Good day, and welcome to the Essex Property Trust Fourth Quarter 2023 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, 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 Fourth Quarter earnings call. Barb Pak will follow with prepared remarks; Rylan Burns and Jessica Anderson are here for Q&A. I will start with the key highlights of our 2023 performance, then discuss our expectations for 2024, followed by comments on the transaction market and our investment strategy. Overall, 2023 was a solid year for Essex. We achieved a 4.4% same-property revenue growth for the full year, which is in line with our revised guidance and 40 basis points higher than the original midpoint. Furthermore, we made substantial progress in reducing delinquency as a percentage of rent from over 2% in the first quarter down to 1.4% by year-end. These are the results of the well-coordinated efforts of our hardworking operations and support teams across the company. Great job team, and thank you. Lastly, we continue to drive results to the bottom line, delivering a 3.6% year-over-year increase in core FFO per share, exceeding the high end of our original guidance range by $0.06. Turning to the fourth quarter, we deployed an occupancy-focused strategy as market rents moderated, generally consistent with a typical seasonal pattern. In addition, we recovered a significant number of delinquent units starting in October. As expected, the subsequent backfilling of non-paying units during a seasonally slow period created a temporary headwind to net effective new lease rates, which averaged negative 1.7% for the quarter. On the renewal front, the positive trend continues with strong retention among our residents, generating an increase in renewal rates of 4.9% for the quarter, resulting in blended rates of positive 2.6%. As we start 2024, leasing activities in our markets are steady. In January, new lease net FX rates improved by 150 basis points and concession usage decreased by half since the fourth quarter, and our financial occupancy sits in a solid position of 96.2%. Moving on to our outlook for the West Coast in 2024 as outlined in our earnings package. We expect the US economy and job growth to normalize in 2024, consistent with economists' outlook of a soft landing. We forecast job growth on the West Coast to perform in line with the national average on the Essex markets to produce market rent growth of 1.25% on average. The consensus macroeconomic US assumptions and the quality of jobs are key considerations to our modest outlook. In 2023, the employment growth was largely concentrated in the service sectors, which did not yield meaningful rent growth. We expect this dynamic to continue, and we currently assume hiring of highly skilled workers to remain muted as companies continue to evaluate their labor needs and priorities. While our base case scenario for 2024 reflects tempered growth, there are several factors that could support a more positive outcome. First, inflation could continue to move in the right direction, increasing the likelihood that the Fed will pivot from tightening to easing. Accordingly, the economy could gain momentum and hiring of highly skilled workers may reaccelerate as the cost of capital becomes more attractive. Second, the large technology companies implemented significant business and labor retrenchments at the end of 2022 through the early part of last year. Therefore, these companies are better equipped today to lead advancements and stimulate growth. To this point, recent layoff announcements have been much smaller in scale with companies citing larger strategic plans to redirect talent and investments toward artificial intelligence projects, which we view as a long-term benefit for the West Coast. With low levels of housing supply in our markets, a modest increase in demand could accelerate rent growth. Despite uncertainties in the overall economy, we are confident in our market's ability to navigate near-term volatility and to outperform in the long term. Our conviction is based on two fundamental factors, low housing supply and favorable affordability. Over the next two years, we expect less than 1% of total supply growth per annum, which enables us to generate positive rent growth in most environments. Also, renting in the Essex markets is considerably more affordable than owning a home, and favorable rent-to-income ratios support a long runway for rent growth, especially in our Northern regions. As such, we expect the economic incentive to rent to persist and drive demand for multifamily housing. Lastly, on the investment market and our strategy. 2023 was a year of historically low transaction volume, primarily due to significant volatility in the capital markets. Although we've seen interest rates decline throughout the fourth quarter, yield spread between buyers and sellers remain wide, ranging from approximately 25 to 50 basis points in our markets. Thus, we are not anticipating a significant increase in deal volume in the near term. Lenders have generally been accommodating to sponsors extending debt maturities when feasible, and there are very few forced sellers in our markets currently. Given the dearth of data points, there is less certainty in the transaction market. It is during periods of uncertainty that Essex has historically created significant value for our shareholders through external growth. As such, our investment team is proactively looking for acquisition opportunities to generate the best risk-adjusted returns. We expect Essex's disciplined approach to capital allocation, strong balance sheet and deep market expertise will be key differentiators in creating long-term value. With that, I'll turn the call over to Barbara.

