© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Essex Property Trust First Quarter 2022 Earnings Conference Call.
As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time.
A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC.
It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Schall. You may begin.
Thank you for joining us today, and welcome to our first quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with prepared remarks and Adam Berry is here for Q&A.
Today, I will comment on our first quarter results recent housing demand and supply trends and a brief overview of the apartment transaction market. We are pleased to announce our fourth consecutive quarter of improving core FFO per share and same-store revenue growth with this quarter's core FFO exceeding our guidance midpoint by $0.07 per share.
As mentioned in our earnings release, our results and rent growth trajectory support an increase in core FFO and same-property revenue guidance for the year, which Barb will review shortly. Overall, rents have continued to improve. And as of April 2022, net effective rents in the Essex markets are now 11.4% above pre-COVID rent levels and up 22% compared to one year ago.
All of our markets have positive sequential rent growth with Northern California leading the portfolio, improving sequentially by approximately 3% in each month of the first quarter. We expect further improvement in Northern California as progress is made on return to office programs for the large technology companies following several COVID-related delays. The top tech companies also continue to hire rapidly in the Essex markets with over 50,000 job openings posted for California and Washington, a 79% increase compared to March of 2020.
Other indicators, including job growth, venture capital deployment and office investment continue to support our thesis that Northern California will remain the epicenter of the technology industries. A significant recent example came from Google, which announced a plan to invest more than $3.5 billion on additional office and data centers in Mountain View, Downtown San Jose and elsewhere across the Bay Area.
The easing of COVID-related regulation has been pivotal for return to office in our markets. mask mandates have been significantly relaxed versus prior quarters making it easier to bring employees back to the office.
Business travel, in-person meetings, property tours and conferences have resumed, and we look forward to in-person investor meetings once again. As COVID-related regulations continue to subside on the West Coast, the deadline to apply for rental relief in California has now passed as of April 1. The Government-sponsored rental relief has been a double-edged sword for California apartment owners as tenants were often encouraged to see government rental relief programs rather than paying rent. Delays in government reimbursements led to the highest delinquency since the onset of the pandemic, with the rental relief program now closed to new applications in California, we are now cautiously optimistic that underlying delinquency trends will improve.
California's rental assistance program remains far behind with respect to payments providing potential upside as we continue pursuing the approximately $76 million of rent owed to the company. Given the extraordinary government restrictions during the pandemic, it became clear that our portfolio would need to achieve 2 inflection points before we could be confident that a full recovery was underway. The first was the reopening of our markets, which occurred in July of 2021 and the second was a return to office for the largest technology companies.
Over the past 2 months, we've seen Google, Microsoft, Meta and Apple all begin to reopen and restaff their offices. Our leasing specialists are reporting more applicants returning from out-of-state as hybrid and similar arrangements require regular office attendance for employees. Return to office mandates are generating economic activities, which is apparent in the job growth reports with San Francisco leading our portfolio with 8.9% trailing 3-month job growth.
On average, the Essex markets reported job growth of 6.7% on a trailing 3-month basis versus the broader U.S. average of 4.7% and marking the second consecutive quarter that Essex markets have outpaced the nation in job growth. We expect this outperformance will continue as Essex has still only recovered 83% of the jobs compared to pre-covid levels versus the U.S. recovery of 95%.
We expect service and hospitality-related jobs to continue a strong growth trajectory supported by increased travel generally and demand for services from the well-paid workforce on the West Coast. The confluence of increasing job growth, a lower unemployment rate of 3.6% in the Essex markets and expensive for sale housing all contribute to favorable rental housing tailwinds.
Turning to housing supply. The ability to ramp up housing production is more challenging along the West Coast as a result of long entitlement processes, burdensome regulations labor shortages and inflating construction cost. As a result, housing permits in Essex markets remain at levels roughly consistent with our long-term averages. Our bottoms-up supply analysis indicates that new deliveries will moderate for the rest of 2022, and we are also expecting a 15% decline in apartment supply in 2023 and which includes a 54% reduction in new supply expected in Northern California. All of our markets remain on the lower end of the supply growth spectrum versus other U.S. metros.
Turning to the apartment investment markets. Geopolitical events, turbulent financial market conditions and high levels of inflation create uncertainty, which may become a headwind for transactions. However, cap rates generally don't move quickly and are mostly a function of investor demand for property. As to the West Coast specifically, strong evidence of recovering apartment market conditions, higher inflationary growth expectations and significant capital pursuing apartments appear to have mostly offset the impact of higher interest cost keeping cap rates unchanged at this point. Our review of cap rates for recent apartment transactions across the Essex markets indicate most institutional quality assets trading in the mid-3% range for stabilized properties with little deviation across markets, building class and location.
We will continue to be selective with our capital allocation strategy, focusing on deals that have the best growth potential and generate accretion to our financial benchmarks. In closing, I'd like to briefly highlight the importance of ESG and its impact on the company. As a leading provider of housing along the West Coast, we know that our company has a responsibility to operate in an environmentally conscious way Consistent with that thesis, we recently released our TCFD report, which is the first step toward alignment with proposed SEC reporting requirements.
Last week, we announced that Essex will co-anchor an ESG housing Impact Fund managed by RET Ventures. Finally, we are also pleased to announce the upcoming publication of our fourth CSR report which should be available in early May.
With that, I'll turn the call over to Angela Kleiman.
Thanks, Mike. First, I would like to express my appreciation for our operations and support teams. As we have implemented new systems and structures to optimize our operations, our team has taken on these challenges in stride and continues to demonstrate exceptional work ethic and dedication to our company's success.
