Q3 2024 Earnings Summary
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Reacceleration of blended rent growth and renewal rates | Q2 outperformed forecasts with a 50 bps revenue boost ; Q1 grew 2.2%, influenced negatively by LA and Alameda delinquencies ; Q4 was +2.6% (renewals +4.9%, new leases -1.7%). | They expect a reacceleration from easier year-over-year comps and see renewal rates in the high 3% range, supported by lower concessions. | More positive as easier comps and reduced headwinds bolster rent growth. |
Impact of stricter return-to-office policies on demand | Q2 saw RTO policies contributing to positive migration in Northern California ; Q1 noted hybrid workers moving closer to offices ; Q4 had no explicit RTO impact mention. | Discussed a spike in demand in Seattle following Amazon’s mandates; about 70%-75% of RTO benefit captured in 2024. | Increasingly bullish as mandates drive demand in tech-heavy markets. |
Increasing job openings at top tech companies | Q2 reported a 150% increase from the 2023 trough, still below historical norms ; Q1 saw openings double from 8,000 to 16,000 ; Q4 anticipated stronger tech hiring but hadn’t seen robust activity yet. | Top 20 tech companies’ openings are back to pre-COVID averages, signaling a potential hiring uptick. | More optimistic as job openings reach pre-pandemic levels, suggesting future hiring growth. |
Acquisitions at below replacement cost and joint venture buyouts | Q2 cited deals 20% below replacement cost , Q1 highlighted JV buyouts adding $2 million to FFO , Q4 had no major new buyouts. | Acquired JV assets at a 20%-25% discount, yielding in the high 4% range; still open to consolidating other JVs when accretive. | Consistent focus on undervalued acquisitions and JV partner buyouts. |
Potential new development projects amid decreasing costs | Q2 indicated slight cost reductions but returns were still insufficient ; Q1 and Q4 had no mention. | Noted no starts in nearly five years, but lower hard costs and fewer permits could tip returns in favor of new developments. | Newly positive as cost environment may make developments viable again. |
Elevated advocacy and lobbying expenses | No mention in Q2 or Q1; Q4 mentioned $20M in non-core G&A expenses mostly for political contributions. | Spent $10M in Q3, totaling $16M YTD, aiming for $30M in 2024; primarily for ballot measures Propositions 33 & 34. | Higher spend than prior periods, though considered nonrecurring. |
Reduced supply competition in West Coast markets | Q2 noted developer exits and delayed deliveries , Q1 and Q4 also emphasized muted supply benefiting pricing. | Expect only 50 bps supply growth in 2025, below the 1% long-term average, supporting performance. | Sustained positive as limited supply underpins pricing power. |
Decline in other income from lease break fees | Q2 and Q4 had no mention; Q1 had a $0.02 benefit from commercial lease terminations considered nonrecurring. | Q3 benefited from one-time corporate tenant break fees, which will not reoccur, causing a sequential decline. | Decreasing as these fees are one-off events. |
Persistent delinquency issues in Los Angeles and Alameda | Q2 still had high delinquencies in LA and Alameda dragging occupancy ; Q1 cited negative new lease impacts in these regions ; Q4 noted courts improving eviction backlogs. | LA delinquency improved from 5% to 1.6%, aided by court evictions; confidence growing with more events and tax credits ahead. | Improving despite being a prior headwind, especially in LA. |
Burn-off of concessions reducing future tailwinds | Not mentioned in Q2; Q1 stated concession burn-off would fade by early summer , Q4 showed lease-rate gains partly from concessions ending. | Concession environment is shifting by submarket, but overall no major variance expected year over year. | Lessening impact as concession burn-off tapers off. |
Dividend constraints and financial flexibility | Q1 reinforced the commitment to annual dividend increases and noted $1B+ liquidity ; no mention in Q2 or Q4. | Not discussed this quarter, though the balance sheet remains strong at 5.5× net debt-to-EBITDA. | Stable funding position, no new constraints highlighted. |
Outstanding receivables with limited collection prospects | Q4 discussed $134M in receivables pursued via small claims and credit actions ; no Q1 or Q2 reference. | No mention in Q3. | Not addressed recently, remains an open item from prior disclosures. |
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Rent Growth Outlook
Q: Could rents reaccelerate in the coming months?
