Good day, and welcome to the Essex Property Trust fourth quarter 2021 earnings conference call. As a reminder, today's conference 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, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin..
Good day, and welcome to our fourth quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A. Today, I will provide an overview of fourth quarter and full year results, our expectations for 2022, and an overview of the apartment investment market. Essex experienced a strong recovery in 2021 following the unprecedented and extraordinary challenges of 2020. The fourth quarter was our second consecutive quarter of positive same store results, and core FFO exceeded our original guidance midpoint by $0.05 per share. Overall, net effective rents remain above pre-COVID levels despite a modest seasonal slowdown that occurs every fourth quarter. In California, the pandemic and related regulation has led to an unprecedented divergence in apartment performance across our portfolio.
The suburban areas that underperformed for most of the past 30 years are now our top performers, and our historical top performers are now our laggards. To demonstrate, net effective rents in San Diego, Orange, and Ventura counties are up at least 25% from pre-COVID levels, pushing rent-to-income ratios in these counties to all-time highs. Conversely, rents in the tech markets remain well below pre-COVID levels, especially San Francisco and San Mateo counties, which remain down at least 15% and now screen affordable relative to their much higher median household incomes. There is a similar divergence in performance in the large metros that contain both urban and suburban areas. For example, in Los Angeles County, Downtown L.A. net effective rents are flat from pre-COVID levels, while suburban areas such as Long Beach and Santa Clarita are up 15%-20%.
We attribute the underperformance of the urban core to the damaging lockdowns in 2020, which resulted in severe job losses in restaurants and the service sectors. More broadly, recoveries in the urban core and major tech companies have been slowed by ongoing government restrictions, worker shortages, and delayed return to office plans. While the large tech companies generally did not experience job losses, their hiring slowed during the pandemic and many employees relocated in the initial phase of the pandemic due to citywide shutdowns. As of December 2021, the U.S. has recovered about 96% of jobs lost in the pandemic, compared to only 78% for the Essex markets. Obviously, we are disappointed that many tech employers pushed back their office reopenings during the surge of the Omicron variant over the holidays.
However, the data indicates that most large tech employers will adopt a hybrid office environment and therefore the return to office should be a significant catalyst for housing demand in our poorest performing markets. With job growth now exceeding the U.S. average, we believe that our recovery is well underway and several observations support our positive outlook. As highlighted on previous earnings calls, there has been many large investments in office space by the large tech companies this past year, contributing to positive net office absorption in seven of our eight major markets, representing 4.8 million sq ft of space. Available office sublease space has begun to decline in San Francisco, San Jose, Los Angeles, and Seattle, which supports our belief that many companies are moving forward with their return to office plans.
As expected, there is a resurgence in service and hospitality-related hiring as our cities recover, with year-over-year increases in leisure hospitality employment ranging from about 29% in Ventura to about 56% in San Francisco. Recent immigration policy changes from the White House announced last week should also support the positive momentum that we're seeing in job growth at the higher income levels. For many years, Santa Clara and San Mateo Counties disproportionately benefited from foreign immigration. However, during the COVID pandemic, stricter immigration policies during the previous administration drove net foreign immigration to a 30-year low. We suspect that the recently announced immigration policy changes will contribute to job growth, particularly in the Bay Area. The venture capital investment in the Essex markets continues unabated.
In the fourth quarter, approximately $37.5 billion of capital was invested in West Coast-based companies, or approximately 40% of the total venture capital deployed in the United States and representing a 124% year-over-year increase. The West Coast remains a leader in venture capital, which is a driver of global innovation and in turn, local economies and job growth. The top 10 tech employers in our markets continue to seek talent, and with open positions listed in California or Washington reaching 47,000 in the fourth quarter, far exceeding the pre-COVID peak by 62%. Turning to our expectations for 2022, page S-17 of our supplemental package summarizes our key operating expectations and assumptions. We continue to expect full-year rent growth of 7.7% for Essex's West Coast markets.
Our rent estimates are derived from a top-down and bottoms-up approach that we continue to refine with each passing year. We are expecting 4.1% job growth in our markets next year, suggesting moderation from the 5.5% trailing three-month average Essex markets achieved as of December. Even at 4.1%, West Coast job growth should significantly outpace the nation. Our research team conducts its own fundamental analysis of apartment supply, and they expect around 37,000 apartment deliveries in 2022. This is slightly higher compared to 2021 and should lead to a limited disruption at stabilized communities. Similar to 2020, there are pockets of apartment supply deliveries in some urban submarkets, notably CBD L.A.
Similar to 2021, for sale housing deliveries will remain very muted at about 0.6% of total stock of for sale homes. Continued improvement in apartment trends in 2022 may be bolstered by inflationary pressures in the United States, currently at the highest level since the early 1980s. While inflation and its countermeasures have the potential to slow the economy, it's worth noting that apartments are resilient with short lease durations and high operating margins. In addition, it is incredibly difficult to ramp up rental and for sale housing production on the West Coast, given long entitlement processes, government restrictions, and construction labor shortages. Finally, we have a conservative debt structure characterized by minimal levels of variable rate debt, staggered debt maturities, and low leverage.
Estimating future supply a few years from now is another important part of Essex's capital allocation process, and page S- 17.1 of the supplemental highlights recent increases in housing permit activity in various prominent residential REIT markets. While future supply in the Essex markets is expected to drop in 2023 and remain at manageable levels thereafter, supply appears to be increasing in several other markets. It is also important to note that we have limited exposure to the institutional single-family rental market compared to other metros. We continue to believe that housing supply and demand is the fundamental driver of our business and our capital allocation priorities. I have a few brief comments on the apartment investment markets, where the deal volume in our markets has now surpassed pre-COVID levels as institutional capital targets West Coast apartments.