Thanks, Angela. Today, I will discuss the key assumptions to our 2024 guidance and provide an update on the balance sheet. Beginning with our outlook for 2024, a key factor to our revenue forecast is our market rent growth assumption. As Angela mentioned, the economic backdrop is expected to be muted this year, which is leading to below-average rent growth for our markets. As a result, same-property revenue growth is tempered at 1.7% at the midpoint on a cash basis. The key drivers of our revenue growth are outlined on Page S-17.1 of the supplemental. Our guidance assumes a delinquency of 1.5% of scheduled rents for the full year, which represents a 40 basis point improvement to year-over-year revenue growth. We expect delinquency will gradually improve as we move through the year. In terms of regional performance, we expect Southern California will produce our highest revenue growth at 3%, led by Orange County and San Diego. Northern California will be around 1%, and Seattle will be our weakest-performing region, which is forecasted to be flat on a year-over-year basis. Moving to operating expenses, we are projecting 4.25% growth for the full year, which was largely driven by higher insurance costs. Although insurance costs account for a small portion of our total operating expenses, we are forecasting a 30% increase in our premiums, which adds 1.4% to our total same-property expense growth. The company remains focused on managing controllable expenses, which we are forecasting to increase 3% in 2024, primarily driven by higher wages. In total, we expect same-property NOI growth of 60 basis points and core FFO per share growth to be flat at the midpoint compared to 2023. Core FFO growth would be over 1% higher if not for the impact from two items related to our preferred equity platform. First, in December, we received $40 million in redemption proceeds, and we are forecasting an additional $100 million in redemption proceeds for this year. We anticipate redeploying the funds into new acquisitions, which tempers our near-term FFO growth but is the best long-term capital allocation decision for Essex. Second, while our sponsors remain current on all financial obligations with the senior lenders, we changed the accrual status on two investments in the fourth quarter based on current market conditions. Further, we've taken a prudent approach as to how we projected income for the remainder of the portfolio as part of our 2024 guidance. We will continue to evaluate the accrual status on each of our preferred equity investments every quarter as appropriate. Turning to the balance sheet, Essex is in a strong financial position with minimal financing needs over the next 12 months and ample sources of capital. Our leverage levels are solid with net debt to EBITDA at 5.4 times, and we have over $1.6 billion of liquidity available to us. We manage our balance sheet and capital needs conservatively to be well-positioned to create value throughout the cycle, and we remain optimistic we will see opportunities to invest this year. With that, I will now turn the call back to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Great. Thanks. Just digging into guidance here. Can you share what your assumptions are for new and renewal lease rate growth are relative to the 1.25 market rent growth assumed and how you're thinking about the cadence of that through the year?

Hi, Austin, it's Barb. Yes. So we're assuming 1.25 for new lease growth and renewals, we expect to be slightly above that at 1.75%. We do expect renewal growth will be in the first half of the year to be above 2% in the low 2% range and then drift down to our market rent growth assumption of 1.25 in the back half of the year.

I guess just following quickly up on that, what's driving that really tight spread? Are there concessions burning off or anything that's impacting the spread between new and renewal lease rates assumed in your guidance?

Yes. So I think if you look at January, you'll see we printed 4.8% on new leases or renewals, but 50% of that is a burn-off of concessions, and so it's not really a new market rent growth. And I would say, our philosophy on renewals is not to push them above market. We want to price them appropriately. And last year, in 2023, we didn't have a significant loss to lease. So we don't have a big spread differential between our new and renewals from last year that would carry forward into this year. So we think it's priced appropriately.

And if I can just sneak in one more. I recognize you guys report financial occupancy, but could you break out the impact from guidance around the occupancy change and then impact from concessions and maybe what market rent growth would look like on a net effective basis if you included the concession impact there? Thank you.

Yes. So the concession piece on the occupancy and concessions, we expect concessions to be a 10 basis point headwind to our forecast this year, and occupancy to be 20 basis points. So we're forecasting 96.2% for occupancy. So we don't expect concessions to have a material impact to the forecast this year on a year-over-year basis.

Thank you. Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Yes. Thanks. I guess, good morning out there. I noticed on the delinquency slide, I guess it's S-16, there was a big jump up in the delinquencies between the fourth quarter and January. And I know you talked about that overall trend getting better for the full year, I think, to the tune of 40 basis points. But just what color can you provide in January that showed that big pop?

