Good day, and welcome to the Essex Property Trust Third Quarter 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made in this conference call regarding expected operating results and other future events are forward-looking statements, that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman, you may begin.

Good morning, and thank you for joining Essex’s third quarter earnings call. Barb Pak and Jessica Anderson will follow with prepared remarks and Rylan Burns is here for Q&A. My comments today will focus on how we performed to date, our initial outlook for 2024 and a brief update on the investment markets. Overall, 2023 has unfolded generally in line with our expectations. We increased our same-property revenue and NOI growth in the middle of the year, despite a challenging operating environment, with almost 2% of rent delinquent for the first nine months of the year. For context, this delinquency level is approximately five times our historical average. The unprecedented eviction protections enacted during COVID, exacerbated by subsequent court delays, has resulted in protracted exposure to non-paying tenants and uncertainty regarding the timing of when we could recapture these units. That said, we made considerable progress reducing delinquency as a percentage of rent, which is now at 1.3% in October. This improvement has naturally resulted in a temporary trade-off between rate growth and occupancy but has proven to be an optimal strategy to maximize revenues as we make progress towards normalization in our markets. Looking ahead to 2024, we plan to publish a more comprehensive outlook for the West Coast in conjunction with our full-year guidance on our fourth-quarter earnings call. For now, we have provided our initial 2024 supply outlook for our market on slide 17 of the supplemental which forecasts total supply growth of only 0.5% of total housing stock. Unlike many other US markets, total housing supply in our markets is expected to remain at a low level. We do not see a near-term catalyst for increasing housing supply growth in the Essex markets. This supply landscape also minimizes our risk to job growth relative to other markets, especially if we encounter a softer demand environment, and will be a tailwind for Essex when the economy accelerates. While muted supply is part of our thesis, we also see conditions that could drive demand for housing. First, after a year of retrenchment, layoffs in the tech industry appear to be slowing, and return to office is gaining momentum, with the percentage of remote job hiring at the largest tech companies now in the low single-digits. This implies that once tech hiring resumes in a meaningful way, job growth will be highly concentrated near major employment centers. Second, it remains to be seen how the artificial intelligence industry will grow. We know that success in this industry will require immense scale and capital resources, and these types of companies are largely concentrated in the Bay Area and Seattle. Third, affordability, particularly in Northern California. Today, the Bay Area is as affordable as we've seen since we began tracking this data, and we expect this will provide a long runway for rent growth. In summary, the combination of this potential demand backdrop and a muted supply outlook gives us confidence that the West Coast is well positioned to outperform in the long run. Lastly, an update on the apartment investment markets. Deal activity slowed further in the third quarter, as interest rates increased sharply in recent months, compressing prospective returns and resulting in many buyers remaining on the sidelines. We have seen several marketed deals not transact this year as sellers await a less volatile interest rate environment. There is little evidence to suggest transaction activity will pick up in the near term as bid-ask spreads remain wide. We have navigated through many economic cycles, and our finance team has done an excellent job in fortifying the balance sheet, which positions Essex well for any environment. With that, I'll turn the call over to Barb.

Thanks Angela. Today, I will discuss our third quarter results, along with investments and the balance sheet. Starting with our third quarter performance. I'm pleased to report that core FFO per share for the quarter came in $0.03 ahead of our midpoint. The outperformance was driven by slightly higher revenues, other income, and lower G&A expenses, partially offset by higher operating expenses. Most of the deals in the third quarter are timing related. As such, we are reiterating the midpoint of our full-year core FFO per share and same-property revenue, expense, and NOI growth. As it relates to operating expense, which increased by only 1% due to the favorable outcome we received in Seattle. As we look to 2024, we expect operating expenses will remain elevated, primarily driven by non-controllable items such as insurance and utilities. In addition, the tax benefit we received in Washington state is not expected to repeat in 2024. However, it should be noted that we have done a good job over the past four years improving the operating efficiency of the platform, which has led to a modest increase in our controllable expenses. Since 2019, our controllable expenses have increased around 2.75% annually despite elevated inflationary pressures and higher costs related to our delinquent units during this period. This favorable outcome is primarily driven by the rollout of Phase 1 of our property collections model. As always, we are continuously looking for ways to improve efficiencies within the platform in order to optimize our cost structure. Turning to investments. For the year, we expect preferred equity redemptions to be around $70 million as we anticipate being fully repaid on a $40 million investment in the fourth quarter. As we look to 2024, we expect redemptions within our preferred equity book to be around $100 million. While we are actively looking for new deals to replace these investments, there could be a timing mismatch in terms of when we get repaid and when we can reinvest. We are finding there are still significant capital sources eager to invest in this portion of the capital stack, while at the same time, projects with reasonable return expectations are becoming harder to find. We will remain disciplined in this environment, leaning on our deep network on the West Coast to source deals at attractive risk-adjusted returns. Turning to capital markets and the balance sheet. In July, we closed $298 million in ten-year secured loans at a fixed rate of 5.08%. The proceeds will be used to repay our 2024 consolidated maturities. We were proactive in refinancing our debt early in today's volatile rate environment, locking in favorable financing ahead of the recent acceleration in treasury yields. As such, the company is well positioned with minimal financing needs over the next 18 months. We are pleased that our net-debt to EBITDA ratio continues to trend lower and stands at 5.5 times today as compared to 5.8 times one year ago. With over $1.6 billion in liquidity, the balance sheet remains a source of strength. I'll now turn the call over to Jessica Anderson.