In today's comments, I'll begin with key operational highlights on our major regions, including our outlook for 2022 rent growth and conclude with an update on the rollout of our property collections operating model. We are pleased with our first quarter operating results, especially in delivering a 6.5% same-property revenue growth on a year-over-year basis.
This is primarily driven by increases in scheduled rents and improvements in concessions detailed on Page 2 of our press release. The first quarter performance exceeded our expectations and included some of our strongest leasing spreads reported in the company's history, with net effective new leases up 20% and renewals up 11.7% compared to the same period last year. Average concessions for the portfolio continues to remain minimal with April loss to lease for the same-store portfolio at 9.5%.
We are well positioned heading into the summer leasing season. Here are the key operational highlights from north to south. Beginning with our Washington portfolio. Rents in the Pacific Northwest had a strong start to the year, improving sequentially each month since December.
In addition, we successfully decreased concession in downtown Seattle throughout the quarter. Our supply forecast reflects a modest rate in deliveries throughout 2022, and the Seattle job market remained strong with March average trailing 3-month growth rate of 6.1%.
Moving forward, we anticipate steady performance from our Seattle region with a loss to lease in April of 7.7%. On to Northern California. As Mike mentioned earlier, rents in this region are being lifted by the return to office of large tech companies and a solid rebound in job growth. After a typical seasonal slowdown in the fourth quarter, construction usage in San Francisco and San Jose declined throughout the first quarter, leading to a steady improvement in net effective rents.
Looking ahead, we expect the supply picture to remain steady for the rest of the year and on the demand side, job growth is accelerating with March average trailing 3 months growth rate of 6.7%. As Northern California is in its early stages of recovery, we are seeing a steady increase to loss to lease, which stands at 5.1% in April, and we continue to expect this region to lead our market rent growth in 2022.
Turning to Southern California, which has been our best-performing market throughout the pandemic, we continue to be confident about Southern California as rents did not experience the typical seasonal decline in the fourth quarter and have continued to improve each month in the first quarter. Concessions have been below one week for almost a year. Turnover in Southern California remains at the lowest level relative to the rest of our markets, demonstrating continued strength and stability of this region.
For 2022, we have forecasted a modest increase in supply delivery and anticipate concessions may temporarily elevate in areas near those development lease-ups. On the demand side, Southern California was our top-performing region with March average trailing 3-month job growth of 7.9%.
Furthermore, our April loss to lease of 14% will provide a tailwind to revenues into 2023. It is with the strong fundamental backdrop that Essex continues to make progress in advancing our property collections operating model. We discussed on previous earnings calls on how we successfully improved efficiency last year in San Diego and Orange County by operating closely located properties as a single unified business.
The benefits of this operating model includes enhancing our customer service through virtual on-demand experience, creating more career advanced opportunities for associates through specialization and ultimately generating a 10% to 15% reduction in administrative staffing needs through natural attrition, which is also mitigating the inflationary pressures we are experiencing today.
Historically, Essex has operated with an employee to unit ratio of 40:1. Today, we are at 43:1, and our target by the end of 2022 is 45:1. At this point, we have completed the Wola of Southern California and expect company-wide implementation by year-end. In addition, we have ongoing digital platform improvements rolling out over the next few years. As such, we have yet to fully optimize our business, and we anticipate further benefits in 2023 and thereafter.
With that, I'll turn the call over to Barb Pak.
Thanks, Angela. I'll start with a few comments on our first quarter results, discuss changes to our full year guidance followed by an update on co-investment activity and the balance sheet. I'm pleased to report core FFO for the first quarter exceeded our expectations. The favorable outcome was due to strong operating results and higher co-investment income. For the full year, we are raising the midpoint of core FFO by $0.25 per share to $13.95.
The increase is driven by 2 factors: First, we are raising the midpoint of our same-property revenue growth by 85 basis points to 8.6% on a cash basis. This is driven by our solid first quarter operating results and an improvement in our net delinquency expectations for the year. Our revised guidance now assumes net delinquency of 1.9% of scheduled rent as compared to our original guidance of 2.4% at the midpoint.
As Mike mentioned, the deadline for applying for federal tenant relief passed on April 1. We believe this has led to an improvement in our residents paying current, while at the same time, we have also seen an increase in emergency rental assistance over the past 2 months. As such, our April net delinquencies were 20 basis points of scheduled rent which is below our historical average of 35 basis points. While this is encouraging, underlying gross delinquencies were about 5% in April and thus, we still need to make progress before we can confidently put COVID-related delinquencies behind us.
A second factor in our improved core FFO guidance range relates to preferred equity investment as we are now expecting approximately $250 million of redemptions compared to our initial midpoint of $350 million. The reduction in redemptions relates to 3 investments that we now anticipate being paid off in 2023.
Turning to our co-investment platform. We recently monetized the promote income within 2 ventures unlocking embedded value for our shareholders. In the first quarter, we amended our WESCO joint venture, realizing $17 million of promote income, which was paid in cash. The venture generated a 16% IRR for Essex shareholders. Subsequent to quarter end, we amended our WESCO 4 joint venture earning $37 million of promote income, which was elected to reinvest back into the venture and increase our ownership to 65%.
This venture achieved a 22% IRR. These 2 transactions are expected to create over $2 million in additional core FFO on an annual basis. Overall, our private equity platform continues to create value for our investors and remains an important alternative source of capital.