Hi, Steve, it's Barb. Yes, this January, we've seen for several years now. It's the post-holiday. I think people are paying off their credit cards and whatnot. So it's not something that we're overly concerned about. We're monitoring it closely. But we have seen this last year, if you go back and you look at our supplemental, we saw a 190 basis points increase from Q4 to January. This year, we're up 80%. So it is a lot lower than we were a year ago, but we're monitoring it.

Okay. And then just, I guess, maybe on the DC or your pref book. I mean just as you've kind of gone through and scrub sort of some of the things you talked about a couple of the underwriting changes. Like just what risk do you sort of see out there on the kind of roughly $500 million you've got outstanding? And I guess, how are you sort of handicapping that in terms of any future write-offs?

Yes, Steve, this is Barb. We approach this matter with caution and consider various factors when assessing our preferred book. We evaluate where our last dollar is positioned in relation to the current market, the maturity of our investments, the timeframe for potential market recovery, and the actions of our sponsors, including their ability to inject equity and continue funding. These are the elements we are analyzing. I believe we have thoroughly assessed the situation based on present market conditions reflected in our guidance. We are monitoring a few assets, but overall, the book is performing as we anticipated.

Great. Thanks. That's it for me.

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

Hey, it’s Daniel Tricarico on for Nick. Barb, with respect to the improvement in new lease rate growth in January, which markets were the largest drivers of that change? And I know you mentioned the 50 basis point improvement from concession burn-off, but is the general market improvement largely in line with typical seasonality?

This is Jessica. I'll take that. With regards to the largest driver of the sequential improvement from Q4 to January, it was 150 basis points. We saw the greatest improvement in Northern California and the Bay Area. And a large part of that was concession burn-off. For the total portfolio, if you break down a 150 basis point improvement, 100 basis points of it is the improvement in concessions. So we were averaging one week in Q4, and that's a half a week for January. And then the other part of it, 50 basis points is attributed to rent growth, which is typical with what we would expect this time of year historically.

Great. Thank you. Angela, follow-up. How are you thinking about recycling capital from your future pref equity redemptions into acquisitions or other uses? You talked about optimism, I believe, in your opening remarks around a growing opportunity set. Are you seeing anything specific in the market today? And I guess, along the same lines, how are your JV partners thinking about deploying new capital into acquisitions today?

Yes, that's a great question. Let me provide some background on our preferred equity investments. The goal of this strategy was to support our development pipeline when yields and interest rates were low, while construction costs were rising significantly faster than rent growth. We leaned into this business when the 10-year yield hit historical lows, making a 12% return relatively appealing. However, the current market environment and interest rate conditions are quite different now. We believe that there is more potential for rent growth in our markets over the long term. Therefore, it is more attractive to focus on straightforward acquisitions. This doesn't mean we are deliberately reducing our preferred equity investments, but this portion may decrease as we prioritize acquisitions to grow the company. The fundamentals in our market indicate that there is significant potential for rent growth. Particularly in our northern regions, we have lower supply, and the affordability metrics are the strongest they have been historically. The rental market is still recovering, and we see demand potential since the largest companies, which have considerable wealth and are committed to infrastructure and investments, are primarily located in our regions. With all these factors in play, the stage is set for growth once the economy transitions from a slow phase to a growth phase. Rylan, would you like to discuss the internal rate of returns?

Yeah. At a high level, I mean, we have several joint venture partners. We've been in this business for a long time and remain committed to us and our investment thesis along the West Coast. So there is demand there if we see the right opportunities. And we would expect we will see some opportunities in the next year or two.

All right. Thanks for the time, guys.

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

Hey, thanks. I think you just mentioned that you saw the largest improvement in Northern California between 4Q and January and your peer just mentioned something similar on their call a moment ago. So I was just curious why you think you'll see this muted rent growth environment throughout the year in Northern California if you're already starting to see signs of a recovery during the seasonally weak period.

Hey, Eric, it's Angela here. In Northern California, it's really when we look at our market rent growth, we do see potential upside. Having said that, that will require the tech companies to resume their hiring in a more robust way. And so our forecast is really a function of the general market outlook, because we cannot disconnect from what's happening with the rest of the country. And in particular, the North Cal region itself, it's really dampened by Oakland because of the amount of supply. And so if you look at the 1.25% market rent, composition, first of all, it's a narrow range, just given the overall economic environment. But our Southern California leads the portfolio and is above that 1.25% and Seattle is a close second. But the drag is really Northern California, which is closer to 1%, so below that 1.25% average, and that's because Oakland is well-below that 1%. So that's the drag.