Cap rates are consistently in the low- to mid-3% range, and we've seen yields converge across markets, construction types, location, and age. We sold four properties last year valued at $330 million, using the proceeds to fund stock repurchases early on, and then acquisitions as the year progressed and our cost of capital improved. For the year, we acquired $432 million, with the majority of acquisitions completed in a co-investment format to conserve capital. Generally, we see greater deal volumes during uncertain conditions, so we are optimistic about more opportunities to create value in the transaction market in 2022, and Barb will detail our 2022 guidance assumptions in a moment. With that, I'll turn the call over to Angela Kleiman.
Thanks, Mike. First, I'd like to express my gratitude for the exceptional operations and support teams we have here at Essex. As the challenge to our business continue to evolve, our team has also continued to step up, which speaks to the dedication, work ethic, and the can-do attitude across the organization. On to today's comments. I'll begin with key operation highlights of our major regions, then focus on our outlook for the year, followed by an update on the progress we are making by leveraging technology, data analytics, and transforming our operating platform. We are pleased with our fourth quarter results of 4% year-over-year and 1.6% sequential growth in same property revenues. We have detailed on S-16 of our supplement, which shows the fourth quarter year-over-year new and renewal rent spreads up by 17.1% and 10.7% respectively.
The significant recovery in rents over the last year was bolstered by the occupancy and concession strategies we implemented throughout the pandemic. To review our markets by region, I'll begin in Southern California, which represents almost 45% of our NOI and was our best-performing region in 2021. Through many economic cycles, we have consistently relied on Southern California for steady performance, and during the pandemic, it has exceeded our expectations. The one caveat is the Los Angeles sub-market. While it is also showing strong rent growth, this market faces offsetting challenges from the ongoing eviction moratorium and disproportionate bad debt. Notwithstanding these challenges, we remain optimistic with the broader Los Angeles sub-market because of the continued strategic commercial investment by companies like Warner Bros., which is planning to develop 1.3 million sq ft of studio and office space in Burbank.
This will be the largest studio development in the country and is expected to bring about 400 new jobs to the market. FilmLA recently reported the production activity hit an all-time high in the fourth quarter, and Apple recently proposed a 500,000 sq ft office development in Culver City, which should create approximately 2,500 new jobs. The continued job growth and high cost of homeownership amidst a slight increase in supply deliveries in Orange County and San Diego are factors considered in our expectation for demand for rental housing and the basis for our 2022 outlook for Southern California market rent growth of 7.1%. Moving north to the Bay Area and Northern California, it is no secret that Northern California's rents have lagged the nation and the Essex portfolio average. We view the region as in early stages of its recovery.
Unlike most markets across the country, which are effectively back to normal economic levels, the Bay Area has yet to fully recover due to ongoing COVID regulations, such as mask mandates and delayed return to office, tempering the momentum of normal economic activities. We have seen communications by Bay Area companies informing employees of plans to return to office after Omicron case subsides, and we remain encouraged by the large tech companies' expansion plans and commercial investments in our markets, as highlighted by Mike. Furthermore, our supply delivery forecasts a decline in 2022. Thus, we anticipate rapid recovery in rent growth without requiring a comparable level of increase in housing demand. Keep in mind that our Northern California portfolio is mostly suburban and should benefit from those employees having fewer commuting days in a hybrid environment.
These factors contribute to our expectation for Northern California to be one of our strongest rental markets in 2022, with market rent forecasted to increase by 8.7%. Turning to our Seattle portfolio, which continues to perform well. We anticipate similar level of supply deliveries this year as last year, with the majority concentrated in downtown Seattle. Because our portfolio skews to the east side in Bellevue and surrounding suburbs, the demand for our communities remains strong from the continued investments by several companies, most notably Amazon, which has committed to developing a second tower in Bellevue with construction to start this year, and is expected to create an additional 3,500 jobs. Therefore, we forecast Seattle's market rent growth at 7.2% for 2022. Moving on to the advancements in our operating model.
By way of background, our discipline and focus of investing in high-quality submarkets has resulted in 70% of our properties being located within 5 mi of each other. With this competitive advantage in geographic concentration and innovation in technology and data analytics, we have re-envisioned Essex operating model with property collections. Essentially, we are transitioning from a dedicated team at an individual property to teams that will cover a collection of properties, allowing each associate to specialize in specific function and improving our ability to cross-sell among nearby properties. By organizing properties into collections and centralizing certain administrative duties, we expect to generate more efficiencies across the portfolio. We have already implemented this collections model in Orange County and San Diego and have achieved a reduction in personnel by approximately 10%-15% through natural attrition.
In addition, our data analytics has determined that our ability to cross-sell neighboring communities has increased by over 800 basis points following the adoption of the collections model. We plan to complete the rollout of the collections operating model to the remaining regions by the end of this year. While Essex has been efficient historically with each associate covering 40 units prior to 2019, with recent enhancements, we currently have each associate covering 43 units across the entire portfolio. Further benefits are expected in 2022 and thereafter as we complete our technology and other implementation plans. We are currently co-developing proprietary applications with partners from RET Ventures and other software developers that will enhance the associate and customer experience.
One example of advancements in our operating model over the past months has enabled 100% contactless tours, which currently consist of 92% self-guided tours and 8% virtual tours. As part of our technology initiative, we are starting the rollout of Alloy Access, a SmartRent common area access solution which will elevate the resident experience while also further the productivity of our operations team by enhancing security, usability and monitoring, along with improving the effectiveness of the self-guided tours for prospective customers. In addition, we are working with Funnel to co-develop a tailored solution to further automate our platform, which we plan to roll out later this year. We believe this will directly benefit both the associates and customers through streamlined systems, on-demand features and link communications across properties which will meaningfully accelerate the timetable to turn prospects into renters.
We integrate these advancements with our data analytics platform to provide new operational insights. For example, leveraging newly available data on our leasing patterns from Funnel has improved the quality and effectiveness of our customer interactions. We have also applied advanced analytics with data from SightPlan to streamline our maintenance workflow, which reduced our unit turn times by 10% in the fourth quarter on a year-over-year basis despite COVID-related labor challenges. We expect that these initiatives will continue to provide us with additional levers and insights to improve our revenue growth and operating margins in the coming years. With that, I'll turn the call over to Barb Pak.