Finally, turning to the balance sheet. In the first quarter, our net debt-to-EBITDA ratio improved to 6.1x compared to 6.6x at the depth of the pandemic. we expect this ratio will continue to improve throughout 2022, driven by stronger operating results. with over $1 billion of liquidity, limited near-term funding needs and multiple sources of capital available to us, we remain in a strong financial position. That concludes my prepared remarks.
And I will now turn the call back to the operator for questions.
[Operator Instructions] Our first questions come from the line of Rich Hill with Morgan Stanley.
Hopefully, it's a relatively straightforward one. But given the really impressive new and renewal growth that you're putting up right now. I'm hoping you can disclose for us what the earn-in for 2023 is right now?
Rich, it's Angela. I would love to be able to give you the earning for 2023, but it's one barbelkilme. And two, it's just too early. I think you can see that our fundamentals are solid, and we're doing quite well.
Okay. I'd figure that try. So maybe just one follow-up question I don't know, some of your peers talk about it. So I know it's not the ESS way, but I figured I'd give it a go. So we did noticed that your occupancy dipped a little bit in April, I'm wondering if you can just walk us through if that was intentional pushing rates into the peak leasing season and how you think that might trend given turnover that feels pretty low?
Sure. That's a good question, Rich. And you've seen us do this, which is when we see market strength, we would change our strategy from favoring occupancy to pushing rents, especially when we see -- when we are anticipating more market strength coming ahead of us. So it is very much intentional. And you'll see that when we are past the leasing season, usually during third quarter, and especially in the fourth quarter, we would change that strategy back to pushing occupancy instead.
Okay. That's great. Mike, if I had another question, which I don't, I'd ask you about solar payables, but maybe we can table that for NAREIT.
About what I missed that.
Just about solar panels.
Solar panels. Okay. I mean They hold the CSR effort
Yes.
I'll just make a couple of quick comments, and then we'll move on from there. We have actually, for over 10 years now been had our own, what we call resource management group. So we've got pretty long history of pursuing things that we thought were good for our properties, good for values and create more efficient ways of doing things. So our CSR efforts have been -- they're nothing new, and they've been part of our past. And -- but I would say, as we think about California especially, there's a mandate here to remove gas cars by 2035. There are other mandates, as you all know, and they keep us focused on that. I think that there is a strong intersection between opportunity to add value to the portfolio many of these ESG efforts, and you mentioned one of them, which is solar panels, but it goes well beyond that. electronic vehicle charging stations, et cetera, part of the mandate as well.
So we're excited about it. We were excited to announce our co anchoring of that new fund that sponsored by RET ventures. And I think it's consistent with our path and the way we think about ESG.
Our next has come from the line of Nick Joseph with Citi.
You talked about the strong rent growth and demand in Northern California. As you survey those incoming residents where are they moving from? Are they within the MSA? Are they coming from kind of other areas of California coming from other areas of country, what migration trends are you seeing maybe specific to Northern California?
Nick, it's Mike, and maybe Angela will want to make a comment. And by the way, FeraBar runs higher I make that comment. But really, it's I think, opening up a number of different things. The normal migration pattern typically has retirees with expensive California homes leading as you enter into a recessionary period, we certainly saw that. And then normally, that's -- those retiring workers moving out of California are replaced by younger workers that are coming into California to take higher-paying jobs and some of the opportunities for the tech company.
So the younger workers were largely told to stay put until the tech company has opened up. And so now we are starting to see them return. In addition to that, there are some foreign migration that has picked up also, and we're starting to see more demand for corporate housing units as these big tech companies in terms of their training and onboarding activities. There's definitely a pickup in demand from corporate house for corporate housing. So it's really across the board. We're seeing more normalization of our activities, and they're coming from a number of different areas.
And then maybe just on the transaction environment and I recognize every environment is different. But just based on your past experience, how are you thinking of asset pricing trending from here? Obviously, there's high rent growth, but negative leverage with higher interest rates. So in the past, as you've seen some of those inputs, what has that done to the transaction market on a lag basis?
Nick, this is Adam. So going forward, we don't see -- we don't see transaction values changing a whole lot. I think Mike you mentioned in his opening comments. You are seeing some interest rate pressures, obviously, but with the growth that we're seeing throughout our markets and with the amount of capital in the market chasing deals. We're really not seeing a dramatic move in pricing for deals that are kind of on the market right now. We're seeing a somewhat less froth than what we've seen over the last, call it, 6 to 9 months. but that that's that extra 5% the groups have moved after the second best and final round that we're not seeing today. So it really -- like I said, we're not seeing a dramatic shift in pricing moving forward.
Our next questions come from the line of Steve Sakwa with Evercore.
Barb, I just wanted to try and clarify some things I'm a little confused. I know there are a lot of numbers on delinquencies and bad debt. So F-16, you showed -- you had 2.2 in the first quarter. It dropped 0.2% in April. But then I think I heard you say that delinquencies -- gross delinquencies were 5% in April. And that your guidance now incorporates 1.9%. So I'm just sort of trying to put the gross and the net together and really figure out how conservative, how aggressive you are on the delinquency front, and what sort of upside maybe there is if the rental assistance program, which have kind of burned off, lead to better collections, what kind of upside can we see?
Steve, yes, that's a great question. So what I was alluding to in our guidance, we've assumed 1.9% scheduled rent, and that's on a net delinquency basis. So that would be after emergency rental assistance. That's for the full year, which implies 2% in the back half of the year. And that would compare to the in the first quarter in terms of net delinquencies on a cash basis. And then the other number I provided was the 5% on gross because we do still have high underlying gross delinquencies. We're working through those. And we have seen a positive change over the last couple of months. For example, in January, February, we're at 6.5%, and we've come down to 5%. And we believe that part of that is a function of the change in the law that occurred in April. That said, we still have a lot of work to do there, and we've only seen 1 month of data. So our guidance doesn't assume that, that materially changes from here, especially with Alameda and LA County where Avicion protections remain in place. So the combination of emergency rental assistance and gross delinquencies kind of gets us to our net 1.9% for the full year.