Got it. That's helpful. And then as far as your renewals, when does the concession burn-off, sort of, the comp get harder? And where are you sending renewals for the next couple of months if you exclude that concession burn-off?

Eric, this is Jessica. As far as renewal burn-off, Barb mentioned it earlier, right now, it's roughly 50/50, and it becomes less so with regards to concession burn-off as we progress through Q1. Our concession strategy last year, I think we averaged roughly half a week free last year, and there were some lumpiness as we dealt with delinquent units. So we may see that show up periodically. But with regards to forward-looking renewals, we've sent out February and March at roughly 3%, 3.5%, and it's a little bit less than 50/50. It's probably more like 60/40, and it will continue to progress that way like I said, unless we have pockets of heavy concession usage from last year.

Got it. Thank you.

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, good afternoon, actually good morning, it’s afternoon here. So two questions here. First, I do like the updated S-17, it's much simpler and I think brings the focus to just the data that you guys provide, so that's good. So two questions here. First, on the pref equity book, I'm assuming that you guys did not underwrite low three cap deals at the peak or such. But can you just walk through where your investments sit in the capital stack? And as we hear articles or read stories about low 3 cap deals being revalued into the 5s, and what that does to people's equity and the associated debt. Can you just walk through your pref book and how you underwrote it and how we should think about it from a cap rate perspective?

Yeah, Alex, this is Barb. There's a lot of moving parts to that question. And every asset is different. What we have is a comprehensive model where we value every asset every quarter. And what we're really focused on is where our last dollar sits? Where are transactions occurring? And what is the exit strategy and our response is going to continue to fund equity shortfalls. We're also looking at their debt maturities, their caps and swaps they have in place as well as their interest reserves with their lenders. So there's a variety of factors that go into it. I do think we've scrubbed the book. We stopped accrual on two others. They were in Northern California, and given where we were in the stack, and we're watching a few others closely. But for the most part, we're at very reasonable valuations on the rest of the book and are not concerned with it. And we've consistently got redemptions even in the fourth quarter we were redeemed out of one of our assets. And so we feel good about the rest of the book, and we've not had to take back an asset. We found solutions, and I think that goes to our disciplined underwriting of our guarantors.

Okay. And Barb, just to be clear on that, the two in Northern California, they're not paying so they're on non-accrual or you just were precautionary and then the other, I think, let that you're watching, do you expect those to go on non-accrual?

In the fourth quarter, we placed two loans on non-accrual status. They were not required to make current payments, but we decided to take this precaution due to our current position. These loans also have near-term maturities, and we are collaborating with the sponsors on their debt refinancings. For the other loans we are monitoring, we will evaluate their status on a quarterly basis. We have accounted for this in our guidance, but we will adjust our assessments based on the prevailing market conditions.

Okay, Barb, regarding the guidance, you've indicated that the market in Seattle is weak, Oakland is also weak, but the rest of the Bay Area is performing well. Southern California is doing exceptionally well, and you are recovering the COVID units; your operating expenses are manageable. There is minimal supply in the rest of your portfolio, and based on what Angela mentioned, the job outlook seems stable. It appears that there are not many challenges in your portfolio and you are not facing the supply issues that many other markets are experiencing. Are there any other challenges we should consider regarding your earnings, or is what I’ve outlined essentially how you are viewing the market this year?

Hey, Alex, it's Angela here. I think you're on point as far as how we see our portfolio. We do see that we have a very stable portfolio and supply definitely is a benefit for us. The variability really relates to the timing on the delinquency. And that is one aspect of our business that we don't have as much control over as we would like, because we are subject to how long it takes for the court to process these delinquent units. The good news is that, that process timing has begun to decline. So for example, last year, when we're talking about L.A., it took about 10 to 12 months. Currently, we're down to 8 months. Everywhere else used to be nine to 10 months, now it's down to six months. So we're making good progress there, but that remains an open item for us as far as the risk is concerned.

Okay. Thank you.

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

Thank you. I wanted to explore your comments on insurance further. You mentioned it was up 30%. Can you clarify if that is the exact figure and if there is any variability? Additionally, has the recent series of storms affected this, or is it more of a forward-looking assessment?