Thanks Barb. My comments today will cover our recent operating results and strategy, followed by an update on our delinquency progress and regional highlights. Operating results were solid for the quarter, including same-property revenue growth of 3.2% on a year-over-year basis. We experienced a normal peak leasing season across all markets. Market rents peaked in August, with 6% growth year-to-date compared to December 2022 and have subsequently moderated by 10 basis points in September, which is consistent with typical seasonality. While we took advantage of opportunities to push rents during peak season, we shifted back to an occupancy-focused strategy midway through the third quarter as we began to recapture a larger volume of units from non-paying tenants. This shift in strategy tempered our blended trade-out rates in Q3 which were similar to Q2 at 2.1%. Renewal growth rates were healthy at 3% in Q3 and 5.3% in October, boosting our blended trade-out rates while new lease growth was muted at 1.2% for Q3, reflecting new lease incentives to backfill recently vacated non-paying units. Eviction-related move-outs increased in September, allowing for improvement in delinquency as a percentage of rents to 1.9% in September and even further improvement in October to 1.3%. Several of our markets, such as Santa Clara, San Mateo, and San Diego have returned to delinquency levels close to the long-term run rate. Los Angeles and Alameda County remained elevated, but significant progress is also being made in these areas after protections expired earlier in the year. As Angela mentioned, the improvement in delinquency will result in a temporary trade-off with new lease growth and occupancy, which can be seen in our preliminary October numbers, but we view this progress as a positive for the company. Consistent with our approach all year, we remain nimble and will shift our strategy as necessary to maximize revenue in any operating environment. Finally, I want to thank the Essex team for their diligent efforts this past quarter. They've been a major driver of the improvement we've achieved. Moving on to regional specific commentary. Beginning with Seattle, this market has performed as expected this year. Blended net effective rent growth averaged 0.5% for the quarter, improving 70 basis points from Q2. Despite nominal trade-out growth, demand fundamentals were solid in Q3, and I'm pleased with the recovery of this market after a slow start to the year. Market rents in this region were the first to peak in July, on par with a typical year, and we anticipate a normal seasonal moderation, although higher levels of supply deliveries in the fourth quarter may have an impact on pricing. Turning to Northern California, blended net effective rent growth averaged 1.4% for the quarter, consistent with Q2. Market rents peaked in late August, later than normal, an indicator of solid fundamentals in this market. Santa Clara was our top-performing market for the quarter as outlined on page S-9 of the supplemental. The ongoing return to office along with corporate housing activity contributed to these positive quarterly results. San Francisco and Oakland CBD, which account for a small portion of our NOI, have lagged the regional average. Oakland continues to be impacted by supply, which is expected to continue into 2024. Lastly, Southern California continues to be our top-performing region led by San Diego. Market rents in Southern California were the last to peak in mid-September and blended net effective rates remained resilient at 3.7%, despite the headwinds in Los Angeles, our market most impacted by delinquency. In October, delinquency in Los Angeles was at 4.6%, reflecting a 2.1% improvement since the start of the year. We anticipate making continued progress on delinquency in Los Angeles, and as such we expect rents and occupancy in this area to be more volatile in the near term. In summary, we are encouraged by the improvement we are seeing on the delinquency front and expect continued progress heading into next year. As we conclude the balance of the year, we remain focused on preserving occupancy and positioning the portfolio favorably heading into 2024. I will now turn the call back to the operator for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Austin Wurschmidt with KeyBanc. Please proceed with your question.