Thanks, Angela. Today, I will discuss the key assumptions supporting our 2022 guidance and conclude with an update on the balance sheet. We ended 2021 with strong momentum in the fourth quarter, as demonstrated by 4.7% same-property NOI growth and 7.6% Core FFO. We believe the economic recovery has only just begun on the West Coast, and thus this positive momentum will continue throughout 2022. As such, we are forecasting Core FFO per share growth of 9.7% at the midpoint, which is the highest growth in six years. We are pleased that our 2022 Core FFO per share guidance is expected to exceed our pre-pandemic FFO achieved in 2019 despite the challenging operating environment. This is a testament to our disciplined operating strategy and capital allocation process, which is driving results to the bottom line.
Our 2022 FFO growth is primarily driven by a 7.8% increase in our same-property revenues on a cash basis and 8.3% on a GAAP basis. For the year, we expect fewer concessions as compared to last year, but delinquency remains a challenge, and we are expecting delinquency of 2.4% of scheduled rent in 2022, which is 30 basis points higher than 2021. We have two counties representing 50% of our total delinquency where tenant protections remain in place. In addition, response times on tenant applications seeking emergency rental assistance remain slow and outside of our control, leading to large monthly swings in the delinquency line item. As a reminder, our historical annual delinquency has been around 35 basis points of scheduled rent. Given our long history of high collections, we believe we can ultimately return to this level once the various restrictions are lifted.
We continue to assist residents in applying for federal tenant relief funds and have received $29 million to date, of which $12 million was in the fourth quarter. As for operating expenses, we are forecasting a 4% increase, which is above our historical average of 2%-3%. This is a result of wage pressures in the market, along with general inflation in the economy for materials. In total, same-property NOI is expected to grow 9.4% on a cash basis. Continuing with our investment expectations for 2022. As we have discussed throughout the past year, we have seen an elevated level of early redemptions of our preferred equity and subordinated loan investments due to high demand for West Coast apartments and low interest rates.
In 2021, we had approximately $210 million of redemptions, and our 2022 guidance contemplates another $350 million of redemptions. Some of this was pushed from the fourth quarter into this year. Over the past year, it has become more challenging to find new investments given the influx of capital to this segment. However, we were able to secure $117 million of new commitments with an average yield of 11%, maintaining our disciplined approach to underwriting these projects. Our 2022 guidance contemplates an additional $100 million of new commitments at the midpoint, of which we assume $50 million will be funded during the second half of the year. The remainder of the preferred equity redemption proceeds will be used to fund new acquisitions. Finally, the balance sheet remains in a strong position.
During the quarter, we saw continued improvement in our credit metrics, and our net debt-to-EBITDA ratio declined to 6.3 x as EBITDA grew. We expect this trend to continue throughout 2022. Over the past two years, we have taken advantage of the low interest rate environment and refinanced nearly 40% of our debt, locking in low rates and reducing our weighted average interest rate by 70 basis points. As such, we have only 6% of our debt maturing over the next two years. In addition, we have minimal exposure to short-term rates with only 4% of our consolidated debt subject to floating rates. As such, we have minimal risk to the rising interest rate environment.
Given limited near-term maturities, no material development funding needs and ample liquidity, the company remains in a strong financial position. 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. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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. One moment please while we poll for your questions. We ask that you please limit yourself to one question and one follow-up question. Our first questions come from the line of Richard Hill with Morgan Stanley. Please proceed with your questions.
Hey, good morning, guys. I wanted to maybe just start off with a question about new leases relative to same-store revenue. I typically view new leases as a leading indicator for same-store revenue, and you put up just a huge number for new leases in January, I think around 17%. How are we supposed to think about that? Maybe if I can push you a little bit, why is the same-store revenue higher?
Sure, Rich. It's Angela here. Let me just give you a little context on the S-16 that shows our new lease rates. You know, it is terrific with that 17%. Keep in mind, that's a year-over-year number to start. We have communicated that, you know, between fourth quarter of 2020 to first quarter of 2021, so that comparable period, that's when market rent troughed. From a year-over-year perspective, we are really hitting kind of the greatest delta, if you will, from a differential perspective. If we're talking about really the same-store guidance, what we probably. You know, I think a better indicator is to look to the S-17 that Mike talked about earlier.
You take that market rent of 7.7%, that market rent growth, and then you factor in the loss to lease at year-end. I know we normally do this, you know, look to the September loss to lease, but you might recall that we had, you know, atypical seasonality and the seasonal peak was pushed. We had, you know, caution against using the September loss to lease. If we look at the December loss to lease, it's around 6%. You factor those in and then, you know, some of these other factors such as legislation and delinquency, that's what ultimately drives our midpoint guidance of 7.8%.
Got it. Look, that makes sense to me. We spend a lot of time on your macro forecasts. I guess your revenue guide was consistent with that, which is sort of what we expected. The new lease spread was just really high and that's helpful color. Just one more question for me. You know, when we're unpacking what you reported and guided to relative to our numbers, one of the things that stood out to us was rising interest expenses and then rising non-same-store expenses. Can you just maybe talk through what you're expecting for the interest expense side of the equation and you know, if you're intentionally being conservative given the interest rate environment that we're in right now?
Hi, Rich. It's Barb. In terms of the interest expense line, the biggest factor there is the reduction in capitalized interest as our development pipeline has substantially rolled off. That's a pretty substantial increase in the interest expense. We do have a couple rate increases forecasted in the guidance, and it will. It's really why we have a range, but we don't have a lot of variable rate debt. We only have 4% of our consolidated debt as variable rate, so that's a small impact to the numbers. It really is the capitalized interest side of the equation. I think that's a $4 million reduction year-over-year.