And if you were to just put the 5% gross in perspective, say, pre-pandemic in 2018 or 2019 before all these issues, what are the gross delinquencies sort of look like just to help frame the 5% number?
It would be less than 1%. Because remember, our net delinquencies were 35 basis points historically. So our gross delinquencies were less than 1%. And on average. So the 5% is definitely very high.
Steve, let me throw out one other set of numbers. And that is we're owed $76 million. I think that was in my script, of which we booked, I believe, $4 billion of that as revenue or accounts receivable. So we have a long way to go, a lot of collections, potential collections out there. We just don't know when or how much, given the -- most of it comes from the state rental relief program, and it is impossible for us to predict when that's going to come in.
Right. No, I understand it’s hard to kind of figure out when you’ll get it. But okay so there’s a fair amount of conservatism there that could lead to further upside. I guess, Mike, I know you’re not big on the development side, but just how are you thinking about new development opportunities, if at all? And are you seeing any changes in land prices or more opportunities coming your way? And how do return sort of pencil given the big inflation we’ve seen, but also the starting to improve rent growth picture?
Yes, Steve. I mean, I’m going to turn that over to Adam here in a second, but I will say that in the recent past, we press released a couple of development deals, one in Seattle and one in Northern California. And that doesn’t speak to our pipeline. So with that, I’ll turn it over to Adam to talk about development.
Steve, we’re seeing we’re not seeing a huge increase in deals coming out on the development side. Those that we’ve seen to trade in the Bay Area the per ore price has definitely gone up. They are generally solving to a low 4 cap, which that does not provide the spread that we need in order to justify risk associated with development deals. We probably have seen more tertiary markets, increase their potential for new development deals. And that really hasn’t been as much our focus either. So generally, we have – as Mike mentioned, we press released a deal last year in the Bay Area. We have a couple in the pipeline that we’re working through. But we are staying selective and disciplined as to what kind of spread necessary for these deals.
One additional note, what Adam talks about a 4 cap, he’s saying today, that’s untrended for cap. So we compare an acquisition yield today against a development yield today. So it’s not trended just a flat.
Our next questions come from the line of Jeff Spector with Bank of America.
My first question, Mike, is on your supply comments. I believe you said that for '23, supply will be down. I think you said maybe 11%. And I was -- and I'm sorry, if I'm saying the wrong percent, please correct me. I'm just curious how confident you are at this point on 23. And has that changed in the last couple of months?
Has it always been -- has the expectation been lower in '23 similarly, let's say, a few months ago? Or has something changed?
Jeff, actually, these numbers didn't change a lot from last quarter. And that overall reduction in 2023 was minus 15%, made up of minus 54% and in the Bay Area. So a pretty flat in Southern California and up a little bit in Seattle. So I think what's happened here is that in the early phases of COVID, people pulled back on development. And so we're starting to see the impact of that. Now couple of years later. And so I think that there will be a low period for development starts and then we'll see what happens in the further along in the cycle. But in my prepared remarks, I noted that the deliveries, we've actually had the peak deliveries in Q1, Q2 '22.
So they moderate little bit toward the end of -- for the rest of the year, the last -- the next 6 months and then next year, again, down 15%. So the trajectory. And we do our own fundamental analysis on this. So we actually have people look at deals and see where they stand. And so we're accurate than some of the other data that you see out there, not that some of these can't change their construction delays, et cetera, that happen. But I think our numbers are spot on with respect to what's coming at us.
Great. And then just a follow-up, Mike, on some of the comments about San Francisco and the return to work. It's interesting. It seems to be one of the only markets where really the return to work has been a catalyst for apartment demand. A lot of other cities or most have seen that strong demand without companies, let's say, forcing people back to work? And I guess I'm more of a worry.
I guess to me that it feels a bit negative, like why is that? Is that a problem longer term? I guess, how would you counter that? Like at the end of the , why is that a positive? I know it's a positive because you're seeing people come in on the return to work. But I guess what are your thoughts on that?
Well, my initial thought goes back to the first chapter of COVID, which the city is basically shut down. They shut down all the restaurants, they shut down hotels, all the leisure, all the service jobs are pretty much eliminated. And so if you're one of those people who generally is not a high wage earner, what are you going to do? You just lost your job and you don't have any certainty about getting another one because basically everything is shut down in the city.
So those people all left. And so now what you're starting to see is the demand for those services really didn't change all that much, but you got to bring all those workers back in order to reengage in those businesses. And so I think that's what's happening. So this was not a voluntary choice, people had to stay in the cities and pursue their livelihood, they were effectively forced out. So as the cities recover and again, we have some concerns about the is given defund the police movements, et cetera, homelessness. And -- but as the cities recover, we think that there's good upside. And it's entirely due to real demand for travel, for services, for restaurants, for hotels, et cetera.
So we don't view it as artificial at all. We view it as a policy choice largely that caused the deep hole, and now, we're just recovering to a natural place.
Our next questions come from the line of Alexander Goldfarb with Piper Sandler.
So 2 questions. Mike, in Northern California with the city reopening and jobs coming back, are you seeing more of the renters flood back to San Francisco, the city? Or are you seeing more come back to the burbs because they want the extra space? Or what's sort of the dynamic? Just trying to see where you're seeing more of the demand as people come back to the market to the region?