Great, thank you. Jessica, you highlighted that you've shifted your strategy from pushing new lease rate growth to growing occupancy, due in part to the elevated move outs of non-paying tenants. But from what I recall, the guidance assumes both an improvement in cash delinquency and re-acceleration in new lease rate growth towards that high 2% range in the back-half of the year. So, I guess I'm just curious if anything else changed from a demand perspective that also contributed to that shift in sort of operating strategy?

Well, just to emphasize, we are on track for the year. And as mentioned in my prepared remarks, there is essentially a trade-out. We did expect delinquency to stay elevated above the 1.3% that we reported for October. So that is lower than we had planned although we had experienced the trade-out with occupancy and our new lease trade-out rate. So as far as demand goes, all of the markets are performing as expected as we move into the seasonal slow period and we're encouraged by recapturing the non-paying units because it will position us well as we head into 2024.

Got it, that's helpful. Can you remind me if the financial occupancy you report includes cash delinquency or if that figure is more about gross potential rent? Thank you.

Financial occupancy does not include delinquency.

Understood. Appreciate it.

Our next question comes from Eric Wolfe with Citi. Please proceed with your question.

Hey thanks. I'm interested in your thoughts on what caused the decline in delinquencies in October compared to two months ago, and even a few months prior. Some of your competitors have started noticing this trend as well. Do you believe the improvement is sustainable moving forward?

Hi, Eric, this is Jessica. Well, we're definitely encouraged by the improvement that we've seen in October, and there are several factors that are contributing to that. The first is, for all of our areas outside of Los Angeles and Alameda, protections expired in July last year and at the time we were reporting that evictions were taking in the range of 10 to 12 months and some longer. Now that we're a year plus into those areas, we are seeing a lot of those units have made their way through the system. As for Los Angeles and Alameda, those protections expired earlier in the year and those tenants are realizing that there are no more protections. There is no more emergency rental assistance. So overall, the tenant sentiment has changed and there is a greater sense of urgency. So we are seeing increased move-outs as tenants are realizing this. As for forward-looking, one month certainly doesn't make a trend and we've seen some choppiness in delinquency as we've worked through it, the last couple of years, but we're certainly encouraged by our recent results and we're going to be monitoring that closely, and we'll have more information on our fourth quarter earnings call.

All right, that's helpful. I guess leads to my second question, which is around you dropping through new lease rates, the increased occupancy of non-paying tenants. I guess, how long would you sort of expect that process to take? And would you expect new lease rates to sort of go back up to that sort of 2.8% that you discussed on the last call or should renewals have to come down? Because, I think you also talked about renewals tending to follow new lease. So just trying to understand how long new lease rates will be depressed and if we should also expect renewals to come down to follow them?

Let me address that. I will discuss new leases and then move on to renewals. For new lease rates this quarter, I expect them to stay subdued. We are entering a time of easier comparisons, but the increased incentives to fill these units will somewhat obscure that improvement. Overall, we see this as a positive. In the short term, it seems neutral with only a few months left in the year, but looking ahead to 2024, it's favorable because we have people in units that aren't paying rent. When a unit becomes available, it won't be counted as vacancy, but it essentially balances out. We are providing concessions to fill these units quickly. At that point, we will have tenants occupying the units who will soon pay full market rent, which positions us well for 2024. Regarding renewals, that’s where we notice our comparisons. Renewals are somewhat shielded from the daily fluctuations in pricing because we've increased incentives to fill these units. In October, we are seeing a mix of gross rent growth and concession burn-off, around 5.3%. I anticipate that renewals will remain quite steady this quarter. We have set them at about 5%, and we will keep a close eye on market conditions. We may make some adjustments, but expect them to remain fairly consistent through the fourth quarter.

Got it, thank you.

Our next question comes from Nick Yulico with Scotiabank. Please proceed with your question.

Hey. It's Daniel Tricarico with Nick. Thanks for taking the question. First question is on market rent growth thoughts for next year. With the 0.5% supply growth you gave in the supplemental, just curious what sort of demand environment would drive negative market rent growth next year, given that supply backdrop? Just looking to sensitize possible outcomes.