Okay. That's helpful. Guys, I'm sure a lot of people have other questions, so I'll jump back in, but thank you for that.
Thanks, Rich.
Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.
Hey, good morning. Morning out there. Just a few questions from me. As far as Southern California goes, the strength that market is experiencing in general, do you think that will continue? When San Francisco reopens and those tech jobs once again have to be in the office, are you expecting a migration back of people who migrated down to Southern Cal, going back to Northern Cal? Or your view is that everyone who has populated Southern Cal loves the lifestyle and is not looking to relocate back?
Hey, Alex, it's Mike. I'll start with this and then flip it to Angela maybe for some more comments. You know, we think that there is a reversion underway, and it will draw people, you know, back to where the jobs were kind of pre-pandemic. The pandemic caused a lot of disruption with respect to where people went, and many people went to Southern California and elsewhere. We think as the pandemic winds down, people will go back to where they once were. You know, again, with the hybrid model being the typical format for a lot of the big companies out here. We think that some of the people will move from Southern California back to Northern California.
Keep in mind, there were people from Southern California that moved to Phoenix and other places as well. It's not just a one direction, movement. We think that the overall impact will be beneficial for California in total. Even though some people will move from Southern California back to Northern California, that'll be, you know, offset by potentially other people moving back, you know, for job reasons, and/or lifestyle decisions. With that, I'll turn it over to Angela. Anything to add, Angela?
Maybe just a little historical context, Alex. You know, with the Southern California portfolio and in particular San Diego, Ventura, and Orange County, these are markets that perform at a 97% occupancy, even pre-COVID. It's already a highly desirable place to be. We combine that with this region having the strongest loss to lease. It actually has, as far as we can see, pretty long legs. In the interim, during the reversion that Mike is referring to, it may be more of a net neutral, but long term, this market will still—we will see this market continues to perform well with a good tailwind from loss to lease.
Okay. Then just as a follow-up to that, as part of guidance, and Mike, you've spoken about the exodus of the, you know, the high tech worker and then the service worker who left when their businesses were shut down. As far as guidance goes, how much of guidance is predicated on the return of tech workers, return of the baristas? Just trying to get a sense. Or if return to office occurs and if service job, you know, those people who left came back, that's incremental above and beyond what you're already assuming in your numbers.
Yeah. Alex, I would say that, it's already happening, so it's not a future event necessarily. I think we're in the middle of the reversion. I think, you know, to point to a statistic, just look at job growth.
Job growth is, you know, trailing three-month job growth is highest in Seattle, 6.2%, followed by Southern California by 5.8% and Northern California by 5%. Jobs are coming back. People are starting to move. The Bay Area obviously is a step behind, but we think it will catch up given the strength and the uniqueness of the tech employers that are there. We think it's all underway and it's just gonna take some time to play out. I guess the question is, can it accelerate? I mean, we actually expect it to accelerate, especially in the tech markets, which were of course, those that were most impacted.
By the end of the year, we expect that California will or our markets will have about 93% of their jobs that they lost during the pandemic recovered. We're currently at about 78% now. We expect, again, these trends to continue and pretty favorable for our markets given you know what the impact on jobs is.
Thank you.
Thank you.
Thank you. Our next question has come from the line of Nick Joseph with Citi. Please proceed with your questions.
Thanks. Maybe just following up on that. It seems like another topic, at least for San Francisco and maybe Seattle as well, is just the quality of life overall. Obviously a return to the office will help improve things. Do you think there's other steps that need to be taken, or will the return to the office really help with quality of life as well?
I think quality of life considerations really come into play in the CBDs, the homelessness concerns about defunding the police, et cetera. I think that is where quality of life issues are more manifest and obvious. You know, as they say, they're not creating any more beaches around here, so that's obviously a benefit. So I think that the quality of life in suburbia is actually very high. You know, as we said before, we're gonna push out a little bit farther, you know, strategically into some other, some different markets.
Adam's here, he can talk about this Vista deal, which we've never bought in Vista before, but it represents one of those markets that's, you know, in suburbia, good community, good decent schools in a very nice northern San Diego sub-market. You know, we're looking for that, and we think that we can find great quality of life in some of those markets, and there's great opportunity out there.
Thanks. As you think about the co-investment and the preferred and the MEZ book, you know, obviously you've gotten good returns from it, and it's led to some opportunities. As you think about kind of earnings and some of the volatility that we're seeing this year associated with it, how do you think about the size going forward from a strategic perspective?
Yeah, Nick, I think it's about right, actually. We have about $700 million combined between preferred equity and MEZ debt. Again, we don't want that business to get to be too large. I think we took advantage of an opportunity in 2020 to grow the business a bit, given that there was very little else that was working, and I think that's helped. It will be somewhat lumpy, and that's the primary reason why the board and all of us, you know, think that we should control its size and not let it get too large. First and foremost on our mind. From our perspective, it is probably the best risk-reward of what we do in terms of how we generate income. Plus there's some other advantages.
One of our investments this quarter was a joint venture that came out of the preferred business. I thought that was, you know, having other types of business tied to that is important. Plus we get a look at many development deals, you know, that are going on in the marketplace and, you know, that allows us to be more discerning with respect to our development pipeline.
Thank you.
Thanks.
Thank you. Our next questions come from the line of Richard Hightower with Evercore. Please proceed with your questions.
Hi. Good morning out there, guys. I wanna go back to a couple of the prepared comments in terms of delinquencies and I guess the longer term assumption that delinquency rate will revert more to, you know, historical norms. You know, every time we talk to your coastal peers, you know, regulatory risk is obviously very prominent in the decision to diversify outside of certain markets. I assume this is part of that. I guess what over the longer term gives you the confidence that, you know, the regulatory environment in that regard will indeed get back to where we were pre-COVID?
