Operator:

Good day, and welcome to Essex Property Trust's Second Quarter 2024 Earnings 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 risk and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.

Barb Pak :

Thanks, Angela. I'll begin with comments on our second quarter results, followed by the key components of our full year guidance raise, and conclude with an update on the balance sheet. Beginning with our second quarter results, we are pleased to report core FFO per share of $3.94, which exceeded the midpoint of our guidance range by $0.11. The outperformance was primarily driven by $0.05 of higher same-property revenues, which was largely the result of stronger net effect of rent growth. In addition, this quarter benefited from $0.04 of one-time revenues and lower operating expenses, which are timing related. Turning to our full year guidance revision, our strong second quarter results and healthy peak leasing season have enabled us to increase the midpoint of our same property revenue growth by 75 basis points to 3%. Our improved outlook is largely driven by blended rent growth outpacing our initial forecast, resulting in a 50 basis points increase to revenue growth. We now forecast blended rent growth to be 120 basis points higher than our initial forecast, driven by outperformance in Northern California and Seattle. As for same property operating expenses, higher utility costs and legal fees are the primary drivers of the 50 basis points increase in our midpoint to 4.75%. As it relates to controllable expenses, we have been effective in managing this aspect of the business despite the elevated cost environment. For the year, we expect controllable expenses to increase less than 3%. In total, we now expect same property NOI to grow by 2.3% at the midpoint, representing a 90 basis points improvement to our prior guidance and 170 basis points improvement from our initial outlook. Based on our strong second quarter results and the revision to same-property growth, we are raising full-year core FFO by $0.27 to $15.50 per share, which represents 3.1% year-over-year growth. In total, we've raised core FFO a notable $0.47 per share so far this year. As it relates to our third quarter guidance, we are forecasting $3.87 at the midpoint. The sequential decline from the second quarter relates to two factors. First, same-property NOI is expected to be $0.05 lower, which is driven by elevated operating expenses given the typical seasonality and spending for repairs and maintenance, taxes and utilities. And second, we had $0.02 of one-time items in the second quarter. Turning to the preferred equity portfolio. For the year, we expect between $125 million to $175 million in redemptions, of which we received $50 million to date. Our intention is to redeploy the proceeds into acquisitions depending on market opportunities. In terms of the watch list, we started the year with five properties on the list, of which three have been removed so far to date. Two of the properties were acquired and consolidated on our financials, and one of the investments had a significant equity infusion, which puts us in a better position in the capital stack. In total, the reduction in the watch list added approximately $0.04 to our full-year core FFO. The rest of the portfolio is performing as planned. Finally, our balance sheet metrics remain a key source of strength. We have no remaining consolidated maturities in 2024, our leverage levels remain healthy with net debt to EBITDA at 5.4 times, and we have over $1 billion in available liquidity. As such, we are well-positioned to capitalize on opportunities as they arise. I will now turn the call back to the operator for questions.

Austin Wurschmidt :

Hi, and good morning, everybody. Angela, you mentioned that you're prepared to shift to an occupancy strategy, so just curious if we should view kind of the pullback and renewal rate growth in recent months as a tactical move to drive occupancy, or are you getting some pushback on the increases and kind of seeing retention moderate? What's sort of driving the pullback? Thanks.

Austin Wurschmidt:

Got it, and then could you break out how new lease growth has trended across the three regions as you get into July, and just curious where you're seeing kind of the most moderation and what's kind of holding stronger, maybe a little longer than you would have anticipated? Thanks.

Operator:

Thank you. Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Angela Kleiman:

That's a great question, Eric [ph]. We are not quite there on LA Alameda in terms of our operating strategy. We pretty much ran a occupancy-focused strategy starting late last year that has continued throughout the year. We've been able to kind of switch back and forth a little bit, but it really didn't last long. At this point, we made really good progress on delinquency, and essentially, it improved by almost 50%. We reduced by another 50% from beginning of the year, so we're making good traction there. We probably will not be able to have pricing power until we get through the rest of this year in LA and Alameda.

Barb Pak:

Hi, Nick. It's Barb. Yes, our guidance has about 1% baked into the rest of the year. Remember, the number can bounce around month to month, but we're pleased with the progress that we've made so far and feel comfortable that we'll continue to make progress. If we do make more progress in the 80 basis points, I'll just be upside to the high end or be to the high end of the guidance range.

Operator:

Thank you. Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Barb Pak:

Yes, this is Barb. It is a difficult number to predict because it does bounce around month to month, and we are pleased with the progress. Keep in mind, we did take that -- we did increase our guidance in the first quarter by 40 basis points because we did lower bad debt to 1.1% for the full year. And through July, we are at 1.1% year-to-date. So we're in line with our forecast. And we do expect -- we're working hard to make progress, but it does depend on when tenants leave and when the courts process evictions. And so it's a little out of our control. So we've got 1% budgeted in the back half of the year.

Angela Kleiman:

Yes. We have that detail, concessions. So generally speaking, so Southern California has a heavier concession in L.A. for the most part, no surprise there. And Northern California concession environment is driven primarily by Oakland because of the higher -- the elevated supply. And so Southern California DQ with L.A. and Northern California, Oakland with supply. And those are the two primary drivers of higher concession levels. But ultimately, we're talking about, say, closer to for five days in those areas versus rest of the region where Seattle has essentially zero and everywhere else around one to two days. So that averages to the two days in July.

Operator:

Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Barb Pak:

Yes. This is Barb. Yes, there's a lot of factors that go into it. And at the low end, it just does depend on how steep the decline is in the back half of the year in terms of the peak leasing season. We expect a normal season, but we've seen air pockets in the past. And so that factors into the low end, and that could impact occupancy and concessions. And then delinquency has been a wild card. It feels like it's less of a wildcard this year. But once again, that is something where we've seen blips every now and then. And so those are the factors that really led to the low end where it is. But we feel very comfortable with where our midpoint is at this point.

Angela Kleiman:

Yes, for sending out renewals at around low 4% portfolio-wide. And based on the negotiations that we're seeing, we'll probably land somewhere between mid-3s to high 3s on the renewal side.

Operator:

Our next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question.

Angela Kleiman:

That's a great question. Well, let's start with -- we have expected that full year our blended rents will be about 2.7%. And we achieved 2.9% in the first half. So there's an implied deceleration about 35 to 40 basis points and this is actually quite moderate. It's not seem to be nothing to be concerned about. But aside from what's going on out there in the political realm, the key drivers to our anticipation is really that we have tougher year-over-year comps. So last year, our seasonal peak actually occurred one to two months later, Northern California, a month later and Southern California two months later. And so that tougher year-over-year comp is a primary driver. And then the secondary factor is the renewals ultimately will converge toward market rate over time, and that's normal.

Rylan Burns :

Yes. This is Rylan here. It's a good question. I'd say working in our favor, we've started to see hard costs come down a little bit from a year ago. The vast majority of development that we underwrite, however, does not meet our return expectations. We're looking for a significant premium to where we can go purchase today given the risk inherent in development. But I would say the trends are favorable, and we are pursuing several opportunities that could lead to an increase in our development pipeline in the near future.

Rylan Burns:

Yes, it's case-by-case dependent, but a general rule would be in our markets today for a shovel-ready site entitlements. We'd be looking for at least 100 basis point spread to where we can go and buy a comparable product.

Operator:

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Angela Kleiman:

That's a great question, Brad. I think that's going to depend on demand. So how quickly do we see job acceleration as we return back to that normal state to the pre-COVID level. And so fortunately, for us, we don't need much, right, given such low level of supply and which is one of the reasons we've been able to produce solid results, even though we are in a low demand growth environment. But the magnitude, if we're talking about, will be really dependent on job growth.

Barb Pak:

Yes. It's most of the timing on the preferred redemption. So we've got $50 million to date. Most of that occurred in July. And then the rest of it is slated for beginning of the -- end of the third quarter, beginning of the fourth quarter. So we'll see the biggest impact from those redemptions then, and that's what's causing that anomaly.

Operator:

Our next question comes from the line of Haendel St. Juste with Mizuho Securities. Please proceed with your question.

Angela Kleiman:

Haendel, that's a great question. Ultimately, we're seeing pricing power and that's translating to our outperformance and you've seen us raise guidance twice and primarily driven by demand because we've always seen that having that low supply environment, we're in a really good position here. As far as where that's going to land, it's hard to say because it depends on the weight of the return. And so just to give you some data points, during COVID, about 400,000 people migrated out of our markets. And what's interesting is the majority of the out migration was to tertiary markets within Washington and California. And so say about a third, 35% of them actually went out to the Sun Belt and East Coast. And so what we're seeing right now is about 1.25 of that has returned. So about 100,000 has come back. And it's generally in line with that proportion of one-third out of Washington and California and two-thirds within the tertiary markets. So there's still some legs here. The question here is when and how much. And that is -- we just don't have enough visibility on the timing about that one.

Rylan Burns:

Hi, Haendel, this is Rylan here. Several questions in there. So if I forget one, please follow up. But in general, we've seen volumes pick up in the second quarter compared to a year ago as well as the first quarter. Cap rates are fairly consistent across our markets for high-quality, well-located buildings in the mid- to high 4 cap range. So we are looking for unique opportunities that we can put it onto our operating platform and generate some additional accretion just from operating a little bit more efficiently. We're always looking for ways that potentially can add incremental yield on the top line. So we are, again, pretty excited about the investments we're able to make in the second quarter. The one that was noted at the Elan was a high 4 cap. We're expecting some additional benefit from putting it onto our operating platform. This is a building probably 20% discount to replacement cost and with rents that are about 15% low pre-COVID levels. So those -- given our fundamental outlook for some of these submarkets, if we can find more opportunities like that, we will pursue as we have always aggressively but with great discipline as well.

Rylan Burns:

Yes, I don't want to provide too much detail just for competitive reasons, but back of the envelope math would suggest that these are above 8.

Angela Kleiman:

Sure, Haendel. For you, yes, you could squeeze another one in. So July loss is about 2%. And so it's certainly a good position, especially when we compare to last year July, it's a 50 basis point improvement. Last year, July was only at 1.6%. So things are moving in the right direction.

Adam Kramer :

Hey, guys. Thanks for the questions. I wanted to ask about competition from new supply in the market. I think looking at the kind of supply disclosure in the supplemental, really helpful, by the way. And it looks in multifamily supply is maybe lower than it was in the prior disclosure, but that there may be kind of more single-family new supply in kind of the way that you guys tabulated. So just wondering if you've kind of seen that have any effect in the market kind of competition from great or new single-family supply.

Adam Kramer:

Got it. That's helpful. And I just wanted to ask about kind of modeling and puts and takes with regards to the kind of the pref equity investments and then kind of buying those assets out. I know you did one in the quarter, maybe on subsequent to the quarter end. So just wondering how to think about kind of the trade-off there, right? You're buying needs a kind of fairly tight cap rates and you're losing yield that's a bunch higher. But just kind of the modeling puts it takes or how to think about kind of the short-term impact in terms of kind of gain of NOI and maybe lost equity income.

Adam Kramer:

Great. Thanks for the time.