That's a great question. It's Angela here. One reason we delayed publishing our macro outlook is that we wanted to consider our investors' feedback regarding its value, as it ultimately influences our perspective on market rent growth. We have decided to adjust our approach and will provide the outlook early next year to better align with the timing of our guidance release. I wanted to share that background, but it's important to note that market fundamentals will be influenced by a few factors. We begin by examining third-party macroeconomic forecasts, which are still developing, and we haven’t encountered any strong projections yet, so it's too soon to make predictions. However, we can say that Essex is better positioned compared to other markets due to low supply, which you've mentioned earlier, reducing the risk to rent growth and presenting potential upside for future demand. Those are the various factors we are considering at this time.

No, that's good. Thanks for that, Angela. And the next question would be on just your different regions. SoCal has been your strongest, but curious if you could see that gap to Northern California and Seattle remaining or maybe converging next year. Any thoughts on the puts and takes there? Thank you.

I believe Northern California is our stable market, and its employment profile is similar to the national average, though it has a higher concentration of professional services. The situation remains steady. We do anticipate that recovery will eventually occur in Northern California. The timing is uncertain, but it is likely to perform well as it is still in the recovery phase. That's our perspective on the two regions.

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

Yeah, thanks. First, Jessica, could you provide a kind of a loss to lease estimate and an earn-in figure for the portfolio?

The loss to lease is consistent with periods pre-COVID, the three years average pre-COVID. As far as earning goes, typically in the past we looked at using roughly 50%, maybe a little bit more of that loss to lease number, which gets us to roughly 70 basis points or 100 basis points. Then we'll look at whatever our market rent forecast is for the year and take 50% of that. It's still early, we'll be evaluating that and providing more information on our fourth quarter. We do see some other building blocks as far as earning for next year with some other income initiatives as well that will contribute to revenue growth next year.

Great, thanks. And then maybe just on the investment side, I guess, I think Barb might have talked about some repayment of some of the preferred investments. I guess just what are you seeing in the marketplace today from other developers or other investors who might be in trouble from a financing perspective?

Hi, Steve, Rylan here. We are still seeing a few opportunities. I would say just a little historical context. The majority of our deals up until last year were development-based. This year it's been a mix, I would say about 50-50 between development and stabilized recaps. I anticipate next year we're going to see more opportunities for stabilized properties that are seeking recaps. We've seen several deals in the past couple of years with above 50% leverage and very low-interest rates capped or swapped that will roll in the next few years at a very different interest rate environment. With limited NOI growth we've seen in several of our markets, we think there are going to be opportunities to put some capital to work.

Great, thanks. That's it from me.

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

Yeah, hey guys. I appreciate that your markets have lower supply than a lot of other markets out there across the country. But just kind of curious on what you're seeing as far as demand goes in San Francisco and Seattle, and then maybe what do we need to see to kind of see an acceleration of that demand in those markets?

Hey, it's Angela here. I think on the demand side for Northern California, we do want to acknowledge that it remains soft, but I do think that we got two things happening. One is from a year-over-year comp perspective, September was still quite robust last year because that was before the tech sectors began their retrenchment. At this point, what we're seeing is that, that has stabilized and so that's definitely a good indicator. As far as other indications, we look at, of course, unemployment claims that remain stable and WARN notices are back to pre-COVID levels. That all points to the market functioning as it should. In terms of looking forward, we think that the technology sector, their hiring needs to return in a more robust way. It looks like they're going through kind of the tail end of the retrenchment, and so we do see light at the end of the tunnel from that perspective. Of course, the remote job hiring, which is now at 8% versus it was 25% last year, and of course 100% during COVID, needs to continue to decline, which we expect to happen. And then, of course, the last piece is really the international migration, which has been quite muted as a result of COVID and the various retrenchments. With these three elements, those are all potential upside for our markets.

Okay, appreciate that color. And then maybe just one quick one and apologies if I missed this. But what does your guide assume for the rest of the year as far as new lease rate growth goes?

We need to achieve a specific number to reach our fourth quarter targets, but we've received a lot of units back from non-paying tenants, which has influenced our occupancy. However, there are various factors to consider for the fourth quarter guidance, and there isn't a specific rent growth target we need to meet since other factors also play a significant role.

Okay, thanks.

Our next question comes from Jamie Feldman with Wells Fargo. Please proceed with your question.

Great. Thank you. Can you talk about the occupancy first initiative in the first half? Do you think that sets you up for potential acceleration next year?

Hi, Jamie, this is Jessica. Can you clarify your question? Were you talking about the first half of 2023?