Yeah, it's a good question and it's definitely something that's on our minds and we will say that it's frustrating from time to time. But I guess, you know, we would ask that everyone take a balanced view of these regulatory risks and look at the other side. I mean, the other side is that limited housing supply really comes from all the regulations that make it difficult to build housing in these markets. You know, we try to balance that equation as best we can and knowing that we are, you know, a beneficiary of, you know, the supply issues that California has because there's always another regulation that is making it more difficult for us to build housing right around the corner, which is what keeps supply under control in California. Keep that in mind.
We know that we need to be a strong advocate with respect to sensible housing policies and, we're gonna be active in that area going forward. Again, we would hate to trade away the, you know, the unique benefits that we have given the supply restrictions in California.
Okay. Yeah. I appreciate there's two sides to the coin there, Mike. Maybe one quick follow-up. I mean, just, are you able to delineate for us on this call the bad debt percentages in terms of leases that were signed in the pre-COVID vintage? You know, true sort of COVID hardship at the time versus any leases that were signed when the world started to get better again, I mean, you know, and people that were gaming the system after COVID was already, you know, a factor. Is there a way to do that?
You know, I'll start and then you know flip it to Barb. You know, a lot of this, there was nothing in the pre-COVID period that indicated that there were any issues with delinquency. I'll make that comment number one. Most of the issues that we have are really related to the government, the governmental agency, which is there's a website called Housing Is Key. They have very recently about $7 billion in applications and they paid out about $1.9 billion. They're way behind. There is this delay in getting reimbursed for all these claims. Barb has some information about what's in process, et cetera.
I guess the key here is that the state agencies are way behind and there's a lot of money that has been submitted and we don't know, we don't have control over what's gonna happen with those funds. So we're just gonna have to wait, which led to what we hope to be is obviously conservative guidance. We weren't intending to be conservative, but we realize that some of these factors are out of our control and you know, we erred, you know, maybe to the conservative perspective, but we just don't know. Barb, with that said, I think you have some additional numbers.
Yeah, Rich. In terms of our cumulative delinquency, we're at about $67 million. We have applied for reimbursement for 80% of that, so about $53 million. Of that amount, $33 million relates to our existing residents. However, you know, the timing and amount of being able to collect that is unknown because the program prioritizes based on the resident's area median income, which is, you know, something that we're not fully privy to at the time they apply. The remainder is applications we've applied for on behalf of past residents. Now, our ability to collect on that is if the resident will engage, and that's unknown at this time.
We have applied for everything that we can, and as Mike said, the state of California has been slow to disperse funds, which is causing a lot of the noise in our numbers at this point.
Okay. Thanks for the color, guys.
Thank you.
Thank you. Our next questions come from the line of Brad Heffern with RBC Capital Markets. Please proceed with your questions.
Yeah. Hey, everyone. Thanks. I was wondering about rent-to-income. You talked in the prepared comments about the big divergence between urban and suburban. Can you give any figures about where rent-to-incomes have trended in those two, you know, splits? If they've moved, has that largely been because rent has moved or has income moved as well? Thanks.
Yeah, this is Mike , and there may be Adam may have a comment too here. Generally speaking, the good news is that incomes are moving and you know, that affects us in terms of our guidance, but it also helps us charge more rent or you know, allows us to have higher rent levels and helps us much more than what it costs us on the operating expense side. We're pleased with higher income levels, and we're seeing that throughout our portfolio. You know, in terms of numbers, Southern California, for example, has a rent-to-median income. This is the median. This is not our data. This is general data that comes from our data vendors.
Using median rents and median incomes, we're currently at 26.9% rent-to-income in Southern California versus the long-term average of 22.3%, so well in excess of that average. Conversely, in Northern California, we're currently at 22.1% rent-to-income versus a long-term average of 23.1%, so well below in that regard. Seattle is a little bit different. It's at 21.1% versus 18.7% respectively. It suggests that it's higher in the rent-to-income versus the long-term average, although that market has changed pretty dramatically in terms of it going from being a lower cost to a higher cost or higher rent market over the last 10 years or so. I'd say it's fundamentally changed its nature.
Does that help answer your question?
It does. I mean, one of the things I was trying to get at is specifically for Northern California, you know, when you have the backfill after the initial sort of COVID pain, I'm curious, did you see, you know, significantly lower incomes from those people, and that's part of what caused the pricing pressure? Is there any reversion of that, or is the pricing pressure truly just due to, you know, other factors?
Yeah, if that's the question. Yeah. No, we see. Take the leisure and hospitality segment, which lost a tremendous number of jobs because the state shut down the restaurants and the hotels shut and travel was shut down, basically. All those people that are, you know, generally pretty low-wage earners left the Bay Area and went somewhere else. You know, they migrated far and wide or, you know, went home with parents, et cetera. We're starting to see them come back. They're skewing the data in terms of their impact on rent-to-income. It looks like we're bringing in a lot of lower-income workers, but it's just replacing what we lost a while ago. There's nothing fundamentally wrong with the Bay Area or any of our markets with respect to income levels.
I think they're still in very good shape. The tech companies continue to. They didn't, you know, lose a lot of employees, and they continue to hire at robust levels at high income levels. Those high income levels are what really drive the demand for the services, you know, all the jobs that we lost early on in the pandemic. You know, high incomes, people here make enough money that they can pay a little bit more for their dinner and some of these other services. We just don't see that as a key issue. The key issue is how do you draw back people that left in the early parts of the pandemic? How do you draw them back now? I think that's an ongoing process. Does that help?
Thank you. Yeah, that's perfect.
Thank you. Our next questions come from the line of John Kim with BMO Capital Markets. Please proceed with your questions.
Hello. I was wondering if you talked about how sourcing new preferred methods has been challenging in this environment. Would you consider doing deals outside of your core markets, not necessarily to own the equity, but just to provide a wider pool of investment opportunities.
This is Mike. Actually, I'm gonna give this to Adam in a minute, but the answer is we are to some extent. In other words, we're not going to completely different markets, but we're pushing into other markets. Adam, you wanna give him a couple examples of deals that we've done?
