Essex Property Trust - Q4 2023
February 7, 2024
Transcript
Operator (participant)
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 important 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.
Angela L. Kleiman (President and CEO)
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 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 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 effect of new lease rates, which averaged -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 blender rates of +2.6%.
As we start 2024, leasing activities in our markets is steady. In January, new lease net effect 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 U.S. 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 U.S. 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 do 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 the hiring of highly skilled workers re-accelerate as 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. But 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 remained wide, ranging from approximately 25-50 basis points in our markets, and 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 Barb.
Barb M. Pak (EVP and CFO)
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 S17.1 of the supplemental. Our guidance assumes delinquency of 1.5% of scheduled rents for the full year, which represents a 40 basis points 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 is largely driven by higher insurance costs. Although insurance costs accounts 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 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.
Operator (participant)
Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that participants limit themselves to one question and one follow-up. One moment please, while we poll for questions. Our first question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Austin Wurschmidt (Senior Equity Research Analyst, REITs)
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 kind of how you're thinking about the cadence of that through the year?
Barb M. Pak (EVP and CFO)
Hi, Austin, it's Barb. Yeah, 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, 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.
Austin Wurschmidt (Senior Equity Research Analyst, REITs)
I guess just following quickly up on that, what's driving that really tight spread? Are there concessions burning off or, or anything that's impacting, I guess, the spread between new and renewal lease rates assumed in your guidance?
Barb M. Pak (EVP and CFO)
Yeah. So I, 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 market rent, new market rent growth. And I would say our philosophy on renewals is not to push them above market. We do like to, we want to price them appropriately, and last year, in 2023, we didn't have a significant loss to lease, and 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.
Angela L. Kleiman (President and CEO)
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? Maybe what market rent growth would look like on a net effective basis if you, if you included the concession impact there? Thank you.
Barb M. Pak (EVP and CFO)
Yeah. So the concession piece on the, on the occupancy and concessions, we expect concessions to be a 10 cent-- or 10 basis point headwind to our forecast this year, occupancy to be 20 basis points. So we're forecasting 96.2 for occupancy. So it-- we don't expect concessions to have a material impact to the forecast this year on a year-over-year basis.
Operator (participant)
Thank you. Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.
Steve Sakwa (Senior Managing Director, Senior Equity Research Analyst, REITs)
Yeah, thanks. I guess good morning out there. I noticed on the delinquency slide, I guess it's, you know, S16. 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, you know, showed that big pop?
Barb M. Pak (EVP and CFO)
Hi, Steve, it's Barb. Yeah, you know, this January pop 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 190 basis points increase from Q4 to this, 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.
Steve Sakwa (Senior Managing Director, Senior Equity Research Analyst, REITs)
Okay. And then just, I guess, maybe on the DC or your, your, I guess, your pref book. I mean, just as you've kind of gone through and scrubbed sort of, you know, 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, you know, I guess, how are you sort of handicapping that in terms of any future write-offs?
Barb M. Pak (EVP and CFO)
Yeah, Steve, this is Barb. You know, we take a prudent approach when we look at this, and there's a variety of factors that we look at when we're looking at our preferred book. Where are we? Where's our last dollar sit relative to the market today? You know, what's the maturity of our investments? So how much time do we have for the market to recover? And really, what is our sponsors doing? Are they continuing to put equity, and can they continue to fund? So those are the factors that we're looking at. I think we have fully handicapped the issues that we see today based on current market conditions within our guidance. It's a few assets we're monitoring, but for the most part, the book is performing as we expected.
Steve Sakwa (Senior Managing Director, Senior Equity Research Analyst, REITs)
Great, thanks. That's it for me.
Operator (participant)
Our next question is from Nick Yulico with Scotiabank. Please proceed with your question.
Daniel Tricarico (Equity Research Analyst)
Hey, it's Daniel Tricarico with 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?
Jessica Anderson (SVP, Operations)
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 the 150 basis point improvement, 100 basis points of it is the improvement in concessions. So we were averaging 1 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.