James Feldman:

Thank you for taking the question. I guess maybe a question for Rylan. It sounds like you're getting more active on potentially the acquisition front. Your markets are at the leading edge or in the headlines probably the most in terms of rent control regulation. Obviously, Prop 13 is always out there. How do you underwrite potential long-term rent growth or at least handicap those risks to the top line and I guess the expense line? As you're looking at new assets going forward, especially given big election coming up and a lot seems to be on the table.

James Feldman:

Okay. So you'll underwrite greater than 5% growth over the long term across any of your markets?

James Feldman:

And then just thinking about your comments on the urban markets getting a little healthier on the turn. Like do you think you might get more -- you could get more aggressive, find better value buying in the urban markets now given what you think you're seeing or do you think you'll keep the portfolio balance? I know you kind of buy what you can get that hits your IRRs. But is there a play there of getting more aggressive in the cities, given that they've been more challenged?

James Feldman:

Okay, great. Thank you.

Connor Mitchell :

Thanks for taking my question. So there's been a lot of discussion on the bidding wars and cover environment and a lot of transaction activity. Just thinking about that and then maybe also the prospect of Fed rate cuts. Just wondering, does that increase opportunities for the preferred and mezzanine business investments? Or are you guys kind of weighing more on the acquisition opportunity still.

Connor Mitchell:

Okay, appreciate it. And then in the opening comments, I think it would discuss the strength of Seattle. It's seeing less of an impact from supply and some more return to office. Just wondering if you guys can give an outlook on those two items for the Seattle market going forward in the back half of the year?

Operator:

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Rylan Burns:

Just for clarity, those rents are about 15% below pre-COVID levels, and we are not anticipating that snaps back tomorrow, but we know that given the strong income growth we've seen in this submarket as well as what we feel is coming through the COVID and slowdown in the tech market that the fundamental setup is attractive, and I wouldn't be surprised if we recovered those rent growth within several years. So that is a factor. As to what our peers are doing, we are seeing some assets trade that we're not -- we're staying disciplined on at levels that don't make a lot of sense to us. So I do think there are other participants in the market underwriting even more aggressive rent growth in some of these submarkets. So it's difficult to parse through exactly what our competitors are underwriting. But in general, it feels like there's been a lot of capital demand and excitement about Northern California, given the fundamental setup that we've been talking about for a couple of years now.

Angela Kleiman:

John, if we had reached our peak, then that would be more of a likelihood. But at this point, what we're seeing is renewal rates trending downward. And relative to the prior months, it's been gradual. So the good news is it's not a huge deceleration. But from June to July, it's about 30-ish basis point cell and renewal ultimately will converge toward market rent. So that will be possible if suddenly there's a massive amount of job growth and demand and that -- and then the market rents take off, but that's not a likely scenario that we are seeing at this point in time.

Unidentified Analyst :

Thank you. I was curious if you could provide some color on what is changing with the multifamily supply forecast and whether some deliveries are being pushed into next year. And to the extent that you can comment on the outlook for 2025 supply growth relative to this year. Thank you.

Unidentified Analyst:

Great. And I'm curious, how does the delinquency issues in your portfolio compared to the broader market? And to what degree could delinquencies and the rest of the market still create some overhang in terms of competition for newly listed units.

Operator:

[Operator Instructions] Our next question comes from the line of Wes Golladay with Baird. Please proceed with your question.

Rylan Burns:

Yes. I think there was news actually just last week of an Atlanta-based developer that's decided to pull out of the West Coast. And given this is not surprise to us given what we've long said is a very challenging environment to develop in. So we're aware of it. And to be honest, we're not that concerned, fewer developers means less competitive product in the near future and should create additional opportunities for Essex.

Rylan Burns:

That estimate is current today. Again, it's all dependent on our fundamental outlook for the specific submarket where we can acquire land at a regional basis that can really drive the numbers. And then we're tracking hard costs very closely. So I'd say we're closer today than we've been in many years. We haven't started a new development in almost four years. And so -- we've been really disciplined. We know it's very challenging to effectively develop and create value for shareholders through that process. So we're going to continue to be very disciplined. But the company has a long history of stepping in at bottom of the cycle, and we are cautiously optimistic that we're going to be able to rebuild that pipeline in the near future.

Operator:

Our next question comes from the line of Ami Probandt with UBS. Please proceed with your question.

Barb Pak:

Yes, this is Barb. The numbers do bounce around month-to-month, that's why we tend not to like to publish the monthly numbers because there is noise every month. So we're not overly concerned about it, nothing to flag there. It's just monthly noise.

Angela Kleiman:

This is Angela here. Our reasons to move-out has remained steady. It's mostly job changes or change in households and that's remained relatively consistent.

Operator:

There are no further questions at this time. I'd like to turn the call back over to Angela for closing remarks.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Angela Kleiman:

Good morning, and thank you for joining Essex's first quarter earnings call. Barb Park will follow with prepared remarks and Rylan Burns is here for Q&A.

With this in mind, we do not anticipate an imminent improvement in job growth in the high-paying sectors, which is typically the key catalyst to accelerate demand for housing and rent growth. While job growth on the West Coast has remained soft. Our steady performance year-to-date is attributed to 2 factors:

first, limited housing supply. This is a significant structural benefit and a pillar of our California investment thesis.

Turning to our full year guidance revisions. As a result of the strong start to the year, we are increasing the midpoint of same-property revenue growth by 55 basis points to 2.25%. The increase is driven by 2 factors:

First, delinquency has improved faster than our original expectations, which accounts for 40 basis points of the revision. We now project delinquency to be 1.1% of scheduled rent for the year.

Austin Wurschmidt:

You guys flagged the impacted select submarkets are having on your new lease rate growth this year, but I'm just curious if that overhang has been lifted in L.A. and Alameda or if you think that the continued improvement in sort of the long-term delinquency continues to have an impact or impacts others in the market, and you could continue to see kind of that weighing on -- are those markets weighing on new lease rate growth moving forward?

Austin Wurschmidt:

Yes, that's correct.

Austin Wurschmidt:

So how should we think about, I guess, when you guys underwrote at the beginning of the year, you had a relatively tight spread in your new versus renewal lease rates. You flagged renewals are trending better, but that's been a little bit volatile, which I suspect is due to some factors on the comp month by month. But can you just give us a sense of or kind of updated thoughts on how you think the 2 of those trend from here?

Angela Kleiman:

Sure thing. So renewal rates for, say, May and June, they're going out in kind of that low to mid-4% range. They average for the portfolio around 4.3%. And we do -- there is some negotiations there. And what we try to do is anticipate where the market is going to be. And because we are seeing that we are trending slightly ahead, we, of course, are going to push renewals wherever possible. But keep in mind, our approach on renewals is still same as before. We are setting market appropriate pricing and with the goal of maximizing revenues.

Daniel Tricarico:

It's Daniel Tricarico on with Nick. Angela, you talked about the jobs backdrop in your prepared remarks. I was wondering if you could expand on the tech hiring trends in your markets? Are you seeing any green shoots from AI companies starting to take office space? Or general tech companies more active in return to work. Just want to understand the current state of the demand backdrop that many are hoping, obviously, including yourselves to drive an acceleration in the recovery within the Northern California and even Seattle markets.

Angela Kleiman:

Sure thing, Daniel. We are predominantly in -- on the east side, so over 60% of our portfolio is more suburban in nature and the east side. And what that means is because supply is predominantly in the CBD, we are more insulated from that. And we -- so we're seeing much better activities coming from the east side of our portfolio. And where things are trending right now, we are seeing some demand -- some demand growth, which is healthy, which is a good indicator at this point.

Operator:

Our next question comes from the line of Eric Wolfe with Citi.

Angela Kleiman:

Nick, Rylan will talk about how we're underwriting activities in our various markets, including L.A.

Angela Kleiman:

Yes, Nick. And as it relates to the actual tenant underwriting itself for leasing activities, we have not needed to make any material change. Obviously, from building to building, there are always nuances and the tenant background and credit. We set a very solid bar for our credit. What has happened with delinquency really is not related to our underwriting. It's really a legislation result because eviction moratorium went on for so long. And then all the courts are backed up in terms of processing these evictions which is why the whole time line to get out these nonpaying tenants became prolonged. And so in terms of -- if you're talking about, say, new tenants going delinquent, we're not seeing that as a material problem at all.

Angela Kleiman:

Yes, that's correct, Nick.

Alexander Goldfarb:

Angela, just going back a few questions back to the demand and jobs and tech jobs. What do you think is more the reason for this if tech is still sort of sluggish on the hiring front, would you say it's more about sort of markets returning to normalcy more about people, let's say, in Southern Cal enjoying that lifestyle? Or is this really just a function of housing shortage. And we can talk about all these other factors, but the reality is the lack of housing, the single-family slowdown, meaning since the credit crisis, the shortage, that's really the dominant driver. And therefore, all these other items that we talk about are sort of on the margin, but it's really the housing shortage that's driving the stronger-than-expected recovery in apartments.

Angela Kleiman:

Alex, that is an important question. What we are seeing is the vast majority of the legislature are not supporting overturning Costa-Hawkins. So they're on our side. And because they recognize, especially in our market, we have an acute shortage of housing. And so that is not -- that is an antigrowth initiative. We have maintained our coalition to support reasonable legislation and especially relating to housing. And of course, this proposal has been defeated overwhelmingly twice, and we just have not seen anything that shows that will be different this time.

James Feldman:

If we ran our numbers right, it looks like your new lease rate growth was flat or even slightly declined month-over-month from March to April. So I guess first question, is that correct? And secondly, if it is correct, we're just wondering what drove the lower acceleration? And how do you expect that to trend into May?

James Feldman:

Okay. And then Secondly, the acquisition in your JV in the quarter seemed like a great opportunity. You didn't have to reassess your tax basis, you already had majority ownership. Can you just talk about the opportunities to continue doing deals like that? And then also just more broadly, I thought your comments on the transaction market were pretty interesting. I think you said 4.5% core cap rates. Can you just talk more about what's going on in the transaction market in terms of buyer interest? I think a lot of your peers have said things have pretty much taken a pause. So curious what you're seeing on the ground and your thoughts on putting capital to work.

Rylan Burns:

It's certainly something we're considering. Again, we are trying to grow the portfolio, but we need to be cautious about where we where our highest and best use of capital can be. So we have both opportunities that we are evaluating.

Joshua Dennerlein:

I want to go back to your comments, Angela, about where you're sending out May and June renewals. It sounded like mid to low 4s. If I recall correctly on the last call, 4Q, I think renewals, your guidance was assuming like a slowing to like market rent growth, like the 1.25%. Is this kind of what was expected in guidance? Or is that ahead of schedule? And just like how should we think about like the cadence for the rest of the year?

Joshua Dennerlein:

Okay. And what's your -- could you remind us what your typical like negotiation spread is on those renewals, they come back to you, they're signed before you send them out?

Operator:

Our next question comes from the line of Haendel St. Juste with Mizuho.

Angela Kleiman:

Haendel, there's a little bit in May and then no more in June and July.