Yeah, John. We have been tracking into other markets since really the platform was put into place. We've done to echo what Mike said. We've looked slightly outside of our markets to where we think the fundamentals are still there. A couple of them we've done, we did one in Redlands, which is Inland Empire. That one's going well, currently funded. We have one round trip in Sacramento that that market has obviously done very well. We continue to track markets kind of within our overall footprint, but a little outside and we'll consider even a little further beyond that.
Okay. Nothing outside of the West Coast, really?
No.
My second question is on your revenue generating CapEx guidance of $100 million, which is more than double what you invested in last year. How much does this add to same-store revenue growth this year versus 2023? Is it fair to assume that most of this CapEx will be outside of Northern California?
We actually are looking at these opportunities throughout the portfolio. It's not skewed toward one region because we are seeing strong market rent growth in all of our portfolios in all of our regions. As far as when they'll be realized, less likely in 2022, just because as you know, it takes time.
To, you know, renovate and then get them leased up until time, by the time that occurs, you certainly wouldn't have a full year of revenue. So it's more likely going to impact 2023.
Great. Thank you.
Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your questions.
Great. Thank you. Mike, in your prepared remarks, you referenced that buyers in the markets are, you know, not really discerning, I guess, between location and maybe vintage of product. You know, is that simply just a function of the amount of capital that's coming into your markets and chasing deals? You know, separately, is there really any opportunity for you to pull forward any, you know, portfolio management objectives as a result of kind of everything seemingly converging in pricing?
Hey, Austin, this is Adam. I can start with that, and then if Mike has any follow-ups. So we're seeing a different buyer pool for different vintages and different locations. Ultimately, what you said in your question is right. There's so much capital chasing these deals, whether it's coming from value add funds or larger core funds or whomever, that the compression between product age, type, construction type, and location has been significant and continues to remain today. As it relates, Mike, do you want to cover the...
Yeah. Could you repeat the question about the portfolio?
Yeah. Just portfolio.
Yeah
management objectives, trading around submarkets, you know, increasing product quality, whatever sorta, you know, is in your purview, I guess.
Oh, I see. Yeah, the broader management objectives. Yes. Well, we continue to believe that we can add value in a variety of ways. It isn't that we're, you know, necessarily gonna dramatically increase our portfolio allocation to any one market or decrease it. I think that we're overall pretty happy, and we wanna see how the pandemic recovery plays out. Like everyone else, there's, you know, a number of unknowns about portfolio transitions, and we would like to get into a more normal world. As I mentioned in my prepared remarks, you know, the laggards of the last 30 years are now our top performing markets. Is that possible that continues, or does it revert back? I suspect that there will be some fairly significant amount of reversion.
As we think of the world, we think that probably the urban core, again, given issues with homelessness, crime, et cetera, are probably a mild negative, mild to significant negative. Hopefully, the cities get control over some of these issues. I think that they can definitely do that with respect to crime. I'm not so sure that there is a plan when it comes to homelessness. But again, that's pretty focused on the urban core, much less so in, you know, throughout the suburban parts of our portfolio, which is, you know, where the vast majority of our property is located. We've commented actually before the pandemic on, you know, de-emphasizing the city centers, partially due to what I just said.
that remains a you know something that we will you know take a look at and potentially transact around going forward. Overall you know north-south balance Seattle I think is doing really incredibly well great job growth and you know a couple of key drivers up there in Microsoft and Amazon that are really pushing that market. You know we'd like to increase our portfolio up there actually but it's difficult to find the product at the price that adds value. More the same. We've been there before.
Yeah. Got it. Just maybe, you know, given where the stock's trading, you know, certainly preferreds, I think, have the preferred equity investments been, you know, one of the most attractive you've referenced. But beyond that, given where your stock's trading, you know, is the joint ventures still, you know, one of the best uses? Do you take a look at, you know, issuing from time to time where you're trading today? What's sort of the thinking around, you know, your cost of capital and potential uses?
Yeah, yeah. We, you know, when we look at deals, our deal generation is sort of independent of how we, you know, capitalize or how we, you know, take the deal down. You know, where we believe that we're adding value to the company, and that could be, you know, Core FFO or cash flow and/or NAV, per share to the company, we will take it down on the balance sheet. At times like now where we don't think we can add value, we will do it in one of our co-investments where we're still a substantial owner. We still own about 50% of these transactions, and we manage it, and therefore, we earn, you know, a small amount of fee income. It's really driven by the capital side of the equation.
Again, at this point, we probably wouldn't issue stock. We would prefer to transact in a co-investment format.
Thank you.
Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your questions.
Thanks. Just one follow-up question to that, the Northern and Southern California balance in the portfolio, either for Mike or Adam. I guess I'm listening, Mike, to your opening remarks and the unsaid investment takeaways by Northern California or by the laggards, and maybe sell or prune the winners just in terms of dispersion of relative rents we've seen in the last 24 months.
Kind of pounding the table on the mean reversion trade, why don't you have as much conviction to go out and tilt the portfolio on the margin towards Northern California more heavily?
John, it's a great question. Adam, will you bring me 100 buildings in Northern California, please, at a 3.8 cap rate? That's the answer. It's not there. If we could do it, we would. We did buy one property in Fremont, again, in a co-investment. We would buy more if we could, John. Again, these markets are gonna evolve and perhaps, you know, we'll continue to see more product hit the market and we would for high quality, you know, properties in the right areas of the Bay Area, you know, we're not redlining the Bay Area by any means.
Got you.
John, just to tack on a little there. We see every deal that's marketed and every deal that's not marketed. It's always a relative game. We're underwriting consistently up and down the portfolio, and jumping in where we see opportunity for that value add. Otherwise, we've seen deals in the Bay Area close at a 3.1-3.2 cap, and that's not where we're going to compete.
Okay. Going in, economic yields are still meaningfully lower in Northern California than L.A., Orange County, San Diego?