Well, maybe Angela will add to that because I don't have anything that tells me on a more granular basis exactly what's happening. I do think that Suburbia has done better in virtually all cases. And the cities, the concern in the cities is both, I think I mentioned before, hoses, et cetera, but also there's more supply in the cities like, for example, almost all the supply in Los Angeles, sort of the greatest percentage supply increase in Los Angeles is in the CBD, same with San Diego and kind of same throughout. So it's really the confluence of both more supplies in the cities and the demand is maybe a little bit delayed from the suburban markets. and the suburban markets generally don't have nearly the extent of the problems that there are in the cities. So they are recovering faster and doing very well.
Alex, if it helps, just a few data points on what Mike just said. It's Angela here. When we're looking at the sequential met new leases, net effective new leases. The best performing are San Mateo and Santa Clara. Those are the 2 top ones. So that is evidence of the strength of the suburban Northern California.
Okay. The second question is on the delinquencies. And Barb, I appreciate your color to one of the previous analyst questions. But how soon can you guys get aggressive and start turning tenants residents over to the credit agency starts stocking their credit reports.
Just how soon can you guys take a quicker hand or quicker tougher hand? And then two, if the state is paying all these people's rents, where is the -- I mean that sounds like a big moral hazard that the people know next time they don't have to pay rent. So it's like it seems to just set up for another repeat of this. Is there any sort of guard against that? Or are we just setting ourselves up for that? I guess it's a 2-parter. One, when can you report to the credit agencies? And two, it seems to be setting up for another if the state is going to pay all this background?
Alex, it's Angela here. Maybe I'll start with the tenant's behavior first and like me, I want to talk about more hazard. It's a favorite topic. In terms of how aggressively we can push on that front, there are a couple of factors. One is that we still have eviction protection in place for LA and Alameda county. And so that will need to work itself out, and that's -- that goes to the legislative issues, right?
As far as our ability to collect going forward, keep in mind that the protection -- delinquency protection remain for any delinquency that occurred during the period before September 2021. So we're really talking about April delinquency. So on the new April delinquency, we can take action outside of L.A., of course, in Alameda. And so it's a whole process that involves going through evaluation of putting people and payment plans, win with our tenants on how to manage through this period of time. And so -- we do, at this point, have the ability to report to the credit agency everywhere, it's really how we want to go about it that will make the most sense to be able to maximize our collections effort.
Okay. Mike, did you want to add?
Maybe again back to where is the delinquency. It's in LA County and Alameda County. And then the other part, which is state law statewide, which effectively says if you have a rental relief application outstanding, the courts will not hear an eviction case through June 30. And so there are still reasons why we can't do the things we would ordinarily do at this point in time. But the good news is, I think, that all of these programs appear to be getting close to their end, and then we'll pretty soon have a good idea of where we stand.
Our next questions come from the line of Austin Wurschmidt with KeyBanc.
Barb, if I heard you correctly, the same-store revenue guidance increase was really 2 parts, neither of which seemed to include any change to your projections for market rents or occupancy through the balance of the year. So I was curious where market rent -- where is market rent growth year-to-date across the portfolio relative to the -- I think it was 7.7% projection you assumed for this year?
I'll take the first part, and then I'll let Mike and Angela take the second part. So in terms of the same-store guidance raise, so 50 basis points of the raise was due to delinquency, another 30 basis points was due to lower concessions and higher net effective rents and then the balance was due to higher rubs. And then in terms of where we are in terms of market rent.
Yes, I'm happy to cover that. It's Angela here. On the market brands, we are tracking pretty much in line in Northern California and Seattle. And keep in mind, we had anticipated that Northern California recovery would be quite strong. And so that is consistent with our expectation. Southern California is outperforming and it is tracking ahead. The -- and so we are in the middle of -- in the midst of relooking at our modeling assumptions, and we'll provide a midyear update.
Having said that, keep in mind that when we're looking at leasing spreads, year-over-year leasing spreads, we will have the -- it will be the strongest in the first half because last year around this time, we still had negative leasing spreads. In fact, that negative leasing spreads weren’t continued through the second quarter, we didn't turn until July. And so for those reasons, with the year-over-year comparable, we need to evaluate the magnitude of what that means.
And maybe 1 final piece, and that is we'll be looking at F '17 and our rent forecast, our economic forecast on -- and the net-net is we're ahead. And we generally don't do that every quarter, we do it biannually, so we'll be looking at that for next quarter.
Yes. All very helpful. And just to clarify, Barb, on the 35 basis points, you mentioned a couple of items there, but I thought I heard you say in the prepared remarks that was mainly driven by first quarter performance. And so not necessarily that you've assumed that the -- even though it's decelerating in the back half of the year, but that growth will be higher than what was assumed in your original projection. Is that correct?
I said it was driven by, yes, strong first quarter results and then better net delinquency collection. So we -- like I said, we factored in 30 basis points improvement in concessions and higher net effective rents for our full year guidance and then 50 basis points on delinquency. Those are the bulk of the same-store guidance rates.
Got it. Okay. That's helpful. And then, Mike, you've provided a lot of data points on the demand to supply ratio and set up for the recovery on the West Coast and how these markets have historically outperformed in an upturn. But obviously, we're amidst sort of some crosscurrents today and concerns about a recession on the horizon. So just curious how that impacts your view about the trajectory of the recovery on the West Coast.