Daniel Tricarico (Equity Research Analyst)
Great. Thank you. Angela, just follow up. How are you thinking about, you know, recycling capital from your future pref equity redemptions into, acquisitions or another, other use? You talked about optimism, I believe in your opening remarks around a growing opportunity set. Are you seeing anything, you know, 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?
Angela L. Kleiman (President and CEO)
Yeah, that's a good question. As far as how we're viewing investments, and, you know, let me just give you a quick background on our preferred equity book. You know, the investment thesis for this vehicle was it was intended to complement development pipeline during a period when yields and interest rates were low and construction costs were accelerating at a significantly higher rate than rent growth. So you saw us leaning into this business when the 10-year fell to a historical low, and in that environment, a 12% yield was relatively more attractive. The general market environment and the interest rate conditions today are very different. And so we view that there's more upside to rent growth in our markets over the long run. So the relative value is more compelling to focus on fee simple acquisitions.
So it doesn't mean that we're shrinking the preferred equity book intentionally, but rather that this book will probably drift lower as we look to acquisitions, you know, as a way to grow the company. And the reason is because if you look at the fundamentals in our market, it all speaks to more upside, relatively speaking, you know, from rent growth. So especially in our northern region, we have much lower supply. Affordability metrics is in the best position we've seen, you know, since we started tracking this metric historically. And there's the rent has yet to recover, so it's still in the recovery phase. And lastly, there's demand optionality.
I mean, if you look at the composition of the companies in our markets, the seven largest, seven out of ten largest companies are located in our markets. And these are companies that have tremendous amount of wealth and looking, and, and have committed to, you know, infrastructure and investment deployments. And so if you look at all the, the building blocks, it's there, and it's ripe for acceleration once the economy shifts from a soft economy to a growth economy. And on the IRFs, Rylan, you want to talk about the IRFs?
Rylan K. Burns (SVP, Investment Strategy)
Yeah. At a high level, I mean, we have several joint venture partners. We've been in this business for a long time, that 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, we expect we will see some opportunities in the next year or two.
John Kim (Managing Director, Senior U.S. Real Estate Analyst)
All right. Thanks for the time, guys.
Operator (participant)
Our next question is from Eric Wolfe with Citi. Please proceed with your question.
Eric Wolfe (Vice President, Equity Research Analyst)
Hey, thanks. I think you just mentioned that you saw the largest improvement in Northern California between 4Q in January, and your peer just mentioned something similar on their call a moment ago. So I was just curious why you think you'll sort of 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 sort of seasonally weak period?
Angela L. Kleiman (President and CEO)
Hey, Eric, it's Angela here. On Northern California, it's really when we look at our market rent growth, it's we do see potential upside. Having said that, that will require the tech companies to hire, you know, 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, you know, 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. It's given, you know, the overall economic environment.
But our Southern California leads the portfolio, and 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 it's. That's the drag.
Eric Wolfe (Vice President, Equity Research Analyst)
Got it. It's helpful. And then, as far as your renewals, when did the concession burn off, sort of the comp get harder? And where are you seeing renewals for the next couple of months if you sort of exclude that, concession burn off?
Jessica Anderson (SVP, Operations)
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.
Eric Wolfe (Vice President, Equity Research Analyst)
Got it. Thank you.
Operator (participant)
Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Alexander Goldfarb (Managing Director, Senior Research Analyst)
Hey, good afternoon, or actually, good morning. It's afternoon here. So two questions here. First, you know, I do like the updated S-17. It's much simpler, and I think brings the focus to just, you know, 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 sort of like low 3 cap deals at the peak or such. But can you just walk through, you know, where your investments sit in the capital stack?
You know, as we hear articles or read stories about, you know, low 3 cap deals being revalued into the 5s and what that does to people's equity and, 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?
Barb M. Pak (EVP and CFO)
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 revalue every asset every quarter. And what we're really focused on is where does our last dollar sit, where are transactions occurring, and, you know, where is, where—what is the exit strategy? And our sponsor is going to continue to fund equity shortfalls. We're also looking at, you know, 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've found solutions, and I think that goes to our disciplined underwriting of our guarantors.
Alexander Goldfarb (Managing Director, Senior Research Analyst)
Okay. And Barb, just to be clear on that, the two in Northern California, they're not paying, so they're on nonaccrual, or you just were precautionary? And then the other, I think, item, loans that you're watching, do you expect those to go on nonaccrual?