You know, I keep telling Adam, I say, "Adam, well, interest rates are going up, so, you know, what's going on with cap rates?" Adam keeps telling me they're pushing down, right? I mean, that's effectively what we've seen.
That's effectively right. John, it's not even going in. My 3.1-3.2 gap that I quoted is economics. We're taking all units to market as of today. It doesn't include any future growth, but that's still absorbing the loss to lease. Yes, very competitive.
Okay. Thank you.
Thanks, John.
Thank you. Our next question comes on the line of Haendel St. Juste with Mizuho. Please proceed with your questions.
Hey, I guess it's still morning out there. Good morning. I wanted to ask. I have a question on your blended rate. I guess I'm trying to better understand the cadence in the back half of the year versus the first half and some of the key drivers or underlying assumptions. You're starting off the year on a strong foot. You seem to be fairly optimistic about an improvement in NoCal back half of the year. But looking at the guide, you know, like, there's a massive drop-off to get to your same-store revenue guide. Maybe you can help me understand or square that a bit more. Thanks.
Sure, Haendel. It's really more of a function of the year-over-year comparable. We expect the first half to be much stronger because first half of 2021 was still quite soft. Of course, we started recovering in the second half of 2021, and so from a year-over-year perspective, this year, the second half will be a harder comparable, and that's really what's driving, you know, the trends.
No, I understand that. I guess maybe helping us understand maybe the delta perhaps between some of the regions in the back half year. Obviously, there's some tailwinds helping NoCal, but perhaps SoCal has more headwinds given how well it's performed. Maybe a bit more color perhaps on, you know, maybe the spread that you're thinking of there.
In terms of the spread, what we see is that, you know, Seattle will be the highest from a year-over-year on the second half because it has higher loss to lease and lower delinquency and so better concession benefit. Northern California and Southern California are pretty much very comparable. Southern California because of the challenged by delinquency, while Northern California has that concessionary benefit, and so they end up more similar. In terms of spread, we're not talking, you know. We're talking, say, 40 basis points versus the, you know, now hundreds of basis points. They're all pretty darn close.
Gotcha. Okay. No, that's helpful.
Haendel, just one question.
Yep.
Are you asking about market rent growth or same-store growth? I'm just trying to understand.
Yeah, no, I guess the first question was more on the blended rate growth within the same store, but the market commentary is helpful.
Okay.
Where are you guys sending? I don't know if I missed it, but did you guys mention where you're sending out renewals today for February and March?
We did not mention that. Let me take a quick look. Under renewals, we're sending out. In fact, hold on. 2022. Where is that? Where did it go? Oh, here we are. We're sending renewals out, portfolio average in the low teens, so around, say, 13-ish%. With Seattle the highest, followed by North Cal and then SoCal around 10-ish%.
Gotcha. No, that's helpful. Mike, I guess a question for you. I heard your comments earlier about VC investments, and I understand there's a lot of profitable and very viable established companies, tech companies today. I guess I'm curious how concerned you might be regarding the ongoing Facebook or Meta troubles and the number of not yet profitable startups. I guess I'm curious, you know, what any level of concern you might have at all as to what might happen to your jobless assumptions that these companies have to cut G&A.
Yeah, Haendel. Hey, it's definitely a concern. But I don't think in terms of you know, the STEM you know, graduates and the workers that are in these fields. I don't think there's any shortage of you know, positions that might be available to them. There's plenty of jobs out there. You know, I was coming out of college. I worked for a venture capital company, and so I was there for you know, quite some time, and it's amazing how different the world is. These companies are you know, venture financed for a much longer period of time now, and the rounds are much larger. In fact, I think most of the money that was deployed that I discussed in the script was mega rounds. You know, rounds exceeding $100 billion.
You know, we have some concern about it. Obviously, those companies are more vulnerable and therefore, you know, I think that's warranted. You know, I've been through that in my career in the late 1990s, where all these companies went public and without a product, and it didn't work out well. I think the current model of venture capital funding is much better and much more resilient. You know, a lot of these companies, the best ones, will see it through. The ones that don't succeed, I think the employees, there's plenty of opportunity out there at some of the other companies. That's what makes this the Bay Area such a unique place from a technology employment standpoint.
Okay. That's helpful. If I could ask, squeeze one more. I don't know if I missed that number two, but did you guys tell us what's embedded in the guide for rental assistance payments for this year?
Yeah, Haendel, this is Barb. Like I mentioned earlier, we have applied for $52 million of our cumulative delinquency. $33 million of that is our existing tenants and, you know, we feel good about that number. However, the timing is very uncertain. What we do is we forecast on a net basis. We've assumed net delinquency does increase this year because of the uncertainty related to the timing of payments on these applications as well as, you know, the California program, which the applications have exceeded the amount that's already been allocated to the state. There's a variety of things that led us to that assumption.
If I understand it, should you be successful in getting. Well, I guess I'm trying to understand what level of payments are kind of embedded and where the upside, where that line lies. I guess I'm having trouble understanding what exactly is the net number, the absolute number that's included in the guide for this year.
In our guidance is a 2.4% delinquency as a percent of scheduled rent. That's what will drive our numbers. You know, one thing that, you know, we are seeing is our net delinquency has gotten worse over the last couple of months as more of our tenants are applying for aid, as the program has changed recently to allow tenants to apply for three additional months. Therefore, applications are going up. There's a lot of moving parts on that front. But the net number is we do expect delinquency to get slightly worse this year before it gets better.
Okay. I think we'll follow up offline. Thank you all. Appreciate the time, appreciate the thoughts. Thanks.
Thank you. Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your questions.
Hey, thanks. Good afternoon now. So is there any logic to the concept that regulatory environment could actually be a good thing in terms of being a magnet for residents? I know some of your peers are running because of regulation, but on the other side of that table is perhaps a resident. I don't know. I'd like to know that I have tenant-friendly regulation behind me if I'm living in California. Is there any relevance to that line of thinking in your mind, Mike?