Well, I will -- I'll start by citing the fearful of Barb comment that we already noted, but we feel good about conditions and where we stand. So we are just recovering the things that were shut down during the pandemic now that, again, all of the mass mandates most of them have been removed, and it feels like we're in a better state. I think that that's most of it. And it feels like we have a lot of catching up to do. And we're at the front end of that process, we’re obviously late to the dance and -- but we feel good about where we stand and expect to continue to perform well.
Our next questions come from the line of John Kim with BMO Capital Markets.
Just wanted to ask for an update on where you're sitting at renewals for May and June? And what's your ability to achieve renewal rates that may approach the new lease growth rate of 22%?
So on the -- you're asking about the renewals that we're setting out for the second quarter, right? I just want to clarify.
Correct.
Okay. I assume, yes. Okay. So on the renewals, company-wide, we're setting at about -- slightly above 11%. And the distribution is actually not a huge variance. SoCal at about 10.5%, and Northern California, close to 12% and Seattle close to 13%. So those are the averages. In terms of our confidence level, given where we're seeing the activities and the demand, we are quite confident that these are achievable rates.
So if that continues in the second quarter, what's implied in your guidance of 8.6% same-store revenue for the second half of the year? I know, Angela, you mentioned that there are tougher comps that you're approaching. But at the same time, the loss lease went up to 9.5%. You have the market rent forecast of 7.7%. What do you -- what do you expect to happen in the third and fourth quarter?
Right. No, that's a good question. So first quarter, our same-store was 6.5%. We do expect that to gradually increase from a revenue perspective because that is -- essentially there's a lag effect, right, between revenues and economic grants. So as market rents taper off, the revenues is falling, but it's continued to increase. So there's that catch-up effect.
And so what's implied in your guidance currently for the back half of the year?
In terms of rent growth or I'm trying to understand what you're asking for. I don't have that in front of -- effective lease growth, I don't have that in front of me. I have to follow up with you after. It's consistent though we haven't changed our full year outlook on F '17 in terms of market rent growth. So there hasn't been a change to that assumption as of right now. We're revisiting that.
And John maybe -- John, as it relates to F '17, keep in mind that if we get it sooner, it doesn't necessarily mean that we're going to get what we got sooner. And in addition, we're going to get what we thought we're going to get. So there could be just -- it happened faster than we thought. And so keep that in mind. That's why we want to make sure that we wait for kind of a full review of F-17 before we start kicking it apart, if that makes sense.
It does.
Our next questions come from the line of Nick Yulico with Scotiabank.
I just wanted to go back to the delinquency number. The $76 million, which is the cumulative number. And I know previously, I didn't see an update on this, but in terms of the reimbursement that you've already applied for and haven't received that number back in March was, I think, $59 million. Is that still the number? Did that change?
Nick, it's Barb. So that number is $64 million as of last week of which half relates to our current residents and half relates to landlord initiated applications on behalf of past residents. And that the latter group is the one that the resident -- the former resident has to engage, which is obviously more uncertain of how we'll be able to collect that.
Okay. Helpful. And then in terms of the guidance then, how should we think about that $64 million. Is any of that factored into full year guidance collecting that money?
Yes. What's implied is effectively the first group, the resident, the current resident applications. We have high confidence we'll get the vast majority of that. Given the programs now ended in terms of applying for new applications, we think that, that will come in this year.
Okay. So about half of it…
Yes. It won't all be same store, though because that's for our total portfolio, including joint venture properties. And so a portion of that will be same-store.
Okay. But about half of it we should think about. And then because I know the number is like over $1 of FFO per share. So we should think about half of that is in the full year guidance this year and maybe half could flow in still or maybe next year depending on that pace?
Right. The other half is uncertain, and we're seeking alternative ways to recoup that money, but the timing is very uncertain on that.
Next question is coming from the line of Brad Heffern with RBC Capital Markets.
Yes. So in the prepared comments, you mentioned the 3 co-investments that are expected to be paid off in '23 now versus 2022 previously. Is that a headwind that's just moving to 2023? Or does the overall macro environment lead to fewer redemptions and better reinvestment opportunities overall and that some of the headwinds that we've seen lately are abating?
Brad, this is Barb. So the 3 investments that were pushed, it's really a function of the interest rate environment today and where these properties are going to be in lease up. Keep in mind, in 2021 given the low interest rate environment, developers were able to get takeout financing before they were fully leased up. And given the higher interest rate environment and debt service coverage ratios, we don't see that happening anymore. And so that's really a function of what caused those to be pushed.
Nothing -- the properties aren't behind on schedule or anything like that. It's just a change in the environment that's occurred from an interest rate perspective.
Okay. And are you seeing any additional reinvestment opportunities, just given I imagine the financing side of things is more difficult now than it was a few months ago?
Brad, we -- I think that we will see more. Again, we have this lag after COVID when construction starts turned downward, and I suspect that we will see a lot of those deals come back and that will create more demand for the food equity program. So I think that will right -- that's in the process of rightsizing itself as well.
Our next questions come from the line of Rich Anderson with SMBC.
Mike, I don't know if you remember, a long time ago, I talked to you about a mood ring. Do you remember that conversation?
I do, as a matter of fact.
I want to ask about your near-term mood ring for San Francisco in a little -- or Bay Area in a little bit different format. Given S-17, I know you're going to update it, but right now, it's the leader. Northern California is the leader in terms of market rent growth. We've gone through that ad nauseam to this point. But you also reported quarter, same-store revenue in Northern California was the laggard of the 3 regions. Should we sort of extrapolate what you're thinking rent -- market rent growth wise, into your portfolio, shouldn't this just flip in the coming quarters in terms of the composition of store revenue growth in 2022 where Northern California should really become the leader in the back half relative to the other regions? Or am I thinking about that wrong?