Barb M. Pak (EVP and CFO)
So the two in the fourth quarter, we put them on nonaccrual. They weren't required to pay current, but we put them on nonaccrual, just given where we are in the stack. They have near-term maturities as well, and we're working with the sponsors on those debt refinancings. And then the other ones that we're monitoring, we're assessing that mark. We'll assess that quarter by quarter. We have reserved it in the guidance, but we're assessing it based on current market conditions.
Alexander Goldfarb (Managing Director, Senior Research Analyst)
Okay. And then, Barb, just on the guidance front, you know, hearing how you guys have described the market, Seattle's the weak one, you know, Oakland is weak, but your other Bay Area is fine. Southern Cal is obviously great. You're recapturing the COVID units. You know, the OpEx is what it is. You have very little supply in the rest of the portfolio, and it sounds like the jobs outlook, from what Angela described, is fine. So are there any additional, like, it doesn't sound like there are really many headwinds in your portfolio. You don't have the supply issues that are plaguing other, other markets or geographies. So are there any other headwinds that we should be thinking about as far as your earnings, or is this, or what I've outlined is pretty much how you guys are looking at the landscape this year?
Angela L. Kleiman (President and CEO)
Hey, Alex, it's Angela here. I think you are, you are 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. There are, you know, the, the variability really relates to the timing on the delinquency, and that is, that is one, you know, aspect of our business that we don't have as much control as we would like, because we are, subject to how long it takes for the court to process these, delinquency units. The good news is that that process timing has begun to decline. So for example, you know, last year, when we were talking about LA, it took about 10-12 months, and currently we're down to 8 months.
Everywhere else, it used to be 9-10 months, now it's down to 6 months. So we're making good progress there, but that remains a open item for us as far as the risk is concerned.
Alexander Goldfarb (Managing Director, Senior Research Analyst)
Okay. Thank you.
Operator (participant)
Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.
Jamie Feldman (Senior Equity Analyst)
Great. Thank you. I just wanted to dig a little more into your comments on insurance. I think you said up 30%. Can you just talk about, you know, what you're seeing there? Is that definitely the number? Is there any kind of variability to that? And does this last round of storms we've seen over the last few weeks impact that at all, or is it more forward-looking?
Barb M. Pak (EVP and CFO)
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 GL, our general liability, but we don't expect that to move the needle too much. So 30%, I think, is the number. It is still a very challenging insurance market, and, you know, we do have a captive, and we utilize the captive as appropriate to minimize our insurance premiums where appropriate and where we could, 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, it's still gonna 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 undetermined. I think what we need to see in the insurance market is the reinsurers to come back into the market in a big way for the premiums to start to come down. 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.
Jamie Feldman (Senior Equity Analyst)
Okay, that's helpful. I get, 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 it. It seems so convoluted.
Angela L. Kleiman (President and CEO)
Yeah, that's. Hey, it's Angela here. That's a tough one to quantify because even though there are more REITs looking at the captive, and then I think it makes sense to do so, everyone approach 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, you know, provide some additional context.
Barb M. Pak (EVP and CFO)
And the other thing I would just add on that is, you know, we've had a captive for decades, and we have a marketable securities portfolio of over $100 million, which is the premiums that we would have paid to third parties that are there to backstop any major insurance loss that we have. So we do have, you know, a substantial amount of money sitting there on our balance sheet because of that.
Jamie Feldman (Senior Equity Analyst)
Okay, that's very helpful. Have you grown the exposure in recent years or not necessarily?
Barb M. Pak (EVP and CFO)
Not, 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, you know, five stories and up. But outside of that, we haven't taken on any real significant risk in the last few years.
Joshua Dennerlein (Analyst)
Okay, all right. Thank you. I'm sure we'll talk about this more.
Operator (participant)
Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.
Adam Kramer (Equity Research Analyst)
Hey, guys. 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, you know, 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?