Yeah, I'm just thinking about what the year-over-year comps could be into next year. Like, where did you push harder in the first half of '23 that you may get the benefit. It might be harder to have the comps for the first half of '24, both on occupancy by market and also by rents?

Yes, I understand what you're saying. Year-to-date, occupancy, I believe we're sitting about 96.5% and right now we floated down to 95.9%. But again, there is a trade-off. So, it's revenue neutral over the short term, but potentially positive as we head into 2024. Where we're heading right now with occupancy, it's hard to peg exactly where we'll end the year. As I mentioned, we remain focused on occupancy and back-filling units. It's a seasonally slow period, so it's uncertain how much progress we'll be able to make with occupancy over the short term. With that said, as we head into the year, we certainly could be lower than last year. Stable is what my expectation is from an occupancy perspective. There are other components that will add to a favorable revenue outcome as we see our delinquency come down. As far as occupancy by area, I mean, generally speaking, we're seeing our stronger occupancies in Orange County, San Diego, and Ventura. Seattle is performing quite well now and having quite a stable seasonal slowdown, particularly when compared to last year, sitting around 96%. Los Angeles is at 95.4%, and I would expect that market to be particularly impacted with lower occupancy, but again with upside on the delinquency front. The Bay Area is also sitting around 96%. Does that answer your question?

Yeah, that's helpful. Thank you. And then, I guess, just switching gears, to the investment here to investment potential. I mean, you mentioned Oakland. I mean, some of these sub-markets, you saw better opportunities or better pricing?

Hey, Jamie. Rylan here. I would say, we are open to any good investment opportunity subject to the conditions that are presented to us. At a high level, as we've talked about, we are relatively bullish on the prospects for Northern California over the next several years, and I think Angela has reiterated several reasons for that case. Oakland will be challenged for the next year or two given the supply that went out there. It would have to be a pretty compelling investment opportunity. But we're open and eagerly looking for opportunities in all of our core markets.

Our next question comes from Brad Heffern with RBC. Please proceed with your question.

Hey, everybody. Can you talk about some of the return to office mandates you've been watching like we saw with Meta in September? Has there been a noticeable impact in leasing activity on the ground from those?

The return to office mandate we’ve observed indicates that last year, tech employers initially required three days in the office, then reduced it to two days while continuing to hire remotely. This year, remote hiring has ceased and has turned into policy, with a growing emphasis on returning to the office. It’s challenging to provide specific insights into our financial lease rates as we are currently addressing evictions and delinquency issues, which take priority and create a lot of noise in the data. We anticipate this will ultimately be beneficial, but being clear at this moment is difficult.

Okay, understood. And then concessions have come up a few times on the call. I'm just curious if you could walk through the individual markets and just give the average concession that you're offering right now?

We're offering across the portfolio with an average of one week free for units as they come in and adjust as needed to manage our new lease velocity. As far as by-market, we have the largest volume of concessions concentrated in pockets. Southern California is still generally just a few days outside of Los Angeles, and we're seeing larger concessions in Los Angeles areas, the Bay Area. Seattle surprisingly is only a few days at this point. It's been a very stable seasonal slowdown in that market.

Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question.

Thank you for your time. I have a couple of questions regarding some demand drivers you've mentioned before. First, I would like to discuss the in-migration to your markets, including overseas tech workers, visas, and other immigration factors. I'm interested in understanding how this contrasts with the focus on outward migration. Secondly, I want to ask about the conclusion of the writer and actor strikes and the potential impact this may have on your business.

Hey, Adam. It's Angela here. Good question on the in-migration. The data on that front is not as readily available, but what we've been tracking is really the move-ins. Last year, we saw a good uptick, and I think part of that relates to really a recovery and since then it's been steady. The in-migration data into our markets from outside of California and Washington have generally remained steady. The piece that we're still missing actually is the international migration part of it. I do think that will return, just not as immediate at this point. As far as the hospitality industries, it's very telling that when we look at the drivers of job growth in the third quarter, it's mainly education, healthcare, and other services. Hospitality and leisure was very muted. We do think that could be a potential demand catalyst as well.

Our next question comes from Wes Golladay with Baird. Please proceed with your question.

Hi everyone. You mentioned getting repaid on $100 million extra in the structured finance. Do you have a timing estimate on that? Is there any chance you extend that? And then when looking at the entire structured finance book, is there any geographic concentration?