Yeah, Rich. It's a good concept. You know, people generally don't thank their landlord very much. We don't hear a great deal of appreciation. Having said that, I mean, I think that, you know, tenants do appreciate it. You know, candidly, from my perspective, I worry that it's taking advantage of the system as opposed to, we're all for, you know, a safety net. We're all for helping people out. It can go too far, and trying to find that comfortable middle ground, I think is what they're trying to do. I'm very glad I'm not managing that program, by the way. I think it's a good point. I think people do appreciate that part of California.
You know, they're gonna do what's best for them, which, you know, ultimately will come down to their job and their quality of life and those factors that we spend most of our time thinking about.
Right. I mean, Costa-Hawkins reversal is defeated, you know, CPI plus 5% statewide rent cap. I mean, these weren't terrible events in the life cycle.
Yeah
...of multifamily California. Anyway. Second question is, you mentioned that cap rates are still going down, with, you know, I guess what we would call the threat of rising interest rates, still 10-year at historical lows. I look back, you know, 2018, 10-year was over 3%. I looked at what you said in your call at the time, you said, you know, cap rates are running around 4.25%. So are you kinda quietly hoping for, you know, perhaps an increase in interest rates to something more like that and also inflation because of the pass-through qualities of multifamily and that you could really
Start to see some opportunities come. I know it's 3.1% now on the cap rate, but maybe that changes if we get some real change to the interest rate environment, and that perhaps opens up opportunities for you and your, you know, more substantial costs or capital raising opportunities versus your peers.
Hey, it's a great question, great observation. I think that the company is positioned sort of for the worst case scenario, whatever that might be, in terms of the balance sheet and the overall structure. A world in which incomes are inflating and rents are inflating is a good world for us, I think. I mean, I think that there will be opportunity. Even though probably our interest costs would go up in that scenario, the vast majority of our debt is pretty well locked down in terms of maturities and rates. That would be a good world for us. I think there's a reasonable chance that's the road we're on.
Is a 4 handle type cap rate, is there anything systemic about your world right now that can't happen even if, you know, a scenario of 3% plus 10-year were to happen? Could that? I would assume that that's a very realistic option for you.
I mean, the comment I would make is that cap rates tend to be pretty sticky over time, so they don't just change overnight just because interest rates move up or down. You know, I would say back in the 2018 period you're referring to, you know, we were maybe a little, you know, frustrated that cap rates weren't moving down somewhat given how much the 10-year had rallied. Until the COVID period, you know, they remained pretty sticky, even though you had pretty significant reductions in interest rates over that period of time. I think that probably you're not gonna see cap rates adjust upward quickly. There's too much money looking for a yield and a yield investment.
You know, 3% versus some of the options is still 3% and is still in the scheme of things, you know, interesting to some investors. I wouldn't expect that to change. It really is all about the flow of money and the, you know, the number of investors that need yield and what the other yield alternatives are.
Right. Okay, great. Thanks very much.
Thank you.
Thank you. Our next question has come from the line of Chandni Luthra. Please proceed with your questions.
Hi. Good afternoon, everyone. Thank you for taking my question. Could you talk about the drivers behind sequential same-store revenue declines in some of your markets in fourth quarter? I'm talking about markets like San Diego, 3%, you know, San Fran down about 2%, similarly, Contra Costa. I mean, how much of this was perhaps a disappointment on return to office as we were, you know, just crossing that Labor Day mark, versus, say, some seasonal factors that had a role to play here?
Sure. Happy to. It's Angela here. The sequential revenue decline really was not a concern for us this time because it's really attributed to the timing of the lumpy delinquency recovery. What I might mean by that is in the third quarter, we had very favorable delinquency recovery. If you take San Diego, for example, if I back out delinquency, the sequential revenue growth would have been 1.6%. Similar relationship plays out for both Contra Costa and San Francisco as well.
Very helpful. Makes sense. My follow-up question is around your collections operating model. You talked about rollout by the end of 2022. You know, you also said that you've implemented this in Orange County and San Diego. Taking that sort of as an example, let's say, you know, thinking about a 10%-15% reduction in personnel to natural attrition across the portfolio, is there a way to contextualize that in some cost savings, either in terms of dollars or in terms of margins? That would be very helpful.
Yeah. I think, you know, the one example that we provided with the rollout and some of our other enhancements has already realized a saving of about 150 basis points in margin improvement, and that represents about $15 million to the bottom line, to NOI. My point in providing, you know, that context is that from a, if you look at the rollout, we're only a third way through, and that represents a rollout of really just two of our major regions. Which is why, you know, I provided indication of an additional 200-300 basis points expectation of margin improvement just from the cost savings.
Of course, with revenue, there's more to come on that, but that's several years down the road.
Very helpful. Thank you so much.
Thank you. Our next question has come from the line of Joshua Dennerlein with Bank of America. Please proceed with your questions.
Yeah. Hey, everyone. Just maybe wanted to explore your comments around maybe pushing farther out into the suburbs. I guess, how do you think about kind of identifying these new targets kinda further out from the urban core? Maybe does this also imply you'll have more capital recycling, so those assets closer in?
Hi, Joshua, this is Adam . I can start off. As Mike noted previously, we've been somewhat rotating outside of the urban centers now here for a few years, since before the pandemic. We use our research team to assess. We look at all the top-line metrics to see what areas within kind of our core footprint makes sense. That's how. Say Sacramento, for instance, that deal was done pre-pandemic. Even at that point, between job growth and incomes and affordability, lack of affordability for single-family homes, it made sense on all of our metrics, which is what drives our investment decisions.
We have a research team that reviews all of those metrics among a number of both our more core markets as well as more secondary markets.
Got it. Thank you.
Thank you. There are no further questions at this time. I would like to turn the call back over to Michael Schall for any closing comments.
Thank you. Thank you everyone for joining us today. I appreciate your participation on the call, and we hope to see many of you in the not distant future at the Citi conference. Thank you.
Okay. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.