Angela L. Kleiman (President and CEO)
Hey, Adam, it's Angela here. You know, that one, the relationship between renewal and new lease rates is really driven by what the prior year's new lease rate is. So for example, in 2022, our market rents or new lease rates were north of 11%. And so that, of course, means that you can have a much higher renewal rate to take it to market. And so that relationship really will be driven by whatever the market rent is going to be, and the renewal then follows. It's really a lagging effect. So there isn't an exact number that you really can peg just because it's really one follows the other, not so much that there is a, you know, logical or relationship that you could just use as a benchmark for trending purposes.
Adam Kramer (Equity Research Analyst)
Got it. That's really helpful. Thanks, Angela. And just on the kind of pref equity, you know, you kind of, you know, you maybe getting kind of more and more money back from that than you have in the past. And you know, 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 the West Coast, and you know, maybe with getting kind of more proceeds back from the pref equity, having a little bit more dry powder, yeah, that could enable you to maybe take a harder look at some markets outside the West Coast. So figured I'd ask that question.
Angela L. Kleiman (President and CEO)
Hey, Adam. No, that's a good question. We actually have, I know this is not a surprise. We get this question on a regular basis, and it's fair to ask. We have historically a disciplined approach when it comes to evaluating markets, not just within our own markets. And so we do look at all the major metros across the US, and it's part of our annual study, you know, to make sure that we have a good handle on what are driving, you know, the fundamentals of other markets as well. And so this is not to say that we wouldn't venture into other markets or, you know, take whatever proceeds available. It's really a function of how we view the relative value.
What I mean by that is, you know, as I mentioned earlier, when we look at the fundamentals of our markets with recovery ahead of us, with potential demand catalysts from these large companies and low supply and affordability metrics, you know, that just speaks to the fact that our markets has much more upside and lower risk from supply, and so it's more compelling in the near term to focus our investments in our markets. We will, of course, continue to watch the other markets and make sure that relative value holds.
Adam Kramer (Equity Research Analyst)
Great. Thanks for the time.
Operator (participant)
Our next question is from Joshua Dennerlein with Bank of America. Please proceed with your question.
Joshua Dennerlein (Analyst)
I just want to go back to your comment that you're sending out renewals at 3.5% right now, but 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 free rent burn-off and when things start to trend down to 1.75%? Because I would assume the second half of the year is actually weaker than the 1.75%.
Angela L. Kleiman (President and CEO)
Hey, Josh, it's Angela here. We are seeing that the benefit of the concession burn-off to begin to abate, you know, as we head into the second quarter. And that's why, you know, as Barb mentioned, that you'll see that renewal rates to start to converge to that 1.25% market rent. So that's hopefully that's the cadence that that answers your cadence question?
Joshua Dennerlein (Analyst)
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, like, blends and occupancy assumptions underlying that.
Barb M. Pak (EVP and CFO)
Yeah, Josh, this is Barb. There's a lot of different assumptions that go into the high and the low end. I think the biggest factor will be delinquency and market rent growth that could drive us to either the high or the low end. And, you know, as we saw, like in the third quarter when we or the fourth quarter, when we got back a lot of delinquent units, it can have an impact, a temporary impact to our occupancy and to market rent if we get those units back in a low-demand period. So there's a variety of assumptions related to that on the high and the low end.
Joshua Dennerlein (Analyst)
... Okay, I'll call it. All right, appreciate that. Thank you.
Angela L. Kleiman (President and CEO)
Our next question is from Wes Golladay with Baird. Please proceed with your question.
Wesley Golladay (Senior Research Analyst)
Hey, everyone. Can you give us the balance on the two nonaccrual investments? And then can you also comment on what the $20 million non-core GNA charge is this year?
Barb M. Pak (EVP and CFO)
Yeah, so the two that we put on nonaccrual, 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 ballot measures, so that's most of what that's for.
Wesley Golladay (Senior Research Analyst)
Okay, thanks for that. And then I guess maybe bigger picture, you know, supply is still relatively low at the portfolio level, and rent growth is, you know, call it low 1%. Is it just mainly the markets with heavy supply bringing that, you know, the blend down for you? You also mentioned something in the comments earlier about, you know, the job growth is being driven by service-related jobs. So I'm just wondering if the job mix is also playing a big part of the forecast this year.