Hi Wes, it's Barb. I think for now you could assume mid-year on the $100 million is probably a safe assumption. I think we have some in the first half of the year and some in the back half of the year. So mid-year assumption is good there. In terms of geographic concentration, our portfolio actually mirrors our actual portfolio in terms of our investments. So about 40% in Northern California, 40% in Southern California, and 20% in Seattle is how the portfolio aligns in terms of where it's located geographically.

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

Thank you. On the 5.3% renewal rate growth achieved in October, can you break that down between how much of that was rate growth versus concession burn-off from a year ago?

Hi, John, it's Jessica. Yes, that it's roughly 50-50. We're seeing about 2.5% to 2.8% or so in rate growth and then the rest is concession burn-off.

So when you compare the concessions that you mentioned earlier that you're offering versus the year-ago, is that additive to rental rate growth going forward?

Where we sit right now it is additive. Last year we were at roughly two weeks, pretty consistently across Q4. Right now, we're sitting at a week. Like I said earlier, we may increase the volume of concessions and the amount, but we'll monitor that. But as of right now, that's a positive.

Okay. Has there been an update on the gross delinquency outlook for the second half of this year? It was last at 1.9%. I think you basically there, including October, has that changed at all?

Hi, John, it's Barb. We didn't make any changes to our guidance for the full year. We believe we're on target for that. There may be puts and takes, and if delinquency does come in favorable, there may be a trade-off with occupancy. Net-net, we're in line with our full-year guidance.

Okay, thank you.

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

Good morning, thank you for your time. Barb, I have a question about the potential deferred repair, maintenance, and CapEx costs that might currently be in the portfolio due to delinquent tenants. Can you provide an estimate of the total amount of money you believe will need to be spent on these units over the next few years? I'm trying to understand whether the costs associated with evictions are just beginning to appear or if most of it has already been addressed.

Hey, John, it's Angela here. Let me provide you with a brief overview. The turnover related to delinquent tenants isn’t significant compared to the past. Some tenants have simply chosen to leave. This turnover is a regular occurrence, and while there are always a few problematic tenants, the rates are similar to what we experienced before COVID. That’s why there isn’t a specific figure Barb can reference. Currently, our capital expenditures are primarily driven by other factors like storm damage. In terms of evictions, while there is a higher volume, it hasn’t led to greater damage than what we’ve typically seen.

Okay. Maybe shifting over to the private market, and I joined the call a few minutes late, so apologies if I missed this, but Rylan, I'm curious where you think market clearing cap rates are right now in the kind of the urban cores of San Francisco and San Jose. I imagine they're pretty close to redline right now. So I'm just curious, what type of pricing do you think buyers and sellers might agree on pricing in the kind of urban high-rise environment in San Francisco, San Jose?

Thank you for the question, John. I’m hesitant to provide a specific number because, as you know, it’s hard to determine where buyers stand when there are no transactions happening. I also want to be cautious about suggesting that an entire city is being redlined. We have seen some transactions this year, and the profile of buyers is different from what we typically encounter. Family office buyers are starting to look at the basis compared to replacement costs, and they are still engaging in transactions in some of the sub-markets you mentioned. It has been a challenging market fundamentally over the last couple of years, but I believe that as conditions improve, investors will return. I’ll refrain from giving you a specific number, but I hope this information is helpful.

Yeah, no, it definitely is. Maybe one follow-up. Just curious, I know you've been talking more suburban over the last few years. What pricing becomes interesting to you to go back into these urban markets that have not really healed from COVID? What kind of range of cap rates would you be willing to be a buyer at?

Thanks, John. Another good question. As you know, we force rank our 30 plus sub-markets and forecast rent growth for five years, forward-looking based on our fundamental analysis. The cap rates have to accommodate for a higher IRR based on those rent growth estimates. There is a price at which we would be willing to invest in these sub-markets. I will say, given the performance we've seen over the past several years with the suburban strongly outperforming and where we're looking at supply for the next few years, I would think on average, incremental dollars will go towards our portfolio investments that look similar to what our portfolio mix currently is demonstrating. But there is a price, and we are turning over every rock and looking for opportunities, and I'm optimistic we're going to see more in the next few years.

Our next question comes from Connor Mitchell with Piper Sandler. Please proceed with your question.

Hey, thanks for the time. Just wanted to follow up on some of the in-migration discussions. Would you be able to kind of give a weighting or the amount of impact that you're expecting from international migration, maybe compared to historical figures, whether that's 10% of the growth compared to the current return to office we're looking for? How much of an impact do you think that could have versus the other demand factors looking forward?