Well, Angela will maybe have some comments. But to your mood ring thing. So I actually -- because of you know what a mood ring is and I have different colors that I have in my mind because of you, Rich. So I never forget. Red would have to be the right color for us. I mean, I think that we feel good, energized, et cetera. And --
No Red is the wrong color. You would think blue, black --
Parting to my mood ring thing, energize is red and excited and adventurous are red. So all that you feel -- I have the wrong mood ring app, I guess. So -- but no, we -- I think we're feeling good about things. And Northern California long term is our #1 market. I think it's the #1 market in America. In terms of long-term CAGRs rent growth, it's fallen well behind the curve in this case. And in this world because rents are always tethered at some level to income levels, it's really important that they move together. And we -- on the income side, we're still seeing some recovery happening there.
So I don't think you could just grow forever unless incomes are growing very rapidly. And 1 number that I was told by the group here is that our income and our -- our move-ins are up something like 15%, which is pretty darn good. It makes us feel better about the rents that we're charging, especially in Southern California. So things look good. I expect Northern California to really pick it up here, and it will become -- once again, as it has for the long term, our #1 market is what I would guess.
And Rich, it's Angela here. Thanks for making my point for me, which is that in the second half, we do see that flip. We do see Northern California rent growth will then outperform Southern California rent growth.
Okay. And then second question for me is -- we talk a lot about services coming back in restaurants and hotels and all that, but also reemployment or the reuse of office buildings with tech. Is it not true that hybrid office would be a better model for you rather than 5 days a week only because where you guys are located, primarily outside of San Francisco.
So maybe a 2- or 3-day a week type of model would be good for your portfolio relatively speaking because people might be able to put up with a longer commute for a variety of reasons in that area, but just because they don't have to go into the office every single day. Is that the right way to think of it? Or is there any kind of return to office work for you and you're not going to really kind of dig into too much more of the detail beyond that?
Yes. No, I think you're thinking about it the right way. I think that because of the hybrid workforce. And I think everyone, including the tech workers and actually Essex as a company, most of them are pursuing a hybrid model of some kind that requires some tethering to an office. And we're actually no different from that, obviously.
And so I think what the effect of that is, is that it makes the downtowns, which have all the office buildings, a little less desirable. And it probably adds -- and we've talked about this before, another ring, let's say, another 10 miles out from where we would have drawn our line because our portfolio is planned around the key job nodes and a commute pattern to those job nodes. So now we will expand that a bit. And a good example is we've been buying in San Diego County, some of the areas that are farther from the major job nodes. And -- but that will be true of Northern California and Seattle as well. So I think it does push out the commutable space and therefore, it expands our geography accordingly.
Our next questions come from the line of John Pawlowski with Green Street.
And just one question, and I'll let somebody else jump on. The revenue-enhancing CapEx spend this year, $100 million is a big number. Can you just remind us what are the drivers? What are you actually spending money on? And then how do you kind of expected returns, IRRs compare versus alternatives, either buying real estate or buy back stock?
Sure. I'll talk about the CapEx program first and -- as far as the redevelopment spend and also just the forward CapEx spend. On the redevelopment side, we are targeting 8% to 10% cash on cash yield, and this is consistent with pre-COVID levels. And it's primarily because we're seeing the demand in our market and the rent growth to support this program. Now the elevated level that you may be referring to when it comes to the CapEx per door, I think that's what you're referring to itself, it's really driven by 2 factors.
One is, of course, the material cost increase, but the other 1 is a catch-up. And so during the COVID period, we, of course, were very careful and ran much leaner from a CapEx perspective, both in terms of just trying to minimize contact and also being sensitive to what we can achieve on the top line. And because of that, our normal CapEx per door of somewhere around 1,750 dropped down to almost below $1,400. And so that -- there's a catch-up that just needs to happen normally.
And then, John, this is Bob. In terms of where to put capital, obviously, redevelopment of the 8% to 10% returns are obviously our best use of cash proceeds today relative to buying an asset in the mid-3s or even buying back the stock. So it's just hard to put a lot of money to work. Remember, you're you've got an occupied building and you can only put so many dollars to work. So there's a capital constraint on how much we can put to work there, but we think that is the best alternative source of capital outside of preferred equity, which we've already discussed in the past.
Our next questions come from the line of Neil Malkin with Capital One Securities.
Now it's gone a little over narrow, so I'll be quick. First one, on the the RET fund, the one the climate change funds. Just curious about how you guys when you're talking about that with you either board or internally in investment committees, I guess what are you guys trying to achieve given that China and India are by far the biggest polluters and emitters of carbon in the world?
It's a good comment, and I'm not going to make any comments about China or India. But I would say that, again, we saw -- as I mentioned earlier, we see good opportunities to invest in our own portfolio and make it better. And by better, I mean, produce a return on investment that makes sense. And we see the cost of electricity, trash removal, water issues et cetera, as being longer-term issues for all of us. And if we can solve some of those issues and get a payback by lowering our bills, et cetera, thdn so be it, we think it makes good sense. And initially, we had -- I know RET Ventures was thinking about that as part of their existing fund and, in fact, had made a number of investments out of their main fund in ESG. And a couple of them are super important One of them is we have SEC requirements.
So a company called measurable was one of the RET investments before this new fund. And it helps us organize our data and getting ready for the SEC requirements that are coming down the road. So there are a lot of important reasons when we should be doing this, and we see a lot of opportunity out there. And it's not just investing money, it's actually getting a return on your investment.