Angela L. Kleiman (President and CEO)
Hey, Wes. On the rents and, you know, for our guidance, it's a couple of factors. So first is what you mentioned, the service sector jobs, which has dominated the job growth last year, and we've all seen the announcements recently. You know, a lot of companies are still retooling and reevaluating. And so typically, if you look at the long-term average of our job growth and the composition, normally you would want about 30% of those jobs to come from higher wage jobs. And so in this environment, which, you know, with the consensus, the macro consensus of a soft landing, we certainly wouldn't be forecasting.
We wouldn't be getting ahead of that and forecasting, you know, robust, high-wage job growth. And so that's one key factor. As far as supply, you're right. For our portfolio, it's, you know, only 0.5% for California. Seattle is elevated and close to 1% and higher than last year. Fortunately for us, it's mostly concentrated in the downtown area, and our portfolio is mostly on the east side. Having said that, there will be some properties that, you know, will be impacted by supply, and we'll see concessions elevated on a temporary basis for those assets.
Wesley Golladay (Senior Research Analyst)
Okay, thank you for that.
Operator (participant)
Our next question is from John Pawlowski with Green Street. Please proceed with your question.
John Pawlowski (Senior Analyst, Residential REITs)
Thanks for the time. Barb, I wanted to follow up on your comments on your quarterly process of remarketing 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 pref book right now? As real values, not lagged, kind of third-party appraised values.
Barb M. Pak (EVP and CFO)
Yeah, I don't have that in front of me, and I, you know, 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 fact, where we are in the capital stack. But like I said, we do a thorough scrub, and we feel comfortable with the book.
Wesley Golladay (Senior Research Analyst)
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? 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 kind of cumulative written-off rent balance.
Barb M. Pak (EVP and CFO)
Yeah, it's a small component of our monthly collections. We are collecting a little bit every month on that past due rent, because we have hit their credit and, you know, gone after them. But because of our conservative approach to how we account for bad debt, whereby if you're delinquent after 30 days, we reserve against it in the financials, you know, when we go and hit their credit, and they need their credit, they will start to pay. So it is a recurring part of our income, given how we account for it, but it's hard to quantify, and it is lumpy. It moves around month to month, and we do expect it will be a recurring part for the foreseeable future, given we have over $130 million in uncollected rent.
It will be a small part, but it'll be drips and drabs.
Wesley Golladay (Senior Research Analyst)
Okay. All right. Thank you very much.
Angela L. Kleiman (President and CEO)
Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.
John Kim (Managing Director, Senior U.S. Real Estate Analyst)
Thank you. I wanted to go back to your market rent forecast of 1.25 for the year, which is below what you had it a year ago. Angela mentioned on 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 you know, tech layoffs were a lot more prevalent?
Angela L. Kleiman (President and CEO)
Hey, John, it's Angela here. We have not seen more move-outs due to job loss, 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.
John Kim (Managing Director, Senior U.S. Real Estate Analyst)
Okay. So just projecting, the unemployment rate moving up.
Barb M. Pak (EVP and CFO)
Yeah, and I think, John, just to add to that, I think the, you know, the mix of jobs has been, we've seen a change in mix over the last year as the high-quality jobs have not been added in mostly service sector, as Angela mentioned earlier. And I think that that is, we just don't see that changing in this environment given the slow economy. So that could change. That would be upside to the forecast, but it's not our base case at this point. And that's what's driving the below average.
John Kim (Managing Director, Senior U.S. Real Estate Analyst)
Can I clarify on the impairment that you had in your preferred? Do you still have a position in this asset, or was the loan fully written off due to recapitalization or some other kind of event?
Barb M. Pak (EVP and CFO)
We still have our investment in the asset, but because the loan and our investment matures in October of this year, and because we don't feel we'll fully realize our valuation by the end of the term of our maturity of our loan, we impaired the asset, which is consistent with GAAP accounting rules. We do believe in the asset long term and the market long term. We're obviously in a very depressed market in Oakland, but it's going to take time for that market to recover. We need to see supply abate, which will start to happen in 2025 and really into 2026. And that should bring rents up. And so that will help our investment long term.