Angela Kleiman:

Sure thing. So loss to lease for the Essex portfolio in April is about 20 basis points. So nothing exciting there once again. But keep in mind, we have a L.A-Alameda overhang. So if you exclude L.A. Alameda. Loss to lease will be a little over 1%. And just to compare to last year, around April, loss lease was 80 basis points. So absent of L.A. Alameda, things are looking slightly better. We're not talking about massive acceleration, but it is slightly better. So in terms of just the disbursement, Seattle has the best loss lease at about 80 basis points; Northern California, about 10 basis points; and Southern California about 10 basis points. So that gives you kind of the range where things stand.

Barb Pak:

Haendel, yes. It's Barb. So on our last call, we had 5 that were either on nonaccrual status or on our watch list. And then we've obviously taken back one of those in the first quarter. So we're down to 4. And of those 4 assets, 3 of them have loans maturing in the next 2 to 3 quarters. So we'll have an outcome there sooner rather than later, I believe. On the other asset, there's one other asset that we're having productive conversations with the sponsor to contribute additional equity, which will put us in a safer position in the capital stack.

Haendel St. Juste:

Okay. And then your thought process perhaps on adding? Or is that not being considered at the moment?

Operator:

Our next question comes from the line of John Kim with BMO Capital Markets.

Barb Pak:

Yes. So in our 2024 initial forecast, we didn't assume any accrual on the Sunnyvale asset. So it was a 0 in our forecast. Now given that we consolidated it, we did pay off the debt. We think it's about a $0.05 benefit this year. Keep in mind, it's a small asset and then growing from there as we see better rent growth.

Angela Kleiman:

Sure thing. John, it's Angela here. So first quarter concessions pickup impacted renewals by about 60 basis points. And then we're -- what we're seeing in April -- Barb, do you have them in front of you?

Angela Kleiman:

Okay. April is about the same is 60 basis points. And obviously, May, we don't know yet, but we know that we have concessions burning off in June, July, August will be flat and a slight pickup in September and into the fourth quarter, but not much.

Angela Kleiman:

Yes, yes, which is typical. And definitely second quarter and into -- a little bit into the third quarter, and then it picks up again in the fourth quarter.

Adam Kramer:

I wanted to ask about maybe a little bit about some of the demographics of your renters and thinking about the different jobs kind of your job growth commentary earlier on in the call in the opening comments. I think you kind of mentioned that the tech industry and some of the higher-paying jobs having really recovered. I think people typically think of your portfolio as more Class B, right, a little bit more suburban, a little bit more Class B. Maybe just walk us through whether it's your tech exposure, whether it's the type of renters that are renting with you guys and maybe a little bit more just about the specific jobs that are within your tenant base? And how has job growth fared among those different industries?

Adam Kramer:

Got it. Okay. That's helpful. And the implication would be there's fewer renters within your tenant base from those government and other service teacher types of industries. Would that be the kind of implication?

Adam Kramer:

Got it. That's really helpful, Angela. Maybe just switching gears. Look, I think the commentary around -- I think you kind of mentioned you didn't buy back any shares, but also an issue in your equity -- maybe just walk us through how you kind of view your equity cost of capital today and kind of the other potential cost of the other potential capital sources and cost of capital there, whether it's -- and again, financial a little bit, but just kind of capital allocation strategy from here? Is this more kind of an asset-light approach in asset late year, if you will?

Brad Heffern:

A couple on the press book. Can you give the yield that you ended up at on Sunnyvale and also say how much debt you paid off as a part of that process?

Brad Heffern:

Okay. Got it. And then, Barb, can you give the interest income that's associated with the assets that are not being accrued? Just what that would be if they paid?

Operator:

And our next question comes from the line of Rich Anderson with SMBC.

Barb Pak:

Rich, it's Barb. It is very important for us to stay on the dividend aristocrat list and maintain the dividend and continue to increase it. We do like free cash flow, but we also have a lot of planning that goes on behind the scenes in terms of how we do raise our dividend. And we do target a certain percent of our FFO and our AFFO yield to go out as a percent of the dividend payment. So all that gets factored into how much we increase the dividend annually. And it won't be 6% every year. It just does depend on a variety of things behind the scenes that are going on. But maintaining the dividend and keeping our long history of increasing it every year is something that's very important to the company.

Angela Kleiman:

Rich, it's Angela here. That's a good question because when we look at the median income, it actually is pretty darn good, and it matches the profile of our property quite well. And so we're -- it's my way of saying we don't have an issue with the demographics in that they can't qualify for our properties because within a market, we have a diversified pool. So even though we're solely in the West Coast, within each submarket, we do have different levels of properties where tenants can qualify. And the quality of jobs I'm speaking to really more relates to our ability to accelerate rent growth. And that's the key when I'm talking about the high paying jobs.

Angela Kleiman:

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

Operator:

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

Barb Pak:

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

Barb Pak:

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

Barb Pak:

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

Steve Sakwa:

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

Steve Sakwa:

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

Steve Sakwa:

Great. Thanks. That's it for me.

Daniel Tricarico:

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

Daniel Tricarico:

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

Rylan Burns:

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

Operator:

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

Angela Kleiman:

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

Jessica Anderson:

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

Operator:

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

Barb Pak:

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

Barb Pak:

So the two in the fourth quarter, we put them on non-accrual. They weren't required to pay current, but we put them on non-accrual just given where we are in the stack. They have near-term maturities as well and we're working with the sponsors on those debt refinancing's. And then the other ones that we're monitoring, we're assessing that -- we'll assess that quarter-by-quarter. We have reserved it in the guidance, but we're assessing it based on current market conditions.

Angela Kleiman:

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

Operator:

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

Barb Pak:

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

Angela Kleiman:

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

Jamie Feldman:

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

Jamie Feldman:

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

Adam Kramer:

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

Adam Kramer:

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

Adam Kramer:

Great. Thanks for the time.

Joshua Dennerlein :

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

Joshua Dennerlein:

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

Joshua Dennerlein:

Okay, all right. Appreciate that. Thank you.

Wes Golladay:

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

Wes Golladay:

Okay. Thanks for that. And then I guess, maybe bigger picture, supply is still relatively low at the portfolio level and rent growth is call it, low 1%. Is it just mainly the markets with heavy supply bringing that -- the blend down for you? You also mentioned something in the comments earlier about the job growth is being driven by service-related jobs. So, I'm just wondering if the job mix is also playing a big part of the forecast this year?

Wes Golladay:

Okay. Thank you for that.

John Pawlowski:

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

John Pawlowski:

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

John Pawlowski:

Okay. All right. Thanks very much.

John Kim:

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

John Kim:

Okay. So just projecting unemployment rate moving up?

John Kim:

Can I clarify on the impairment that you had in your preferred? Do you still have a position in this asset? Or was it -- was the loan fully written off due to the recapitalization or some other kind of event?

John Kim:

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

John Kim:

Okay. Great. Thank you.

Michael Goldsmith:

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

Michael Goldsmith:

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

Michael Goldsmith:

Thank you very much. Good luck in 2024.

Operator:

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

Barb Pak:

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

Angela Kleiman:

Hey, Rich. Yes. So I think from your question -- from your perspective, the absolute number is right now, we're going from zero to something. So you can't be below zero. But keep in mind, the way Barb has outlined the guidance, we are assuming an improvement in delinquency, which means we will need to get -- we do need to convert some of those zeros into a positive number, just to be at midpoint. Does that help?

Rylan Burns:

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

Operator:

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

Barb Pak :

Yes, Linda, we are -- this is Barb. We are pursuing every avenue to try to collect on that money, whether it be taken to small claims court, we've being their credit -- and like we are collecting a little bit here and there, but it depends on when they need their credit. And when they need their credit, then they tend to come back and pay, but if they don't need their credit for a long time, then it can sit out there. But every avenue we can pursue, we are pursuing to try to collect on that money.

Angela Kleiman :

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

Operator:

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

Angela Kleiman:

Buck, it's Angela here. We have been -- our team has done a great job staying on top of these potential issues. And when we look at the fraud instances, it has not ticked up or become elevated. And in some instances, say, if it's a building specific issue, we immediately remedied those. And so that really hasn't been a driver for whether it's behavior or impact to our financials. It really is driven by the core processing time. So, I'll give you an example. When the tenant goes delinquent, pre-COVID, it only took us about, say, two months on average to evict this tenant. Because of the court delays, it's six months plus, right, or eight months if you're in LA. And so that's the time that's getting accumulated. And so we normally have a level of delinquency in our portfolio, but it's elevated now because it's just taking longer.

Rylan Burns:

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

Operator:

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

Angela Kleiman:

Good morning, and thank you for joining Essex’s third quarter earnings call. Barb Pak and Jessica Anderson will follow with prepared remarks and Rylan Burns is here for Q&A. My comments today will focus on how we performed to date. Our initial outlook for 2024 and a brief update on the investment markets. Overall, 2023 has unfolded generally in-line with our expectations. We increased our same-property revenue and NOI growth in middle of the year, despite a challenging operating environment, with almost 2% of rent delinquent for the first nine months of the year. For context, this delinquency level is approximately five times our historical average. The unprecedented eviction protections enacted during COVID exacerbated by subsequent court delays has resulted in protractive exposure to non-paying tenants and uncertainty on timing of when we could recapture these units. That said, we made considerable progress reducing delinquency as a percentage of rent, which is now at 1.3% in October, this improvement has naturally resulted in a temporary trade-off between rate growth and occupancy but has proven to be an optimal strategy to maximize revenues as we make progress towards normalization in our markets. Looking ahead to 2024, we plan to publish a more comprehensive outlook for the West Coast in conjunction with our full year guidance on our fourth quarter earnings call. For now, we have provided our initial 2024 supply outlook for our market on S-17 of the supplemental which forecasts total supply growth of only 0.5% of total housing stock. Unlike many other US markets, total housing supply in our markets is expected to remain at low level. And we do not see a near-term catalyst for increasing housing supply growth in the Essex markets. This supply landscape also minimizes our risk to job growth relative to other markets, especially if we encounter a softer demand environment and will be a tailwind for Essex when the economy accelerates. While muted supply is part of our thesis, we also see conditions that could drive demand for housing. First, after a year of retrenchment, layoff in the tech industry appears to be slowing and return to office is gaining momentum, with percent of remote job hiring at the largest tech companies now in the low single-digits. Implying that once tech hiring resumes in a meaningful way, job growth will be highly concentrated near major employment centers. Second, it remains to be seen, how the artificial intelligence industry will grow. We know that success in this industry will require immense scale and capital resources, and these types of companies are largely concentrated in the Bay Area and Seattle. Third, affordability, particularly in Northern California. Today, the Bay Aera is as affordable as we've seen since we began tracking this data, and we expect this will provide a long runway for rent growth. In summary, the combination of this potential demand backdrop and a muted supply outlook gives us confidence that the West Coast is well positioned to outperform in the long-run. Lastly, an update on the apartment investment markets. Deal activity slowed further in the third quarter, as interest rates increased sharply in recent months, compressing perspective returns and resulting in many buyers remaining on the sidelines. We have seen several marketed deals not transact this year as sellers await a less volatile interest rate environment. There is little evidence to suggest transaction activity will pick-up in the near term as bid-ask spread remains wide. We have navigated through many economic cycles and our finance team has done an excellent job in fortifying the balance sheet, which positions Essex well for any environment. With that, I'll turn the call over to Barb.