Appreciate that, Mike. Last 1 real quick, maybe Adam, for you or anyone really, but your stock price is pretty much right around all-time high. I know that this typical model is stock price up, issue equity and buy stuff, stock price down, sell assets, JV stuff. Maybe just talk about the -- I think maybe some I touched on it before, the acquisition pipeline around in your market, potentially maybe some suburban locations, et cetera. Has that picked up recently, just kind of the things you're looking at? And or potentially maybe in the West Coast. Any commentary on how you think the rest of the year is going to shake out on the acquisition side, obviously, in the face of higher debt costs?
Sure. Neil, this is Adam. As to what's going to come later in the year, it's hard to say. Over the end of Q4 and early Q1, the volume generally on the market was pretty low. There's a pretty significant decline in overall transaction volume quarter-over-quarter. There is quite a bit on the market today. As I noted before, over the last 6 to 9 months, we really didn't partake in the frenzy that was happening in those best and best final rounds. We're always constantly assessing what's on the market and where we see more growth going forward. And so we're looking at those deals. We're not going to be in the low 3s. And so if there's any sort of adjustment or if we see an opportunity that comes up, and we did see a few of those that we closed on in early Q4 and early this quarter, then we will jump into those windows.
Okay. So it just seems like it's going to be a little bit harder to kind of do the types of things you did maybe in years past when your stock price was up, and you're heavily acquisitive. It seems like that's maybe have a little tougher hurdle now just given cap rates and overall cost of capital. Is that fair?
Yes, that's fair. I mean if you take the cap rates that Adam was talking about and you compare it to the company, you've climbed to the company, you will find that issuing stock is something we really shouldn't do. And so we have not done that and try to use our co-investment platform to fund most of the deals. And obviously, having positive leverage, i.e., cap rates over debt cost was a -- it helps a lot when it comes to deal making. And so we're no longer in that world. And so there's a bit of an impediment on the deal side caused by negative leverage once again.
Our next questions come from the line of Chandni Luthra Newton with Goldman Sachs.
If you could perhaps give some more insight into the connections operating model, I know you have it lined up to be rolled out fully across the portfolio by the end of 2022. And then I think you have the digital platform improvement next year. So is there a way to quantify in margin or cost benefits? And then how do you think of all that sort of culminating together from a timing standpoint?
It's Angela here. I think you're asking about how we look at or how we evaluate the success of our property collections operating model.
Exactly. From a number standpoint, I know you've given that ratio of 45 to 1from 40, which is very helpful. But how does that data translate into the P&L down the line? What sort of could you benefit as you think about running our models?
Sure, sure. So we think about the benefit in 3 key ways. First is our customer interactions. And we can look at that by the retention rate. And the second one is operating efficiency, and that is the 40:1 ratio that I talked about that we now improved to 43:1 in terms of units to employ. And ultimately, what that means for the financial impact, and that's the third key metric.
And so when I refer to the 100 to 200 basis points of margin improvement, when we implemented San Diego and Orange County, that translated to about $15 million of benefit to NOI, and we have realized that savings when we were only about 1/3 way through our implementation back then.
So the expectation is that going forward, once we complete the rollout -- now keep in mind, we also have a digital platform rollout that's embedded in all of the cost savings. But upon completion, and this is several years out, we would expect an additional 200 to 300 basis points of margin improvement. The trick here is -- or the challenge is trying to figure out, it's not a dollar for dollar because when we -- when I talked about the $15 million things, we were not under such extreme inflationary pressure today. And so there will be offsets, which will go towards helping us to manage our controllable expenses.
Our next questions come from the line of Alexander Goldfarb with Piper Sandler.
Just wanted to follow back on the delinquencies. You -- I just want to understand something. The rent payments that the state is making for the $76 million, is the state making all of that or the half of that? I think it's half of that, that you mentioned by former residents that you said those residents have to initiate, is that -- it sounds like the whole $76 million may not get paid back. It sounds like only the existing residents get paid by the state. Otherwise, the former residents have to do it on their own. Is that the correct understanding? Or did I misunderstand?
Alex, it's Barb. So the total that we've applied for is $64 million as of today, the cumulative delinquency that Mike alluded to is $76 million. So there is a delta there. And then of the $64 million in applications, it's made up of 2 components: our existing residents, which is half and then past residents. Now we've applied on behalf of those past residents. Those past residents have to engage in the process for us to get our money. If they don't engage then the application doesn't move forward. And that's why I'm saying it's a little bit uncertain in terms of whether the past resident will engage and whether we'll collect that portion of the emergency rental assistance.
And what's the incentive for them to engage?
They get their rent paid. Keep in mind, Alex, we can't -- the landlord -- this is not a landlord program, it's a tenant program. And they have to have a COVID-related hardship. So they have to certify as to the hardship basically. And so we can't do it by ourselves. So -- but it's really their reimbursement paying us off and their incentive ends, they're going to owe some money if they don't process the application.
Yes. Alex, it's Angela here. And that includes the impact to their credit report we can, and we actually have reported on our past residents. But also, there are other means for us to try to connect with them, which is we can go through small claims court. There are other means. And so it is actually to their benefit to engage with us and get this assistance from the state.
Thank you. There are no further questions at this time. I would now like to turn the call back over to management for any closing comments.
Okay. Thank you. And thanks, everyone, for joining our call today. We are looking forward to NAREIT, and hopefully, we will see many of you there. Have a great day. Thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.