Hi, Jamie, it's Barb. So we did our property and earthquake insurance renewal in December. So that number is fairly baked for the year. We still have our general liability, but we don't expect that to move the needle too much. So 30% is I think the number. It is still a very challenging insurance market, and we do have a captive and we utilize the captive as appropriate to minimize our insurance premiums where appropriate based on the risk that we would take within the captive. So we used all angles to minimize that number, but I think it is still going to be a challenging market for the foreseeable future. In terms of the storms that won’t impact the number this year, but what the carriers will do next year is still it's undetermined. I think what we need to see in the insurance market is the reinsurers that come back into the market in a big way for the premiums to start to come down. And in terms of storm damage, we haven't had anything material. We've had obviously some leaks and some minor things, but nothing material related to the storms.

Okay. That's helpful. I know it's so hard to like quantify because there's a waterfall at every tranche of the coverage, but is there a way to give a number of like your captive exposure? Like what percentage of total liability does fall on the company versus third party? It seems like more and more REITs are growing their captives or using their captives more. I just wonder if there's a way to benchmark that seems so convoluted.

Yes, Angela here. That's a tough one to quantify because even though there are more REITs looking at the captive, and I think it makes sense to do so, everyone approaches how they take first loss and that first layer differently. And so I don't know if you can really get apples-to-apples. We'll look into it and see if there's a better way to provide some additional context.

And the other thing I would just add on that is we've had a captive for decades, and we have a marketable securities portfolio of over $100 million, which is the premium that we would have paid to third parties that are there to backstop any major insurance loss that we have. So we have a substantial amount of money sitting there on our balance sheet because of that.

Okay. That's very helpful. Have you grown the exposure in recent years or not necessarily?

Not necessarily. We will ebb and flow earthquake depending on the earthquake premiums that are out there because sometimes the earthquake coverage can be extreme. So we will look at that in a different way, but we do have third-party earthquake on all high rises and five stories enough. But outside of that, we haven't taken on any real significant risk in the last few years.

Okay. All right. Thank you. I'm sure we'll talk about this more.

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

Hey, guys. I just wanted to ask you about kind of the new versus renewal spread. And I know it's been talked about a little bit already, but just wondering if you were to look over whether it's a long run average, or maybe go back to kind of prior recessions, even and use that as kind of the test case. Wondering what the kind of spread historically was between new and renewals?

Hey, Adam, it's Angela here. The connection between renewal rates and new lease rates is largely influenced by the new lease rates from the previous year. For instance, in 2022, our market rents or new lease rates exceeded 11%. This implies that we can expect a much higher renewal rate to align with the market. Essentially, this relationship is dictated by the market rent, and renewals follow accordingly. It reflects a lagging effect, meaning there isn't a precise figure to reference since one rate follows the other. There's not a clear logical correlation that can serve as a benchmark for trends.

Got it. That's really helpful. Thanks, Angela. And just on the kind of pref equity, you kind of may be getting kind of more and more money back from that than you have in the past. And I know in the past you were asked about kind of, hey, would you look at other markets in the U.S., right, other markets outside of West Coast. And maybe with getting kind of more proceeds back from the pref equity, having a little bit more dry powder that could enable you to maybe take a harder look at some markets outside of the West Coast. So figure I’d ask that question.

Hey, Adam. That's a good question. We frequently receive inquiries about this, and it's a valid concern. We have a historically disciplined approach to evaluating markets, not just in our own areas. We analyze all the major metros across the U.S. as part of our annual study to understand the driving fundamentals of other markets. This doesn't mean we wouldn't consider entering other markets or utilizing available proceeds. It really depends on how we assess the relative value. As I mentioned earlier, when we evaluate the fundamentals of our markets, we see a recovery on the horizon, potential demand from large companies, and low supply alongside affordability metrics. This indicates that our market holds more upside with less risk from supply. Therefore, in the near term, it makes more sense for us to concentrate our investments in our markets. However, we will continue to monitor other markets to ensure that the relative value remains favorable.

Great. Thanks for the time.

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

I just want to go back to your comment that you're sending out renewals at 3%, 3.5% right now, while your guide assumes 1.75% for the full year. I think some of that might just have to do with the free rent burn-off. But can you maybe walk us through the cadence of when we get past that for your rent burn-off and when things start to trend down to 1.7% because I assume the second half of the year is actually weaker than 1.75%?