Jessica Anderson:

Thanks Barb. My comments today will cover our recent operating results and strategy, followed by an update on our delinquency progress and regional highlights. Operating results were solid for the quarter including same-property revenue growth of 3.2% on a year-over-year basis. We experienced a normal peak leasing season across all markets. Market rents peaked in August, at 6% growth year-to-date compared to December 2022 and has subsequently moderated by 10 basis points in September, which is consistent with typical seasonality. While we took advantage of opportunities to push rents during peak season, we shifted back to an occupancy focused strategy midway through the third quarter as we began to recapture a larger volume of units from non-paying tenants. This shift in strategy tempered our blended trade-out rates in Q3 which were similar to Q2 at 2.1%. Renewal growth rates were healthy at 3% in Q3 and 5.3% in October, boosting our blended trade-out rates while new lease growth was muted at 1.2% for Q3, reflecting new lease incentives to backfill recently vacated non-paying units. Eviction related move-outs increased in September, allowing for improvement in delinquency as a percentage of rents to 1.9% in September and even further improvement in October to 1.3%. Several of our markets such as Santa Clara, San Mateo and San Diego have returned to delinquency levels close to the long-term run rate. Los Angeles and Alameda County remained elevated, but significant progress is also being made in these areas after protections expired earlier in the year. As Angela mentioned, the improvement in delinquency will result in a temporary tradeoff with new lease growth and occupancy, which can be seen in our preliminary October numbers, but we view this progress, as a positive for the company. Consistent with our approach all year, we remain nimble and will shift our strategy as necessary to maximize revenue in any operating environment. Finally, I want to thank the Essex team for their diligent efforts this past quarter. They've been a major driver of the improvement we've achieved. Moving on to regional specific commentary. Beginning with Seattle, this market has performed as expected this year. Blended net effective rent growth averaged 0.5% for the quarter, improving 70 basis-points from Q2. Despite nominal trade-out growth, demand fundamentals were solid in Q3 and I'm pleased with the recovery of this market after a slow start to the year. Market rents in this region were the first to peak in July on par with a typical year and we anticipate a normal seasonal moderation although higher levels of supply deliveries in the fourth quarter may have an impact on pricing. Turning to Northern California, blended net effective rent growth averaged 1.4% for the quarter, consistent with Q2. Market rents peaked in late August later than normal, an indicator of solid fundamentals in this market. Santa Clara was our top-performing market for the quarter as outlined on page S-9 of the supplemental. The ongoing return to office along with corporate housing activity contributed to these positive quarterly results. San Francisco and Oakland CBD, which account for a small portion of our NOI, have lagged the regional average. Oakland continues to be impacted by supply, which is expected to continue into 2024. Lastly, Southern California continues to be our top-performing region led by San Diego. Market rents in Southern California were last to peak in mid-September and blended net effective rates remained resilient at 3.7%, despite the headwinds in Los Angeles, our market most impacted by delinquency. In October, delinquency in Los Angeles was at 4.6%, reflecting a 2.1% improvement since the start of the year. We anticipate making continued progress on delinquency in Los Angeles and as such we expect rents and occupancy in this area to be more volatile in the near-term. In summary, we are encouraged by the improvement we are seeing on the delinquency front and expect continued progress, heading into next year. As we conclude the balance of the year, we remain focused on preserving occupancy and positioning the portfolio favorably, heading into 2024. I will now turn the call back to the operator for questions.

Austin Wurschmidt:

Great, thank you. Jessica, you highlighted that you've shifted your strategy from pushing new lease rate growth to growing occupancy, due in part to the elevated move outs of non-paying tenants. But from what I recall, the guidance assumes both an improvement in cash delinquency and re-acceleration in new lease rate growth towards that high 2% range in the back-half of the year. So, I guess I'm just curious if anything else changed from a demand perspective that also contributed to that shift in sort of operating strategy?

Austin Wurschmidt:

Got it, that's helpful. And then can you just remind me -- I know you guys report financial occupancy, but does that capture cash delinquency or is that figure more reflection of gross potential rent? Thank you.

Austin Wurschmidt:

Understood. Appreciate it.

Eric Wolfe:

Hey thanks. Just curious what you think drove the decline in delinquencies in October sort of specifically versus, say, two months ago and -- even a couple of months ago. Some of your peers started seeing it. Do you think that the improvement is sustainable going-forward?

Eric Wolfe:

All right, that's helpful. I guess leads to my second question which is around the -- you dropping through new lease rates, the increased occupancy of non-paying tenants. I guess, how long would you sort of expect that process to take? And would you expect new lease rates to sort of go back up to that sort of 2.8% that you discussed on the last call or should renewals have to come down? Because, I think you also talked about renewals tending to follow new lease. So just trying to understand how long new lease rates will be depressed and if we should also expect renewals to come down to follow them?

Eric Wolfe:

Got it, thank you.

Daniel Tricarico:

Hey. It's Daniel Tricarico with Nick. Thanks for taking the question. First question is on market rent growth thoughts for next year. With the 0.5% supply growth you gave in the sub, just curious what sort of demand environment would drive negative market rent growth next year, given that supply backdrop? Just looking to sensitize possible outcomes.

Daniel Tricarico:

No, that's good. Thanks for that, Angela. And the next question would be on just your different regions. SoCal has been your strongest, but curious if you could see that gap to Northern California and Seattle remaining or maybe converging next year. Any thoughts on the puts and takes there? Thank you.

Daniel Tricarico:

Great, thanks for the time.

Steve Sakwa:

Yeah, thanks. First, Jessica, could you provide a kind of a loss to lease [Technical Difficulty] and an earn-in figure for the portfolio?

Steve Sakwa:

Great, thanks. And then maybe just on the investment side, I guess, I think Barb might have talked about some repayment of some of the preferred investments. I guess just what are you seeing in the marketplace today from other developers or other investors who might be in trouble form a financing perspective?

Steve Sakwa:

Great, thanks. That's it from me.

Joshua Dennerlein:

Yeah, hey guys. I appreciate that your markets have lower supply than a lot of other markets out there across the country. But just kind of curious on what you're seeing as far as demand goes in San Francisco and Seattle and then maybe what do we need to see to kind of see an acceleration of that demand in those markets?

Joshua Dennerlein:

Okay, appreciate that color. And then maybe just one quick one and apologies if I missed this. But what does your guide assume for the rest of the year as far as new lease rate growth goes?

Joshua Dennerlein:

Okay. Okay, thanks.

Jamie Feldman:

Great. Thank you. Can you talk about for the occupancy first initiative in the first half. Do you think that sets you up for potential acceleration next year?

Jamie Feldman:

Yeah. I'm just thinking about what the year-over-year comps could be into next year. Like, where did you push harder in the first half of '23 that you may get the benefit. It might be harder to have the comps for the first half of '24 both on occupancy by market and also by rents?

Jamie Feldman:

Yeah, that's helpful. Thank you. And then, I guess, just switching gears, to the investment here to investment potential. I mean, you mentioned Oakland. I mean, some of these sub-markets, you saw better opportunities or better pricing?

Jamie Feldman:

Okay, all right. Thanks, Rylan.

Brad Heffern:

Hey, everybody. Can you talk about some of the return to office mandates you've been watching like we saw with Meta in September. And has there been a noticeable impact in leasing activity on the ground from those?

Brad Heffern:

Okay, understood. And then concessions have come up a few times on the call. I'm just curious if you could walk through the individual markets and just give the average concession that you're offering right now?

Brad Heffern:

Okay, thank you.

Adam Kramer:

Hey guys, thanks for the time. Just a couple of questions on kind of a couple different demand drivers you guys have touched on in the past. I think one would just be -- some of kind of be in-migration to your markets, right? And that could be overseas tech workers, visas, other kind of immigration factors. Just want to maybe kind of walk through that because I know there's a lot of focus on the outward migration. Maybe just kind of thinking about the in-migration to your markets. And then the other kind of demand driver question is just on kind of the end of the, writer strike, actor strike, if that -- what potential impact that could have on your business?

Adam Kramer:

Great, thanks. I'll leave it there. I appreciate the time.

Wes Golladay:

Hi everyone. You mentioned getting -- I think, repaid on $100 million extra in the structured finance. Do you have a timing estimate on that? Do you -- is there any chance you extend that? And then when looking at the entire structured finance book, is there any geographic concentration?

Wes Golladay:

Great. That's all from me.

John Kim:

Thank you. On the 5.3% renewal rate growth achieved in October, can you break that down between how much of that was rate growth versus concession burn-off from a year ago?

John Kim:

So when you compare the concessions that you mentioned earlier that you're offering versus the year-ago, is that additive to rental rate growth going forward?

John Kim:

Okay. Has there been an update on the gross delinquency outlook for the second half of this year, it was last at 1.9%. I think you basically there, including October, has that changed at all?

John Kim:

Okay, thank you.

John Pawlowski:

Good morning, thanks for the time. Barb, I have a question about the potential deferred repair and maintenance and CapEx costs that might be in the portfolio today associated with delinquent tenants. Have you -- could you give us an order on that, a sense, like an order of magnitude of the total amount of dollars you think that needs to get spent over the coming years on these units? I'm just trying to get a sense of whether early innings is seeing the cost flow through from evictions or you've already worked through most of it?

John Pawlowski:

Okay. Maybe shifting over to the private market, and I joined the call a few minutes late, so apologies if I missed this, but Rylan, I'm curious where you think market clearing cap rates are right now in kind of the urban cores of San Fran and San Jose, I imagine they're pretty close to redline right now. So I'm just curious, what type of pricing do you think buyers and sellers might agree on pricing in the kind of urban high-rise environment in San Fran, San Jose?

John Pawlowski:

Yeah, no, it definitely is. Maybe one follow-up. Just curious, I know you've been talking more suburban over the last few years. What -- like what pricing becomes interesting to you to go back into these urban markets that have not really healed from COVID? What kind of range of cap rates would you be willing to be a buyer at?

John Pawlowski:

Okay, thanks for the time.

Connor Mitchell:

Hey, thanks for the time. Just wanted to follow up on some of the in-migration discussion. Would you be able to kind of give a waiting or the amount of impact that you're expecting from international migration maybe compared to historical figures, whether that's 10% of the growth compared to the current return to office we're looking for? How much of an impact do you think that could have versus the other demand factors looking forward?

Connor Mitchell:

Yeah, of course. And then, just another question. You've talked about the secured financing a little bit. So after you issued the secured debt earlier this year recently, just wondering if you could give an update on how the unsecured market is looking now versus the secured market and whether there's been any narrowing of the spreads? The unsecured market has improved a little bit since then. Thanks.

Connor Mitchell:

Appreciate the color. Thank you.

Haendel St. Juste:

Hey guys. Couple quick ones for me. First, Angela, I guess I'm curious, any perspective on -- there's an article in New York Times the other day, in it called -- California called -- slam San Francisco for egregious barriers to housing I think was the header. So I'm curious if you have any thoughts on this. Certainly the idea of low barrier to entry, low supply in California is the key theme, key part of the thesis there. So I'm curious if there's any perhaps updated perspective reviews on the barriers to building, if there's any changes that are being contemplated that could be real and how that could impact the marketplace? Thanks.