The sponsor continues to fund equity shortfalls and is actively putting money into the project, and we are working actively with them on the refi that will be coming up here in the fall.
John Kim (Managing Director, Senior U.S. Real Estate Analyst)
What is the likelihood you'd put more capital into the project or take ownership of the asset?
Barb M. Pak (EVP and CFO)
I think that that'll 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.
John Kim (Managing Director, Senior U.S. Real Estate Analyst)
Okay, great. Thank you.
Operator (participant)
Our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith (Equity Research Analyst, US REITs)
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 number of property tours, that would be helpful. Like in a market like Seattle, does increased supply in the urban core, combined with return to office, draw residents away from the more suburban Essex properties?
Jessica Anderson (SVP, Operations)
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 lease 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 this time of year.
Michael Goldsmith (Equity Research Analyst, US REITs)
Yeah, thanks, thanks for that. And my follow-up question is on rent control. Have you seen any change in the rent control environment in your markets? And then, you know, given that it's an election year, does that create a little bit more noise than a traditional year? Thanks.
Angela L. Kleiman (President and CEO)
Hey, Michael. In an environment where we're looking at 1.25% market rent growth, we certainly don't expect an elevated, you know, concern when it comes to the rent control conversation. Now, there is... I think many of you are aware that there is a proposition out there to repeal Costa-Hawkins, once again, sponsored by Michael Weinstein, the head of the AIDS Foundation. And, you know, we, of course, participate in the housing coalition that supports responsible legislation, and we do not view that this proposal to repeal the Costa-Hawkins Housing Act will have traction. Because it's, you know, this is the third time that this proposal has come up, and in the past two times, it was overwhelmingly defeated.
I mean, only 1 out of 58 counties voted in favor of repealing Costa-Hawkins, and that was by a narrow margin. It lacks the governor and general political support. It is viewed as an anti-growth proposal that will deter housing production when we already have a housing shortage. But that is one that we are watching carefully. But beyond that, it's, you know, that's a normal operating environment for us from a legislative perspective.
Michael Goldsmith (Equity Research Analyst, US REITs)
Thank you very much. Good luck in 2024.
Angela L. Kleiman (President and CEO)
Thank you.
Operator (participant)
Our next question is from Rich Anderson with Wedbush. Please proceed with your question.
Rich Anderson (Managing Director, Equity Research)
... Hey, good morning, everyone. So Barb, you said, you know, one of the swing factors for you is, getting back delinquent units and, you know, perhaps into a downtime in the rental market and, you know, not knowing what that opportunity would present itself. But I, I imagine it would be either zero or something more, and it's just a matter of, you know, when that something more hits. Is that, 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.
Barb M. Pak (EVP and CFO)
Yeah. So, yeah, and we can take the example of what happened in September, October. We got back hundreds of units. Our 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, to backfill those units. If we get the units back during peak leasing season, and we have strong peak leasing season, there will be less impact to occupancy and rent growth.
Rich Anderson (Managing Director, Equity Research)
But why, why would there be an impact?
Barb M. Pak (EVP and CFO)
Does that make sense?
Rich Anderson (Managing Director, Equity Research)
Why would there be an impact negatively if they weren't paying rent? Who cares what the occupancy was if there was 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 be either zero or something more.
Angela L. Kleiman (President and CEO)
Hey, Rich.
Rich Anderson (Managing Director, Equity Research)
Yeah.
Angela L. Kleiman (President and CEO)
Yes. So I think from your question, from your perspective, the absolute number is right now we're going from zero to something.
Rich Anderson (Managing Director, Equity Research)
Right.
Angela L. Kleiman (President and CEO)
You can't be below zero. But keep in mind, you know, the way Barb has outlined the guidance, we are assuming an improvement in delinquency, which means we do need to convert some of those zeros into a positive number-
Rich Anderson (Managing Director, Equity Research)
Okay.
Angela L. Kleiman (President and CEO)
just to be at midpoint.
Rich Anderson (Managing Director, Equity Research)
Yep. Okay, perfect.
Angela L. Kleiman (President and CEO)
Does that help?