Hey Connor, It's Angela here. That's a good question. California historically has a negative net in-migration, so 17 out of the last 20 years, even during years when we have significant growth. But once you factor in international, net migration becomes positive. As far as the exact percentage, that's influenced by a lot of factors like supply and demand and where the macroeconomy generally is, and of course influenced by the affordability ratio. I don't think I could do you justice by making a straight line from migration number to an absolute percentage of increase.

Yeah, of course. And then, just another question. You've talked about the secured financing a little bit. So after you issued the secured debt earlier this year recently, I was wondering if you could give an update on how the unsecured market is looking now versus the secured market and whether there's been any narrowing of the spreads? The unsecured market has improved a little bit since then. Thanks.

Yeah, this is Barb. So on the unsecured bond market for us today, we would probably be in the high 6% range to do a 10-year unsecured bond offering. If we were to go do a secured loan, 10-year secured loan like we did, I think we're around a mid-six. There has been a little bit of a narrowing from when we originally did our secured loan back in July, but there haven't been a lot of transactions on the unsecured bond market. It's a little unknown at this time. But we feel good about where we executed and our capital needs for next year. We don't have a lot of capital needs next year.

Appreciate the color. Thank you.

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

Hey guys. I have a couple of quick questions. First, Angela, I'm curious about your perspective on a recent article in the New York Times that criticized California, specifically San Francisco, for its significant barriers to housing. I'm interested to hear your thoughts on this. The theme of low entry barriers and limited supply in California seems crucial. Do you have any updated insights on the obstacles to building? Are there any changes being considered that could realistically take place and how might that affect the market? Thanks.

Hey, Haendel. It's Angela here. It's a good question; we've all seen the acute housing shortage in California, and despite Governor Newsom's efforts to enact multiple legislations to spur housing production, it just has not moved the needle in a meaningful way. You may recall that he campaigned on building 3.5 million homes by 2025. There were numerous legislations passed and even recently a few more passed. The barrier continues because there is a cost barrier, as part of legislations they enacted requiring prevailing wages, and there are environmental protections, so it just is very challenging. I go back to that original goal of 3.5 million homes to be built by 2025. Currently, they're on track and have issued about 450,000 permits. So now units built and we're two years away, so that gives you the magnitude of how we view supply and why we do believe that it will remain favorable. When we look at the permit data, it remains very low as well.

Got it, got it, thank you for that. And then one more, I believe, earlier you mentioned that concessions in San Francisco, broadly in your portfolio average one week. I was hoping you could bifurcate that a bit further, maybe San Francisco proper versus down in the Peninsula. Thank you.

Hello, this is Jessica. I don't have that information in front of me. San Francisco is such a small market for us with just about 1,000 units and a couple of large buildings. As far as what we're currently offering, I would say roughly one week free with a little bit more in pockets of the Bay Area like San Jose. Oakland is supply impacted, so we have higher concessions there. Seattle has very minimal concessions. All of Southern California, outside of Los Angeles, has minimal concessions.

Our final question is from Linda Tsai with Jefferies. Please proceed with your question.

Hi, thanks for taking my question. Over the next 12 months across, which markets would you expect the highest rent growth, and how much faster might growth be in these markets versus your portfolio average?

Hi It's Angela here. We do expect our Northern region to outpace the southern region, particularly Northern California and Seattle, and for different reasons. Northern California has much lower supply and will benefit ultimately from tech hiring when they come. Seattle has been our strongest job growth market, but it also has a higher level of supply, about two times that of California as a percentage, so about 1% of stock versus 0.5%. Both of these markets, particularly in the Northern region, are rebounding, and of course, Northern California, as I've mentioned before, has a much better affordability metric. For these reasons, we do expect the Northern region to outperform the Southern regions.

And then just one quick follow-up on expenses. Given the commentary about higher utility and insurance costs in '24, do you see more markets where this is more pronounced versus others?

Yes, this is Barb. Regarding insurance, it’s a widespread issue across the nation, not limited to Essex, Pacific, or the West Coast. We're experiencing significant pressure on insurance costs, which we anticipate will continue. This has been a concern in 2023 and we expect it to persist in 2024. On the utility side, we have seen an approximately 6% increase year-to-date, and we believe utility pressures will remain above inflation in the near term, despite our efforts towards ESG initiatives. These factors will likely lead to increased expense growth in the upcoming year.

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