Haendel St. Juste:

Got it, got it, thank you for that. And then one more, I believe, earlier you mentioned that concessions in San Francisco, broadly in your portfolio average, one week. I was hoping you could bifurcate that a bit further, maybe San Francisco proper versus down in Peninsula. Thank you.

Haendel St. Juste:

Thank you.

Linda Tsai:

Hi, thanks for taking my question. Over the next 12 months across, which markets would you expect the highest rent growth and how much faster might growth be in these markets versus your portfolio average?

Linda Tsai:

And then just one quick follow-up on expenses. Given the commentary about higher utility insurance costs in '24 , do you see more markets where this is more pronounced versus others?

Linda Tsai:

Thank you.

Angela Kleiman:

Goodbye.

Angela Kleiman:

Good morning. Thank you for joining Essex's second quarter earnings call. Barb Pak and Jessica Anderson will follow me with prepared remarks, and Adam Berry is here for Q&A. We delivered a solid second quarter with core FFO per share exceeding the high end of our guidance range. In addition, we are pleased to announce a meaningful increase to our 2023 guidance for same property revenues, NOI and core FFO per share growth. Barb will discuss this further in a moment. Our performance to date demonstrates the underlying strength of the West Coast economy along with continued refinement to our operating strategy. My remarks today will focus on our 2023 revised outlook for the West Coast and conclude with an update on the transaction market. Starting with expectations for the balance of the year, as shown on Page S17 of the supplemental. Our improved outlook reflects the year-to-date resilience of the economy and labor markets both surpassing our initial forecast. This dynamic, coupled with slowing apartment deliveries have contributed to a healthy demand for rental housing in our markets. As a result, we raised our average market rent growth expectations for the West Coast by 50 basis points to 2.5%, with notable increases to San Diego and San Jose. Demand associated with job growth is a key driver to the revision. We now expect our markets to generate 1.7% job growth for the full year. This is mostly attributable to the growth achieved in the first half of the year, with our markets posting 2.6% job growth on a trailing 3-month average through June. Additionally, the layoff announcements from the largest technology companies have proven less consequential than headlines suggested with only a fraction occurring within our markets, and the vast majority of those affected quickly finding new employment. Turning to the supply outlook. Our research forecast a slight reduction in 2023 deliveries as a few delay projects get pushed into 2024. While we have been pleased with the steady job growth achieved on the West Coast to start the year, we remain cognizant of the potential for more interest rate increases given the Fed's focus on inflation reduction. Thus, our job outlook contemplates a moderating economy as we approach year-end. And accordingly, our base case expectation assumes modest market rent growth for the remainder of the year. Looking forward to the next several years, we see the West Coast as uniquely positioned to generate above-average rent growth based on 3 key factors present today. First and most importantly, the West Coast supply outlook is relatively muted, and a multiyear lead time is required to develop new housing in our markets. With permitting activities declining, we expect to benefit from moderate supply levels for years to come. Second is rental affordability. Since 2020, average personal income in the Essex market has grown over 20% compared to cumulative rent growth of 10%, resulting in attractive rental affordability. Furthermore, high cost of homeownership continues to favor renting. It is now over 2x expensive to own compared to rent in the Essex market. Third, solid demand drivers. Our Southern region continues to demonstrate stable growth supported by a diverse and vibrant economy. Likewise, the Northern region economies are steadily growing, a key driver is the investment in AI companies that are largely concentrated in Northern California. We've seen open positions of the top 10 tech companies improved gradually each month since the trough earlier this year. Lastly, fully remote as a percent of total job postings have significantly declined at below 10% in June. For these reasons, we expect the West Coast to continue gaining momentum for the remainder of 2023 and outperform over the next several years. Lastly, turning to the investment markets. Transaction activities in the West Coast have remained muted. Similar to the first quarter, volume in the second quarter was about 55% lower than the same period prior year with cap rates in the mid-4% to low 5% range for institutional quality properties. We are starting to see more deals actively marketed at a similar valuation levels. Interest from a healthy group of buyers range from local syndicators to large institutional and foreign investors. As expected, leverage buyers remain largely in the sidelines, waiting for more clarity on interest rates. We continue to diligently underwrite deals as we are well positioned to be opportunistic. With that, I'll turn the call over to Barb Pak.

Jessica Anderson:

Thanks, Barb. I'll begin my comments today by providing color on our recent operating results and strategy, followed by regional commentary. I was pleased with our operating results from the second quarter, including a same-property revenue increase of 4% year-over-year. For the first several months of the year, we maintained an occupancy-focused leasing strategy to mitigate expected headwinds from eviction-related move-outs. This approach helped us exceed revenue expectations in the first half of the year and left us well positioned to push rate during peak leasing season, which continues today. Our new lease trade-out accelerated through the second quarter from 0.5% in May to 1.7% in June and finally to a preliminary 2.1% in July. Renewal trade-out is stable and averaged 3.4%, resulting in blended net effective rent growth of 2.2% for the second quarter. These results were achieved despite increased turnover driven by eviction-related move-outs. Given ongoing delinquency court backlog, we will continue to work through evictions for the rest of the year and anticipate some of this activity spilling over into 2024. Moving on to regional specific commentary. In Seattle, blended net effective rent growth averaged negative 0.2% for the second quarter, dragging down the portfolio average. This is attributed to 2 key factors. First is the year-over-year comp. In the second quarter of 2022, Seattle generated a portfolio-leading net effective rent growth of over 16%. Second, Seattle remains our most seasonal market, thus is more sensitive to changes in the operating environment. You may recall during the back half of 2022, the Seattle market experienced increased supply during a period of softening demand, which heavily impacted rents as we headed into 2023. However, throughout the second quarter, we saw a steady strengthening of demand, particularly in Seattle CBD that coincided with Amazon's mandatory May 1 return-to-office of 3 days a week. Strong leasing activity drove a collective 680 basis point sequential increase in net effective rents from April to June and a solid 97% quarter-end occupancy. Moving on to Northern California. Blended net effective rent growth averaged 1.5% for the second quarter. Oakland continues to be impacted by supply posting a negative 0.4% for the quarter, diluting the healthy 2.7% achieved in San Jose, where the bulk of our Northern California portfolio is located. Despite the tech employment headlines, we still experienced corporate housing activity associated with the large tech companies albeit muted from last year, which helped support seasonal demand. Quarter-end occupancy was also solid at 96.7%. Lastly, in Southern California, blended net effective rent growth averaged 4.1% for the quarter, driven by continued strength in San Diego, Ventura and Orange County. Los Angeles is pulling the average down with a 1.9% blended lease trade-out for the quarter. However, because of the eviction activity in this market, rent growth and occupancy are expected to run lower relative to the rest of Southern California for the remainder of the year. Quarter-end occupancy in Southern California was 96.3%. In summary, we are encouraged by our results for the first half of the year and the current operating environment. As we begin the third quarter, we are well positioned with the current physical occupancy of 96.7%, coupled with strong leasing activity across all markets. As we look to the back half of the year, we will reassess our rent growth focused strategy as the summer leasing season wraps up in the next 30 days and maintain our flexible approach to maximize revenue in a variety of market conditions. I will now turn the call back to the operator for questions.

Eric Wolfe:

I think at NAREIT, you mentioned that you saw some earlier move-outs of nonpaying tenants, which probably was impacting your pricing and the use of concessions. But based on your comments and just looking at the July data, it seems like your delinquent percentage is staying about the same. So I'm just trying to reconcile that and try to understand when we might actually see the delinquent percentage come down.

Eric Wolfe:

Understood. But I guess, just to be clear, I mean, if I look at the sort of May data around new leases, you're using concessions, that was what was depressing that number. I mean, guess what -- I guess what drove that then? And then what changed to allow you to feel more comfortable with the push rate?

Operator:

Our next question is from Steve Sakwa with Evercore ISI.

Barbara Pak:

Steve, this is Barb. I'll take the first part of that question. And so in terms of delinquency, yes, it's roughly 2% for the full year. We're at 2.1% today, year-to-date. And so it's a little bit under that in the back half of the year. Like I said, we do expect it to continue to trend favorable, but it's an inherent lumpy number. And so it's difficult to predict month-to-month, but end of the year should be less than 2% for sure. And then on the blended, I'll let Jessica answer that.

Operator:

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Barbara Pak:

Yes. This is Barb. I would say, I think we know -- we've done the vast majority of our leases. We still have some to go. So we know where leases are going to trend this year and that top line number. If we get substantially more rent growth from here, it's really going to benefit 2024 at this point versus 2023 given the amount of time that's left in the year. And the number of leases that we have left to sign is lower in the third and the fourth quarter. And so I think that's the biggest factor. The biggest factor to our guidance at this point in terms of same-store is really delinquency. It can swing up or down. That's the biggest wildcard right now. I think with other -- the other components of the same-store revenue are pretty dialed in.

Jessica Anderson:

So as far as where we see trade-out going would expect that is slightly different by market, but expect that to accelerate from here. It will be higher in Q4, and that's simply based on the comps, as you pointed out. And then as far as seasonality goes, we see this as being a typical year, and we may have a prolonged peak. We've been monitoring our rents. And typically, we peak in NorCal and Seattle around -- right around about now or mid-July and then SoCal is often a little bit later. But as of this week, we're still seeing rents accelerate in San Jose specifically in Southern California, and some of our other markets are leveling off at this point. So pretty normal, but we're seeing strong leasing on the ground and anticipate a typical seasonal slowdown.

James Feldman:

Your comments and also EQR commented earlier, talked about maybe an improving return-to-office, especially in the Bay Area. Can you talk more about what you're seeing? And also, how do you think about the implications for suburban versus urban type of assets as more people are getting pulled in the cities? I think their comment was the urban -- more urban as the people want to be closer to their workplaces.

James Feldman:

Okay. And then as we think about your expenses heading into kind of late into the fourth quarter or even into next year. Can you just talk a little bit about where you think you may see either the greatest moderation or maybe some acceleration in operating expense growth across the major line items?

James Feldman:

Okay. That makes a lot of sense. I guess just sticking with insurance, are you seeing any lightening up from the insurance company in terms of what they're willing to offer as they build up their capital reserves? Or no, you think it's going to be another tough year?

Operator:

Our next question is from Alexander Goldfarb with Piper Sandler.

Angela Kleiman:

Yes, Alex, that's a good question. We haven't seen an active hiring from an international basis yet. And what we have seen is on a net migration for California as a whole. So this is market as a whole. That net outflow remains negative, but it hasn't been -- it's gotten better. So during COVID, it was an extreme outflow. And now when we look at the net migration outflow number, it's pretty consistent to pre-COVID. And so we do think that once we have that international, it would definitely be a good tailwind. As far as when we look at our own portfolio, just on a more granular level, so this is move-ins. We saw a pop last year between the first and third quarter with California reopening, and that acceleration was definitely very encouraging to see. And since then, the move-out, obviously, it's not going to continue at that level in terms of acceleration. But the -- I'm sorry, I meant to say the move-ins, but it has remained positive, and it's been stable. And so that's another good sign.