Hey Josh, it's Angela here. We are noticing that the impact of the concession burn-off is starting to lessen as we approach the second quarter. That's why, as Barb mentioned, you will see renewal rates start to align with the 1.25% market rent. I hope that addresses your question about the cadence.

Okay. Yes. No, that's good. And then maybe just one more. For the same-store revenue range, could you walk us through the assumptions that get us to the high and low end of the same-store revenue range of 70 basis points to 2.7%, mostly focused on blends and occupancy assumptions underlying that?

Yes, this is Barb. There are various factors that influence the high and low ends of our projections. The most significant drivers will be delinquency rates and market rent growth, which can push us towards either end of the spectrum. For instance, during the third or fourth quarter, when we recovered many delinquent units, it had a temporary effect on our occupancy and market rent, especially if we retrieved those units during a period of low demand. Thus, there are multiple considerations tied to our high and low revenue estimates.

Okay, all right. Appreciate that. Thank you.

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

Hey everyone. Can you give us the balance on the two non-accrual investments? And then can you also comment on what the $20 million noncore G&A charges this year?

Yes. So, the two that we put on non-accrual, the balance is $25 million for both and in terms of the $20 million that we have in our guidance, that's mostly related to political contributions. As you know, we're fighting a couple of ballot measures. So, that's most of what that's for.

Thank you for that. Looking at the bigger picture, supply remains relatively low across the portfolio and rent growth is around 1%. Is the decrease primarily due to markets with high supply? You also mentioned earlier that job growth is mainly influenced by service-related jobs. I'm curious if the job mix is significantly affecting this year's forecast.

Hey Wes, regarding our rent guidance, there are a couple of factors to consider. First, as you noted, the job growth last year has been largely driven by service sector jobs. We have all seen recent announcements from various companies that are still adjusting and reassessing their strategies. Typically, if we examine the long-term average job growth and its composition, we would expect around 30% of new jobs to be higher wage positions. Given the current macro consensus of a soft landing, we definitely are not expecting robust high-wage job growth in our forecasts. That's one significant factor. In terms of supply, for our portfolio, it's only 0.5% for California, while Seattle has a higher rate close to 1%, which is an increase from last year. Fortunately for us, that supply increase is mostly concentrated in the downtown area, while our portfolio is primarily located on the Eastside. However, there will be certain properties affected by this supply, and we may see temporary elevated concessions for those assets.

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

Thanks for the time. Barb, I wanted to follow-up on your comments on your quarterly process of remarking the values in your preferred equity book and making sure your dollar basis is safe. Are you able to share a rough average loan-to-value in your prep book right now? On real values, not lagged kind of third-party appraised values?

Yeah. I don't have that in front of me. And I think it varies by asset. So I don't have that in front of me. But it does matter about the rent growth that we've seen in each asset for each property and how we underwrote it initially that all plays into the fact of where we are in the capital stack. But like I said, we do a thorough scrub and we feel comfortable with the book.

Okay. One more for you, Barb. How much success, if any, have you had collecting past written off rent from tenants that have moved out? I'm just not – I don't have a good sense of how much teeth you guys have to go after credit scores and how much you're able to actually collect from the huge cumulative written off rent balance?

It's a small part of our monthly collections. We are gradually collecting on the past due rent because we have affected their credit and pursued them. Our conservative approach to bad debt accounting means we reserve for delinquency after 30 days, so when we impact their credit and they need it, they begin to pay. This is a recurring part of our income due to our accounting practices, but it's difficult to quantify and can vary from month to month. We anticipate it will continue to be a recurring aspect in the near future, especially with over $130 million in uncollected rent. However, it will remain a minor component that comes in gradually.

Okay. All right. Thanks very much.

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

Thank you. I wanted to go back to your market rent forecast of 1.25% for the year, which is below what you had a year ago. Angela mentioned in the prepared remarks, layoff announcements have come down quite a bit year-over-year. So I was just wondering, are you actually seeing more move-outs due to job losses this year versus a year ago when it seemed like tech layoffs were a lot more prevalent?

Hey, John, it's Angela here. We have not seen more move-outs due to job loss, and we do track that. When we look at move-out reasons, it's relatively stable. And so our market outlook is really a function of where the economy is and how we believe we would perform relative to the overall economy.

Okay. So just projecting unemployment rates moving up?