Rich Anderson (Managing Director, Equity Research)
Yep, thank you. And then, so where there are problems in the bank industry and as it touches multifamily, it's in the rent-regulated area, and we've seen that in New York Community and Signature portfolios and so on. Rent-regulated can, you know, California can be described, you know, with that, with that phrase, I assume. I'm curious to what degree you're seeing anything popping up, and if this was covered earlier, I apologize. But is there... You know, are you in a position to, you know, jump on opportunities? Is there a pipeline building of these sort of distressed situations, you know, maturities coming, anything like that, that is interesting to you?
Or is it not really sort of apparently happening at this point, as a, as an external growth opportunity for Essex? Thanks.
Rylan K. Burns (SVP, Investment Strategy)
Hi, Rich. You know, I'll echo what many of our peers have said is we're not currently seeing much distressed selling at all in our markets. You know, 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.
Rich Anderson (Managing Director, Equity Research)
Okay. Thanks so much.
Operator (participant)
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai (Senior Vice President, Equity Research Analyst, REITs)
Hi. In terms of the $134 million in receivables, are there different ways to chip away at that? You know, like, get debt collectors involved or just anything operationally you can do to get your money back faster?
Barb M. Pak (EVP and CFO)
Yeah, Linda, we are. This is Barb. We are pursuing every avenue to try to collect on that money, whether it be take them to small claims court, we've dinged their credit. And like I said, we are collecting little bits here and there, but it depends on when they need their credit. And when they need their credit, then they tend to come back and pay. But if they don't need their credit for a long time, then it can sit out there. But every avenue we can pursue, we are pursuing to try to collect on that money.
Linda Tsai (Senior Vice President, Equity Research Analyst, REITs)
Got it. And then just in terms of getting units back in a low-demand period where it's more negative for you, you know, 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?
Angela L. Kleiman (President and CEO)
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, you know, When we looked at the fourth quarter, the majority of those tenants just leave. So what that means is, for us, normally in a, you know, in a normal environment, we have notices that a tenant is going to vacate. We can pre-lease these units, we can plan for a turnover, and, and of course, coordinated marketing efforts and, and, and, our site personnel is ready for the move-out, move-ins and all, and, 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 gonna come back or when, that's the part that creates that pressure when it comes to pricing, and it's, it's very difficult to predict.
Linda Tsai (Senior Vice President, Equity Research Analyst, REITs)
Thank you.
Operator (participant)
Our next question is from Buck Horne with Raymond James. Please proceed with your question.
Buck Horne (Managing Director, Housing/REITs)
... Thanks. Appreciate, appreciate the time. Was wondering if, going to the delinquency issue, if you could maybe, you know, 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 L. Kleiman (President and CEO)
Hey, Buck, it's Angela here. You know, our team has done a great job staying on top of these potential issues. And when we look at the fraud instances, it has not ticked up or become elevated. And in some instances, say, if it's a building-specific issue, we immediately remedy those. And so that really hasn't been a driver for whether it's behavior or, you know, impact to our financials. It really is driven by the court processing time. So, you know, I'll give you an example. When a tenant goes delinquent, pre-COVID, it only took us about, say, two months on average to evict this tenant. Because of the court delays, it's six months plus, right? Or eight months if you're in L.A. And so that's the time that's getting accumulated.
We normally have a level of delinquency in our portfolio, but it's elevated now because it's just taking longer.
Buck Horne (Managing Director, Housing/REITs)
Gotcha. Gotcha. Okay, that's helpful. I appreciate the color there. And just as it relates to your future, you know, investment opportunities or kind of how you think about capital allocation between urban core or, you know, suburban assets and opportunities in your core markets. You know, you're saying there's a lot of upside still yet to be achieved in the West Coast markets and some, you know, significant recovery potential. Do you think that applies to, you know, the downtown urban cores of, you know, LA, San Fran, Seattle? Is that where you would look to, you know, allocate additional dollars first, or do you think the suburban submarkets would continue to outperform?
Rylan K. Burns (SVP, Investment Strategy)
Hi, 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 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.
Buck Horne (Managing Director, Housing/REITs)
Got it. I appreciate it. All right. Thanks, guys. Good luck.
Operator (participant)
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.