Barbara Pak:

Alex, it's Barb. That's a great question. I will tell you, we do prefer unsecured debt, and that's been kind of our ammo for many, many years as that's the way we finance the balance sheet. In this environment, though, we saw a significant pricing differential between the secured and unsecured market. So while we locked in our -- the secured loans at 5.0%. If we were to go to do an unsecured bond, it would have been 65 to 75 basis points wide of that. And so that pricing differential was so great that we decided to move forward with the secured side of the equation. 95% of our NOI is unencumbered. And so we have lots of room within our covenants to secure a few assets. And there's no change in our overall balance sheet philosophy. It was just really a pricing differential that made us move the way we did.

Joshua Dennerlein:

Just wanted to ask about the R&M same-store expenses. It looks like it was impacted by storms and flooding damage in the first half of the year. One, is that all behind us now, so it will kind of normalize out in 3Q? And then what would that trend look like if you could strip out the storm impact?

Joshua Dennerlein:

Okay. I appreciate that, Barb. And then can you just clarify when exactly you made that strategy shift from occupancy to rate growth. And then I guess my real question is, does that imply you have a bigger mark-to-market? I'm not sure if you actually set the mark-to-market at this time.

Joshua Dennerlein:

Okay. Is that about average of the loss-to-lease at this time of the year, 1.7%? Or is it a little bit below normal because of that -- the initial strategy on the occupancy?

Operator:

Our next question is from Nick Yubico with Deutsche Bank.

Jessica Anderson:

This is Jessica. Yes, we did see Seattle was a large contributor to the sequential improvement, followed by Northern California. Southern California has been performing pretty steadily. And then as far as specific markets in Northern California, San Jose has been particularly strong, which reflects over 40% of our portfolio in the Bay Area. So we've seen strong occupancy, strong leasing demand. That one is encouraging, certainly watching it. We've seen with all of the prior return to office announcement. So Amazon and Seattle CBD and then last year with Google as well in the Bay Area, there's definitely demand associated to these return to office events. And so anticipating that Meta, which is in September is going to have the same impact. I would imagine, we're experiencing some of that demand right now. And then also, as I mentioned in my prepared remarks, the corporate housing activity. It is less than last year, but we still saw the activity this year, which is always an encouraging sign as far as the health of the big tech employers, they certainly wouldn't be investing in interns and contract work if they were planning on tightening their belts and we've certainly seen an uptick in hiring as well. So San Jose has been doing quite well. And then Seattle had already touched on the Seattle CBD and the Amazon returned to office, so that was a factor. And we're still seeing strength in demand today. However, it is our most market. And so we certainly see the most pronounced reduction in rents in the back half of the year in that market. But I expect it to be in line with our typical seasonal curve and expectations there and then also supply. We do have good supply headwinds in Seattle. Some of it was pushed to the first half of 2024. So it's a little bit better than what we originally expected, but we still have some supply on our radar there.

Angela Kleiman:

It's Angela here. The key drivers in actually all of our markets have been in the health services and education and, of course, the leisure and hospitality as well. And so with San Diego rebounding, it's been good to see those activities coming back in a more robust way.

John Kim:

On the Washington property taxes coming in lower than expected, was that due to a favorable appeal that you had or lower mill rates or something else?

John Kim:

Do you think that rate is a good run rate going forward? Or is it more of a onetime reduction?

John Kim:

Okay. My second question is on your loss-to-lease. I think Jessica mentioned it was 1.7%. Last year, Angela mentioned that the September loss-to-lease is a good indicator for your future earnings. And I'm wondering how you think that trend just given the market rental rate assumption has gone up? I think you touched on this a little bit, but where do you see that September loss-to-lease go to?

Angela Kleiman:

Just a little context. I think last year, around this time, we were sitting around 7% loss-to-lease. And -- but we were looking at the seasonal curve that is occurring in a more -- that mirror pre-COVID level. What happened was the prior year, we didn't even peak until November. So it's been a little wonky coming out of COVID. And so it's September, generally, as a rule of thumb is a good data point. But just because of the uniqueness in the past couple of years, I just -- we didn't want anyone to just peg a June number as a good rule of thumb.

Haendel St. Juste:

So first question is on transactions. As we've heard we've seen still pretty stalled. But you mentioned that you're diligently underwriting deals. So I'm curious where you peg the bid-ask spread at today and where asset pricing would need to be for you to get more active?

Haendel St. Juste:

Got you. That's helpful. A follow-up on the conversation around concessions. Can you guys provide a more detailed breakdown perhaps by region what the average concession that you're providing in your NorCal or SoCal and Seattle regions are and then also a loss-to-lease by region?

Haendel St. Juste:

Great. And then sorry, if I missed this, but what's the embedded assumption for bad debt impact the revenue in the back half of the year?

Haendel St. Juste:

That's the incremental tailwind? You're saying that the expectations by year-end? Is that the incremental benefit you expect in the back half of the year?

Operator:

Our next question is from [indiscernible] with Green Street.

Adam Berry:

Robin, this is Adam. So at this point, our intention is to -- well, our guidance really is not to acquire anything in the back half of the year. We -- like I said, we've been underwriting everything. And if there are deals that makes sense strategically that fit in with our existing portfolio, whether through economies of scale or other methods, then we will focus more on those deals. But for the moment, given our cost of capital, we wouldn't expect much on the acquisitions front.

Barbara Pak:

Yes. I mean we did do stock buybacks in the first quarter, and we will assess our sources of capital to do that because we want to maintain our balance sheet strength and a leverage neutral approach to the stock buyback. So we would need a source of capital to continue to buy back the stock, and so that would imply that we would dispose of something. So it will all depend on where we can find opportunities to add value to the bottom line. Because at the end of the day, that's our goal on the external front is how can we grow accretively. And to Adam's point, it's hard to do it via acquisitions today. But it doesn't mean that we're just going to go buy back the stock. We would need a source of capital to do that as well. So it all go into the mix.

Barbara Pak:

Yes, it's a great question. It's difficult to know. I mean, obviously, we'll get some of that. But -- and none of that is baked into our guidance for delinquency this year. We are making progress collecting. The problem is, until the courts get caught up delinquency keeps accruing because we have tenants that are in our properties a lot longer than they were historically. Pre-COVID, if somebody went delinquent, they were out within 2 to 3 months. And now they go delinquent, they're out in 9 to 12 months. And so that's part of the compounding problem on the delinquency side and the cumulative delinquency side. In terms of what we're going to collect, I can't give you a number. It's just too hard to predict.

Barbara Pak:

Yes. I'm not going to throw out a number because it's just not something that we know with any sort of certainty at this point. We're working hard to collect every time that we can. We've used all measures possible to go after these tenants who are delinquent and have delinquent balances, but it's not a number I can throw out there.

Michael Goldsmith:

For the L.A. market, are you seeing any pressure from the writers and actor strikes? Or does your guidance contemplate any impact from this?

Michael Goldsmith:

That's helpful context. And for my follow-up question, when you look at the A versus B quality properties. Are you seeing any differences in trends between them? Is there any differences in demand or tenant health and how that's trending between A versus B quality properties?

Operator:

Our next question is from Nathan [indiscernible] with Robert W. Baird.

Jessica Anderson:

This is Jessica. So yes, San Diego has been a phenomenal market for us. I think it benefited during the pandemic. It was a popular area to relocate to, rents were lower and overall great quality of life. And as Angela mentioned earlier, there is some underlying employment industries that have strength there. So San Diego has been very solid, and we expect it to continue to perform well. As far as other markets that I have my eye on that are showing signs of strength, go back up to the Bay Area with San Jose. Just to reiterate what I'm seeing there, that's been a strong market for us. And then when you couple that with the recovery as well that we still anticipate with continued return to office and where we're at relative to pre-COVID rent. There's definitely an upside there and then up in the Seattle area for similar reasons. But of course, we're going to be facing some supply headwinds there over the next year.

Angela Kleiman:

Good morning. Thank you for joining Essex's first quarter earnings call. Barb Pak and Jessica Anderson will follow me with prepared remarks and Adam Berry is here for Q&A. We are pleased to report a solid first quarter that exceeded our initial expectations, and that we are raising the midpoint of our FFO per share guidance for the full year. Barb and Jessica will provide more details on the quarter, while my comments will focus on our economic outlook, the opportunities within our platform, and some perspectives on the apartment transaction market. Beginning with our outlook for the remainder of the year, we continue to anticipate modest economic growth in 2023 resulting from a more restrictive monetary policy tempering job growth nationally. Our assumptions are detailed on Page 17 of our supplemental package. As we all know, the West Coast is home to some of the largest companies to announce layoffs over the past six months. Even so, the West Coast economies have proven resilient, producing a solid job growth of 2.7% on a trailing three month basis through March. We believe there are two key factors contributing to the durability of the underlying West Coast fundamentals. First, many of the layoff workers have quickly found new jobs. And second, the vast majority of the layoff affected people who do not reside on the West Coast. For example, we continue to monitor WARN notices and, of the largest companies to announce layoffs, only 16% of their reductions have occurred in our markets. With the exception of a few specific submarkets, the overall labor market and demand for housing in the West Coast had a healthy start to the year. On the supply side, the outlook remains favorable with only about 60 basis points of total housing stock forecasted to deliver in 2023, the supply risk in our markets remain low. We expect that continued housing production challenges, such as diminished labor force and high construction costs, should lead to relatively [light] (ph) apartment deliveries for the next several years in our markets. Thus, we do not need meaningful job growth to generate modest rent growth in 2023. Since none of us have control over the Fed or the economy, our team will remain focused on what we can control, which is the continued enhancement of our operating platform. We have been thoughtfully transforming our operating model for several years, which has resulted in one of the most efficient operating platforms in the industry. Relative to our peers, Essex has the highest controllable operating margins and one of the lowest average controllable expense per unit. While the rollout of our property collections model has contributed to this efficiency, we are only midway through implementation. Our next phase of expanding this operating model to the maintenance function will maximize the workflow of our associates, including reducing tasks time and vendor costs. These advancements will enable incremental revenue growth to flow more efficiently to the bottom-line, ultimately generating additional FFO per share and dividend growth throughout all economic cycles. Lastly, turning to investment activities. We're still seeing institutional quality transactions occur from the mid to high 4% market cap rate with a deeper buyer pool towards the high end of this range. Keep in mind that the transaction market is still digesting higher interest rates, as evidenced by a significant reduction in volume of approximately 70% nationally and 60% in the West Coast in the first quarter compared to last year. In addition to the [indiscernible] volume, our cost of capital remains unattractive from an acquisition's perspective. But keep in mind that Essex has a long track record of creating value for our shareholders by arbitraging discrepancies between the stock price and the underlying asset value. Once again, we demonstrated this strategy in the first quarter, locking in significant FFO and NAV per share accretion for shareholders, which is the primary driver of raising our FFO guidance mentioned earlier. We continue to actively evaluate potential deals and are ready to act swiftly and thoughtfully when opportunities emerge. With that, I'll turn the call over to Barb Pak.