I believe, John, to add to that, we have observed a shift in the types of jobs over the past year, as high-quality positions have not been generated mostly in the service sector, as Angela previously noted. Given the sluggish economy, we do not anticipate this changing in the current environment. While this could evolve and provide an upside to our forecast, it isn't our primary expectation at this time, and this is influencing the below-average performance.

Can I clarify on the impairment you experienced in your preferred? Do you still hold a position in this asset, or was the loan fully written off due to the recapitalization or another event?

We still have our investment in the asset. However, since our loan and investment mature in October of this year and we believe we won't fully realize our valuation by the end of the loan's maturity, we have impaired the asset in accordance with GAAP accounting rules. We do have confidence in the asset and the market's long-term prospects, although the market in Oakland is currently very depressed. It will take time for that market to recover; we need to see supply decrease, which we anticipate will begin to happen in 2025 and into 2026. This should lead to an increase in rents and benefit our investment in the long run. The sponsor continues to provide funding for equity shortfalls and is actively investing in the project, and we are collaborating with them on the refinancing that is expected this fall.

What is the likelihood you put more capital into the project or take ownership of the asset?

I think that will be determined as we work through the refinance and based on the sponsor's response to the refinance. So it's a little too early and premature to talk about that. We'll know more as we work through that this summer.

Okay. Great. Thank you.

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks a lot for taking my question. How is demand trending in your markets? And if you can quantify that in any way, like the number of property tours that would be helpful. Again, a market like Seattle does increase supply in the urban core combining with return to office, drawing residents away from the more suburban Essex properties?

Hi, Michael, this is Jessica. I can provide you some basics, I guess, as far as how leasing fundamentals are going in our markets. And it's really trending as expected in all of our markets. Right now, when we're looking at things like lead volume is steadily increasing, which is what we would expect this time of year, and then also leasing activity overall is stable. As far as quantifying it goes, I mean, we really see that increase in demand that we would expect, of course, correlates to whatever sequential rent growth that we see. And we pointed that out earlier; we saw good growth in both NorCal and Seattle. And that's something that is in part due to concession burn off. Those are our most seasonal markets. So we do expect them to grow more substantially on a sequential basis, but overall, they're performing as expected, in line with what we would expect at the time of the year.

Got it. Thanks for that. And my follow-up question is, is on rent control. Have you seen any change in the rent control environment in your markets? And then given that it's an election year, does that create a little bit more noise than a traditional year? Thanks.

Hey, Michael, in a market with a 1.25% growth in rent, we don't anticipate significant concerns regarding rent control discussions. Many of you might know there is a proposal to repeal Costa-Hawkins again, led by Michael Weinstein, the head of the AIDS Foundation. We are involved in a housing coalition advocating for responsible legislation, and we don’t believe this repeal push will gain momentum since it’s the third time it has been proposed. In the previous two instances, it was decisively rejected; only one of the 58 counties supported the repeal, and even then, it was by a slim margin. It lacks governance and political backing and is seen as an anti-growth measure that would hinder housing production at a time when we are facing a housing shortage. We are monitoring that situation closely, but overall, this is a typical legislative landscape for us.

Thank you very much. Good luck in 2024.

Thank you.

Our next question is from Rich Anderson with Wedbush. Please proceed with your question.

Hey, good morning, everyone. So Barb, you said one of the swing factors for you is getting back delinquent units and perhaps into a downtime in the rental market and not knowing what that opportunity would present itself. But I imagine, it would be either zero or something more. And it's just a matter of when that something more hits. Is that it? Because obviously, the delinquent unit wasn't paying rent. I just want to make sure I understand that logically what you're saying there.

Yes. So yes, and we can take the example of what happened in September, October. We got back hundreds of units or occupancy. So our delinquency dropped about 50 basis points, but our occupancy also dropped commensurately. And then when we backfilled, we gave back a little bit on the rent growth. And so there was a small impact to the bottom line, but it didn't all fall to the bottom line. Long-term, it's beneficial for us. But there is a temporary headwind, especially if you get the units back in a low-demand period because then you have to give concessions to backfill those units. If we get the units back during peak leasing season, and we have a strong leasing season, there will be less impact to occupancy and rent growth.

Why would there be an impact negatively if they weren't paying rent, who cares what the occupancy was if there were zero rent coming in anyway? I'm just curious, I'm not sure I understand why there would be a negative number in that scenario. It would either zero or something more. Yes.

