring from 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.

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 congratulations. I appreciate it. Regarding supply pressure, there are some areas with supply issues. We previously mentioned Oakland, where several lease-ups are contributing to a decrease in price. Seattle is experiencing more supply deliveries this year, especially in the fourth quarter, which is typically a weaker season. Demand in Seattle tends to drop significantly in the fourth quarter compared to the California markets. While there is an increase in apartment supply in Seattle, the overall supply outlook appears to be declining. This decline is primarily due to the lack of rent growth over the past few years, which makes it challenging to produce housing at a profitable level. We can see this trend reflected in our preferred equity portfolio as well. Therefore, it seems we will be in a situation with relatively low supply, and if we see any demand, it will be beneficial.

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?

We have a strong process in place for evaluating potential tenants. We conduct credit checks to identify any outstanding debts they may have. This is our most reliable method for assessing their financial history.

Okay. So that would be a relatively timely event. I guess there are some tenants who are not paying, and it's already recorded as a delinquent tenant for you.

We have updated the credit report for tenants who have left, and we continue to monitor ongoing debt. We have access to various resources which we have utilized.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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?

Thank you for the congratulations, Wes. I appreciate it. Regarding supply pressure, there are some areas experiencing this issue. We mentioned Oakland earlier; there are several lease-ups happening there, which are driving prices down. Seattle is seeing higher supply deliveries this year, particularly in the fourth quarter, a seasonally weak period where demand significantly decreases. Seattle has a larger number of available apartments. However, looking ahead, the supply situation appears to be declining, mainly due to the lack of rent growth over the past few years. This has created challenges in producing housing at a profitable level, a trend we also see in our preferred equity portfolio. Therefore, we anticipate a period of relatively low supply, and any uptick in demand would put us in a favorable position.

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?

On the tenant rental side, we have a strong process in place. We conduct credit checks, which help us determine if the applicants have unpaid debts. This is our primary method for assessing their eligibility.

Okay. That would be a relatively timely event. I guess there are some tenants who are not paying, so it's already recorded for you as a delinquent tenant?

We have promptly updated the credit report for tenants who have left, and we continue to monitor ongoing debt. We have various resources available to us that we have utilized.

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. was 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 transferring from 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 at our normalized run rate by the end of the year.

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.