Jessica Anderson:

Thanks, Barb. I'll begin my comments today by providing color on our recent operating results and strategy, followed by regional commentary. I was pleased with our operating results from the first quarter, including a same property revenue increase of 7.6% year-over-year. As Barb mentioned, one core factor driving these results was the successful execution of our occupancy strategy that resulted in a solid 96.7% for the first quarter, up 70 basis points from the fourth quarter. This focus began in Q4 and was done proactively in anticipation of elevated turnover from eviction. During the first quarter, we made progress recapturing units from non-paying tenants and we experienced the highest volume of eviction related move-outs to-date. The number of long-term delinquent residents has declined by 65% from our peak over a year ago, excluding Los Angeles and Alameda County. Additionally, a notable milestone in the first quarter was the ending of the eviction moratoriums in the city and county of Los Angeles, where approximately half of our delinquency resides. Given backloged eviction courts, it will take many months to recapture these units, but steady progress throughout 2023 is expected. I am very proud of the team and appreciate the tremendous amount of work that has gone into recapturing, turning, and re-leasing units. Thank you, team, great job. Throughout the first quarter, we saw positive demand indicators for the portfolio, lead volume, which reflects the number of initial inquiries into leasing an apartment and as a leading indicator of demand, was consistent with and up in some cases over same quarter last year. Additionally, concession usage has declined from approximately two-weeks free in the fourth quarter to a half-a-week free in the first quarter. We are experiencing a relatively normal ramp up to the peak leasing season. Net effective blended rates accelerated through Q1, averaging 2.9% for the quarter and ended with March at 3.8%, although they moderated in April. This was due to a temporary increase in leasing incentives to offset a period of heavy eviction volume. While April averaged 96.4% occupied, we are at 96.9% today and well positioned to absorb additional turnover while still increasing rents as demand allows. Moving on to regional specific commentary. In the Pacific Northwest, our most seasonal market, blended net effective rents were up 30 basis points in the first quarter compared to one year ago. The elevated supply in the downtown submarket is weighing on our regional performance. The supply outlook for Seattle is comparable to 2022 and similarly a more challenging second half of the year is expected. In Northern California, blended net effective rents improved to 2.6% in the first quarter year-over-year. We're seeing strength in the San Jose submarket, offset by supply driven weakness in Oakland. The supply outlook for Northern California remains relatively muted, which will benefit our ability to push rents, presuming job growth continues to outpace the recently announced layoffs. Finally, in Southern California, blended net effective rents were up 5% in the first quarter as demand remained solid. All regions have fared well to start the year, including Los Angeles. As I mentioned earlier, we're expecting elevated turnover in this region driven by eviction. In general, supply outlook in Southern California is very manageable and outside of pockets of supply in submarkets such as West LA, this market is expected to fare well. In summary, 2023 has started off slightly better than expected. Demand for apartments has been solid. We continue to make progress with evictions and our occupancy-focused strategy positions us well. We are cautiously optimistic as we head into the peak leasing season, but also acknowledge the macroeconomic uncertainty that could influence apartment demand through the balance of this year. I will now turn the call back to the operator for questions.

Nick Yulico:

Great. Thanks. Appreciate some of the commentary on the markets and tech job exposure. I guess if you were to quantify some of the impact to markets whether it's parts of Oakland, Downtown Seattle, any other more difficult markets right now within the portfolio, how would you come up with that as a percentage of a total company?

Nick Yulico:

Great. That's helpful. And then just a second question is I know you talked a little bit about the tracking ahead of same store revenue growth guidance right now. I guess in terms of what some of -- you could talk a little bit more about some of the offsets that could prevent the guidance raise in the second quarter. I don't know if it's the delinquent units coming back to market and how they get leased. And then, separately on the economic forecast, it sounds like the job losses are playing out better than expected year-to-date. In many cases, large tech has already come out with their announcements. So, maybe talk a little bit more about the decision to not change some of the economic forecasts as well. Thanks.

Barb Pak:

Hi, Nick. Yeah, I would say on the guidance piece, delinquency, obviously, is something that's still a little bit uncertain to predict in terms of getting units back. As Jessica mentioned, LA, Alameda, just are coming out of their eviction moratoriums. And so, the timing on when we're going to get those units back is uncertain. And so that's a factor. And we also want to get a little further into the peak leasing season given the uncertainty that Angela just mentioned. And then, we'll do a full reforecast for the second quarter. But the first quarter was very strong for us, and we feel we feel pretty good going into second quarter.

Eric Wolfe:

Thanks. I guess with respect to the stock repurchases, is there an internal limit sort of in the short term or long term, or just as long as you're able to sell assets and then buy back your stock at a reasonable discount, you'll just keep going?

Eric Wolfe:

Right. And I guess, what I was trying to understand is just -- if you're able to sell $200 million, you're able to sell $300 million successfully, you'd be willing to repurchase $300 million? Or is there just sort of a certain point where from a G&A perspective and sticking other sort of considerations into account that it's just not as efficient for you to keep selling assets and buyback stock? And then, I guess to sort of add on to that question, for your internal NAV, are you using the cap rates that you see transact in your markets or sort of making adjustments about where it should be based on debt cost? Because I think the theory of that it's a pretty thin transaction market right now. So, the cap rates we're seeing may not be sort of reflective of where things would transact if they had to.

Eric Wolfe:

Okay. Thank you.

Steve Sakwa:

Hi, thanks. Good morning. I guess maybe for Jessica, I was hoping you could speak a little bit to the blended rates that you talked about. I think in April you said maybe there were some impact from the eviction. So I'm just hoping to see if you could quantify that, because I think amongst all your peers, you might be the only one that showed a decline in April. So just trying to get a sense of the magnitude of that and maybe what your expectations are for May and June.

Steve Sakwa:

Thanks. And then, I guess maybe as a follow-up, just to get a little more color on Seattle. I mean some of your peers had maybe a bit more weakness and spoke to the weakness specifically in Downtown Seattle. I know that you have probably more East side exposure. But just any thoughts around Seattle in particular? And does Amazon's kind of May 1st return to office policy have any influence or have you seen any influence from that? Or do you think people were sort of already back in the Seattle market? Or do you think there's a wave of people to come back to the market in the near term?

Operator:

Our next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.

Adam Berry:

Hey, Austin. This is Adam. Apologies. So at the moment, we are not actively marketing anything. We're always opportunistically looking at potential for disposing of assets that are either non-core or in non-core markets. And this is how [indiscernible] deal we sold last quarter, that's how that came about. But currently no, not marketing anything right now.

Barb Pak:

Yeah. This is Barb. On the Emergency Rental Assistance payments, in April, we had a $100,000 in our same store portfolio, so nothing material. And that is disclosed in our supplemental. And then in terms of factors in the April guidance, the one thing I would say is that for delinquency, we did assume the first half of the year would be in the mid 2% range, 2.5%. And then the back half, we expect continues to trend down to close to 1.5% and 2% for the full year. So we're on plan with delinquency in April, and then occupancy at 96.4% is generally in line with plan as well.

Jamie Feldman:

Great. Thank you. I was hoping to shift gears to the expense side. Can you talk about just the key line items in expenses? There's been a lot of volatility for insurance for people and taxes. Just kind of what gives you conviction on your current outlook for the different expense lines? And where do you think maybe there might be some risk either the upside or downside of the growth rates?

Jamie Feldman:

Okay, thanks, Barb. And then, Orange County seems to have come through this quarter pretty well across most portfolios, including yours. Can you just talk more about what's going in that submarket specifically?

Operator:

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Barb Pak:

John. So, on the tax line, it really deals with the comp issue from the first quarter of last year. So, in Seattle, if you recall, we did have a favorable surprise last year where our real estate taxes went down 4%. We didn't know that until the second quarter. The first quarter of last year was our budget and what we assumed taxes would be. And so it was way too high. so we're comping off of a really easy comp, and that's why you see the negative 1.6 on the tax line. We -- like I said a few minutes ago, we'll know where Seattle taxes come in, in the second quarter when we pay the bills. And so, that's still TBD. We're still assuming 4.25% overall for the tax line for this year. It's really just a comp issue in the first quarter.

Adam Berry:

Hi, John. This is Adam. So over the last couple of months, we've seen, I would say, a slight uptick in possible opportunities come in the mezz and pref world. As you said, some of the lending sources out there have either tightened or disappeared entirely. It remains to be seen if this new wave that we're seeing will actually translate into deals. There are legacy development deals that have been out there a while. There are some new, actually existing deals that we're seeing as well. But again, this process takes a long time and several months. And so, we're assessing a number of new opportunities, but very too early to tell how many of them translate into actual deals. But we'll always -- we'll continue to look at potential options when we have liquidity, whether that's through dispositions or redemptions, what the best use of that capital is.

Brad Heffern:

Yeah. Hi, everybody. Thanks. So the big tech layoffs have already been touched on, but I'm wondering what effect, if any, do you think the SVB failure and the associated impact on tech company funding they have on your residents. I know you typically talk about a relatively small exposure to big tech in the resident base, but I'm curious if you think that applies to start-ups as well.

Brad Heffern:

Okay. Got it. Thanks for that. And then maybe for Barb, another one on the guide. The increase to the guide was smaller than the beat versus the first quarter midpoint guide. I know you mentioned that most things are outperforming, and then you had the repurchase as well, but it seems like there was some sort of offset for the rest of the year, second quarter to fourth quarter. So, can you talk about what that is?

Brad Heffern:

Okay. Thank you.

Adam Kramer:

Hey guys. Thanks for the question. Just wanted to ask about -- look, I know we touched on kind of tech and SVB. Maybe asking the same question a little bit differently, which is just on kind of severance packages. I know some of the early layoffs last year, maybe some even -- later in the year, have longer severance packages, right, and so maybe you wouldn't kind of see that change in resident behavior right away. Wondering if maybe since some time has passed since then [indiscernible] many differences in resident behavior kind of given the severance packages that may be expiring now?

Adam Kramer:

That's great. That's all super helpful. Maybe a follow-up. I think you guys have done a really good job of kind of bringing us into your minds when it comes to kind of managing occupancy versus pushing rents I think both on this call and in prior calls. Maybe just kind of on a go-forward basis, walk us through kind of that trade-off, right? I know you mentioned concessions now lower than they were earlier in April. Walk us through maybe just kind of how you're thinking about that trade off now, given kind of the demand screen today, right, how you're thinking about kind of managing occupancy versus pushing rents?

Operator:

Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Barb Pak:

Hi, Alex, it's Barb. What I was speaking to is that there is still capital available in the multifamily space. I know in other sectors, it's just definitely pulled back, and I definitely think the banks have pulled back. But the government financing is still available. Life insurance companies are stepping in. And I think you're seeing other lenders step in. And in our preferred book, keep in mind the deals that we're getting taken out of, they were underwritten 2019, 2020, a long time ago when cap rates were in the mid 3.5%, and so we can get fully taken out. And so I think they're good situation for us. And we haven't seen any real issues within our own portfolio. It doesn't mean that it's not happening elsewhere. But in terms of distress in the whole market, we haven't seen that in a significant way on the West Coast.