Hey, Rich. Yes. From your perspective, the absolute number right now is increasing from zero to something, so it cannot be below zero. However, as Barb has outlined in the guidance, we are expecting an improvement in delinquency, which means we will need to turn some of those zeros into a positive number just to reach the midpoint. Does that help?

Yes, that's exactly what I'm looking for. Thank you. Regarding the challenges in the banking industry related to multifamily properties, particularly in the rent-regulated sector, we've observed issues with portfolios like New York Community and Signature. I assume California can also be included in this context. I'm interested in knowing how significant these problems are and if you have the capacity to take advantage of any opportunities that may arise. Is there a pipeline developing with distressed situations or upcoming maturities that might interest Essex? Or is it not currently unfolding as an external growth opportunity? Thank you.

Hi, Rich. I'll echo what many of our peers have said is we're not currently seeing much distressed selling at all in our markets given the amount of debt coming due in the next couple of years. We anticipate there should be some opportunities, but as of yet, we have yet to really see any forced selling. So we are keeping our eyes open and looking for opportunities, but nothing as of yet.

Okay. Thanks so much.

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

Hi. In terms of the $134 million in receivables, are there different ways to chip away at that, like get debt collectors involved? Or just anything operationally you can do to get your money back faster?

Yes, Linda, this is Barb. We are exploring all options to collect that money, including taking legal action through small claims court and monitoring their credit. While we are managing to collect some payments occasionally, it largely depends on when they require their credit. When they need it, they tend to pay, but if they don’t need it for a while, the payments can be delayed. We are actively pursuing every possible method to collect that money.

Got it. And then just in terms of getting units back in a low demand period where it's more negative for you, like what are some of the determinants for the timing of when you do get those units back and how do you forecast that to the extent you can?

Linda, that's the $64,000 question of the day. When do we get these darn units back? And for us, it would be great to get them back as soon as possible. The challenge here is that once a unit is in eviction. When we looked at the fourth quarter, the majority of those tenants just leave. So what that means is, for us, normally, in a normal environment, we have noticed that a tenant is going to vacate. We can pre-lease these units. We can plan for a turnover and of course, coordinated marketing efforts and our site personnel is ready for the move-out, move-ins and all those logistics. In a situation where we have a certain number of evictions in play, and we don't know how many are going to come back or when, that's the part that creates that pressure when it comes to pricing and it's very difficult to predict.

Thank you.

Our next question is from Buck Horne with Raymond James. Please proceed with your question.

Thanks. Appreciate the time. I was wondering if going to the delinquency issue, if you could maybe add a little color if you're seeing any systemic application fraud or upticks in just application fraud or identity fraud or other types of misrepresentations by tenants? Is this something that's kind of spreading on social media that's becoming more of a structural issue?

Angela here. Our team has done a great job addressing potential issues, and we have not seen an increase in fraud instances. In cases where there have been building-specific problems, we have resolved them immediately. This is not affecting our financials or behavior, as the main factor influencing our situation is the core processing time. For instance, before COVID, it took us about two months on average to evict a delinquent tenant. Now, due to court delays, the process takes six months or longer, especially in areas like LA. While we typically have some level of delinquency in our portfolio, it has increased now because of the longer processing times.

Got you. Got you. Okay, that's helpful. I appreciate the color there. And just as it relates to your future investment opportunities? Or kind of how you think about capital allocation between urban core or suburban assets and opportunities in your core markets? You're saying there's a lot of upside still yet to be achieved in the West Coast markets and some significant recovery potential. Do you think that applies to the downtown urban cores of L.A., San Fran and Seattle? Is that where you would look to allocate additional dollars first? Or do you think the suburban submarkets would continue to outperform?

Buck, it's a good question. Obviously, investment returns driven by what you pay. So we are paying attention to everything that's coming to market, and we'll keep an open mind to any investment. A major consideration for us is also making sure that we are acquiring near our existing footprints, given our unique operating model. We think we can add a lot of value when it's purchased when we buy something near an existing asset collection. Now as you know, the majority of those assets happen to be in the suburban market, and that is where we're primarily focused. They also have fewer quality of life issues currently. So, a simple answer is we are very focused in our suburban footprint, but we will keep an open mind to anything that crosses our broader markets.

Appreciate it. All right, thanks guys. Good luck.

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Goodbye.