A: We're anticipating a possible reacceleration of rents due to easier year-over-year comparisons. Last year, rents continued to increase through October, but we faced headwinds in November and December. This year, we don't have the same headwinds, and we're sending renewals out in the mid-4% range, with early indications landing in the high 3.8% to 3.9% range. New lease rates went negative in October, but with easier comps ahead, we expect an inflection point where rates become neutral or positive. -
Supply Impact in Key Markets
Q: How will new supply affect San Jose and Seattle?
A: In San Jose, we expect the supply impact to be concentrated in Q4, with 2,400 units delivering this year, 1,100 of which are in Q4. This is still low overall, and we anticipate quick absorption within 3 to 4 months. In Seattle, supply is shifting to the east side, impacting Q4 and Q1 next year. However, Seattle's high demand and job growth should help absorb this supply, limiting the duration of concessions. -
Acquisition and Disposition Cap Rates
Q: What are the cap rates on recent acquisitions and dispositions?
A: We acquired two joint venture interests at 20% to 25% discounts to replacement cost, yielding in the high 4% range. One transaction included an OP unit at a $305 strike price when the stock was around $270, making it accretive. We disposed of a 76-year-old asset in San Mateo at approximately a 5% cap rate, redeploying the capital into higher-return investments. -
Potential Repeal of Rent Control Protections
Q: What if the Costa-Hawkins repeal passes?
A: We believe the repeal is unlikely. Similar initiatives were defeated by landslides in 2018 and 2020. Only about 8% of California's 483 cities have enacted rent control, and 23 mayors have announced opposition to Proposition 33, including those from cities with rent control like San Jose. We're confident it will be defeated, but the impact would be minimal even if it passed. -
Capital Redeployment Impact
Q: How will redeploying capital affect FFO?
A: We're losing investments yielding around 10% on preferred equity and redeploying at approximately 5%, impacting FFO. Structured finance contributed about 5.5% of our 2024 core FFO; we expect this to moderate to the low 4% range next year due to redemptions. However, higher NOI from acquisitions should offset some of this impact. -
Return to Office Trends
Q: How is return to office affecting demand?
A: We've seen increased demand correlated with companies announcing return-to-office policies, notably in Seattle with Amazon. When Amazon announced a three-day return, demand spiked within 30 to 45 days. With Amazon's full-time return in January, we're awaiting enforcement to see the benefit. -
New Development Plans
Q: Are you planning new developments soon?
A: After not starting new developments for almost 5 years due to unfavorable returns, we're seeing costs come down as permits decrease. By securing land at attractive prices and designing efficient buildings, we're getting closer to starting new projects, potentially in the next several quarters. -
Improvement in Bad Debt
Q: How is bad debt improving, especially in LA?
A: Delinquency in LA has significantly improved from almost 5% of rent in December last year to 1.6% today. This progress is due to courts processing evictions and positive economic signs like upcoming events (World Cup, Olympics) and increased film tax credits from $330 million to $750 million. -
Exclusion of Advocacy Costs
Q: Why exclude advocacy costs from core FFO?
A: We view these expenses as nonrecurring. We haven't incurred such costs since 2020, so it's been four years. We believe excluding them is standard industry practice and we're transparent about our spending, projected to be over $30 million this year. -
Refinancing Plans Impact
Q: How will refinancing affect earnings?
A: We have $500 million in unsecured bonds maturing next year. We'll refinance, moving from a 3.5% coupon to the low 5% range. This will impact earnings due to higher interest expenses, but we're monitoring the market for attractive opportunities.
Research analysts covering ESSEX PROPERTY TRUST.