Angela Kleiman:

Hey, Alex, it's Angela here. It's a good question. I'm trying to figure out looking ahead, what's happening here. In terms of our portfolio, just big picture starting this year compared to last year, overall supply is slightly down. But the vast majority, as you pointed out, is Northern California is down over 20%. And Southern California is up slightly about 14%, and the bulk of it is in the Downtown LA and then some of these other West LA, certain other markets. But overall, of course, that supply number is quite muted. As we look forward to 2022 -- 2024, what we're seeing preliminarily [indiscernible] landscape. And so not a huge drop-off, but similar level. But keep in mind, we're already operating at a pretty darn down low level, right? I mean total supply as a percent of total stock is only 60 basis points. And so, we do foresee that to continue especially given the environment of much more challenging labor force available and higher construction costs. And lastly, rents in the northern region haven't moved significantly past pre-COVID. So, Northern California is still slightly below pre-COVID level. And so, it didn't surprise us that Southern California supply picked up slightly this year. And I think you kind of see that throughout the country where you have significant rent growth that's where supply will occur. So that's the big picture of our overall this year and next year, similar levels and it's going [indiscernible] in our markets.

Angela Kleiman:

Seattle overall is slightly down, but Downtown is up.

Angela Kleiman:

So, yes.

Operator:

Next question comes from the line of Anthony Powell of Barclays. Please proceed with your question.

Adam Berry:

So, on the first -- hi, Anthony, this is Adam. The first part of your question, do we have a list of non-core assets, the answer is yes. And we're constantly having discussions and going through those to see where they could potentially sell and what we could do with the proceeds. As to the amount with which we can buy stock back, there are challenges always with dispositions. There's always the different ramifications of tax gains, Prop 13. So all of those are taken into account when we assess what we can do with those proceeds. There's also another tool in the shed is to use 1031 exchanges to exchange out of non-core assets into markets that we think will overall affect the portfolio in a positive way.

Angela Kleiman:

Yeah, hi. It's Angela here. On the diversification question or expanding outside of West Coast, it is something that we have been disciplined about evaluating. And so that -- just that basic discipline has not changed. We're going to continue to monitor those markets and look for opportunities. But back to your original point, I think you hit the nail on the head, especially as it relates to Northern California, a couple of things going for our markets where we have the lowest supply deliveries and especially Northern California supply is down 22%. We're just starting to rebound in terms of job growth, getting jobs -- numbers getting back to pre-COVID levels and market rents still below with gradual improvements. We're in the best affordability position from a rent-to-income perspective in the northern region, below long-term average. And so that would point to all the best growth prospects. On the just broad picture on the migration front, and we all experienced meaningful net migration during COVID, while the migration landscape has been improving gradually as well. And so, you put together all those pieces [indiscernible] point to that where we want to deploy our dollar, where we see the most upside ahead of us, it's in the West Coast.

Operator:

Our next question comes from the line of Wes Golladay with Robert W. Baird. Please proceed with your question.

Adam Berry:

Hi, Wes. This is Adam. It's -- the development landscape today is challenging for a number of reasons. Angela has pointed to a few of them. With a challenging labor market, construction costs have remained elevated. And so when solving for a, call it, 20% premium over where market cap rates are, it just -- it basically will lead to a lower land price than landowners are willing to go. So, sure, we would love to be delivering into a lesser supply market, but right now, it's just the development deals just don't cancel.

Adam Berry:

We do, yes. And those are still generating active revenue. And now with some, we're pursuing entitlements in the meantime, so parallel processing and others have just longer-term lease commitments.

Angela Kleiman:

We actually see the international part to be a tailwind for us, because it's just starting. And so I think it's no surprise that historically, California has a net out-migration if you only look at domestic numbers. In fact, 17 out of the last 20 years, it's net out-migration domestically. And even during those periods, we had meaningful rent growth acceleration. So the international component is what drives migration to become positive for California. And that virtually disappeared. I mean it was zero during COVID. And so that is just starting to come back. And so we are hopeful that will be additive to the demographics piece.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my question. My question is about migration. How is demand from customers -- how has demand been from customers currently living outside Essex's market? And how does that compare with normal? And then also the other side, have you seen increased or decreased move-outs to non-Essex markets?

Michael Goldsmith:

Got it. And my follow-up, we talked a lot about tech layoffs, but have you seen any specific changes in the reasons for move out?

Operator:

Our next question comes from the line of Chandni Luthra with Goldman Sachs. Please proceed with your question. Chandni Luthra, your line is live.

Angela Kleiman:

Hey, Chandni, it's Angela here. We actually have been reducing our usage of RealPage as we develop our new revenue management system over the past several years. And so, we started as well before the RealPage lawsuit for the reasons that Jessica mentioned earlier. So, we believe that their claim is without any merit, and we're very confident about our defense prospects.

Barb Pak:

Hi, Chandni, it's Barb. So in the first quarter, gross delinquencies were 2.5% versus the reported number of 2.1%, so 40 basis point improvement tied to Emergency Rental Assistance. And then for the outlook for the year, the 2%, we're still holding to it. I think LA and Alameda just come off. It's really going to depend on how quickly the court move on these evictions. It's taking six-plus months right now. And so that really is going to depend how quickly either people go through the whole eviction process or whether they just skip. And that's a little unknown at this point. I think in the next few months, we'll have a better visibility on that.

Operator:

Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.

Barb Pak:

Yes, John, it's a great question, something we talk about internally a lot. We historically have been at 35 basis points pre-COVID. We believe we will ultimately get back there because there won't be any loss to protect tenants like there was during COVID, which allow tenants to have this behavior. And so now that we're coming out of all of the moratoriums, I think the City of Oakland is the only one that really remains, we think we will get back there. But it's going to take until into 2024 to get there. And it won't be -- for the full year of 2024, it's going to take into that year because of the eviction process and how long it's taking. But structurally, we don't believe that there will be a fundamental shift in delinquency and our long-term trends will go up because of COVID.

Barb Pak:

I don't think we -- no, I don't think we've gone back fully to pre-COVID levels in our other markets. As Jessica said, in the call or in our prepared comments that we've gotten over 60% of our long-term delinquent residents out over the past or since the start of 2022. So, we're making good progress, but we're not fully back to where we should be at this point.

Angela Kleiman:

It's Angela here. I'll start, and Jessica, welcome to add. In terms of the upside or the most revenue growth, we definitely see Northern California being in the top of that list followed by Seattle and then Southern California. And both for -- with Northern California because of, as I said earlier, the job growth is just getting back to pre-COVID levels, market rents are still below pre-COVID, but it has been gradually improving. It has the lowest level of supply deliveries relative to our other portfolio and the best affordability position. And so that -- for those reasons, it's ranked number one. And Seattle for similar reasons, but it does have a higher supply, and then it's more volatile or more seasonal. And so -- which means that -- so with Southern California coming in last, not because we don't like it, it's just because it's just done so well. I mean it's 15%, in some cases, 20%, 30% rent growth above pre-COVID. And we're starting to see some supply pressure, which -- it's still in check relative to the rest -- the U.S., but relative to our markets, it's starting to creep up. And so that's the order of the ranking. Jessica?

John Pawlowski:

Agreed.

Operator:

Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Barb Pak:

This is Barb. It was primarily related to a legal settlement for construction defect at one of our properties, and there's no carry-forward on that. That was just a one-time item that occurred in the first quarter. It was paid in cash. So that's done.

Operator:

Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.

Jessica Anderson:

Hi. This is Jessica. Yes, things are going very well. We're very pleased with the platform thus far, and we have a long development pipeline for that revenue management system. So, all is going well. I mean a couple of benefits to point out that we're looking at is in alignment and allows us to price at a portfolio level with our property collections model versus the commercially available systems you're often pricing at the property level. And then second, we also see, as far as long-term development, the ability to optimize our amenities. So when you look at like our average rent, it's $2,600 and good $200 of that is actually fixed amenity values. And again, with your commercially available systems, that portion of the rent is not optimized. And so if you look at that on an annual basis, what that is for us is over $100 million that's not optimized. So that's one opportunity we also see moving forward with the system. So there's a few value-add opportunities to give you a couple of examples.

Jessica Anderson:

Well, when you're looking at, we have a high geographic concentration. And so when you're pricing properties individually, sometimes you can be kind of cannibalizing yourself based on the occupancy position at a property. And so, when you're looking at an entire portfolio collectively one-bedrooms, two-bedrooms, ultimately, you can maximize revenue through a more stable approach to rents and the balance with occupancy.

Operator:

Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Angela Kleiman:

Yes. In our markets, well, in the northern regions is, of course, more tech centric. But in the Southern California, it's more service driven, leisure and hospitality. It's much more diversified and mirrors that of the U.S. broad economy with more professional services and, of course, higher income levels.

Angela Kleiman:

It's more diversified.

Operator:

There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

Michael Schall:

Good morning, 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 touch briefly on our full year results, expectations for 2023 and why we believe that our West Coast rental markets are positioned to outperform over the next several years. I will conclude with comments on the transaction market and the upcoming CEO transition. Overall, 2022 was a positive year for Essex as we generated full year core FFO per share growth of 16.2%, our highest year-over-year increase in a decade and 9.3% above pre-COVID levels. We attribute these strong results to relentless execution by the Essex team, improved efficiencies from the implementation of our property collections model and the strong recovery in our West Coast markets for the better part of the year. Our positive results were achieved despite the challenges associated with COVID-19 regulations in our markets. Our near-term results will remain impacted by elevated delinquency, which we estimate will represent a $0.60 per share drag on FFO in 2023 compared to our pre-COVID levels of delinquency. Notwithstanding the impact of delinquency in 2023, we believe we are entering the final phase of these challenges and that our COVID-related headwinds will be behind us in 2024. For 2023, we reaffirm our 2% market rent growth expectation across the Essex markets as shown on Page S-17 of the supplemental package, which is predicated on consensus assumptions for a slowdown in the U.S. economy driven by higher interest rates. Macroeconomic visibility is limited by a variety of factors, which translates into a wider-than-normal range of potential outcomes this year. Recent economic data highlights continued resiliency in the labor market with solid reports for job growth and unemployment claims even with elevated layoff announcements. In Essex markets, preliminary job growth for December was 3.8%, and the recent unemployment rate was only 3.2%, both outperforming national averages. Looking ahead, layoff announcements and lower job openings among large tech companies signal a softer employment outlook for 2023, which we incorporated into our forecast assumptions shown on Page S-17. Our primary challenge since early 2020 relates to the massive layoffs that occurred as a direct result of the government's response to the pandemic, which eliminated nearly 3 million jobs in California alone and force people out of densely populated areas in search of work. It has taken over two years to recover those jobs lost during the pandemic, and I'm pleased to say that the Essex markets have now fully recovered those losses. It is notable that each of the eight major metros in the Essex portfolio have now recovered from 98.8% to 100.9% of the jobs lost in the early part of the pandemic, leading us to believe that most of the slack in the housing supply-demand relationship from the pandemic no longer exists. We believe that this is a major milestone which should lead us back to our pre-pandemic growth profile once the economy stabilizes. As with past economic slowdowns, a frequent concern involves the tech companies that dominate Northern California and Seattle with nearly daily reminders of tech layoffs amplified in the newspapers. The tech sector is often volatile yet over longer periods, the industry has reliably generated top paying jobs and wealth creation that are at the foundation of a strong rental growth. A core strength of the tech industries is their ability to evolve in a cyclical process of reinvention, where the groundwork for new rounds of innovation are laid while the prior cycle is slowing. I am confident that this is what is occurring today. Going back to the 1980s, Big Tech was focused on IBM PCs and R&D efforts to improve semiconductor manufacturing, and that phase ended with the recession in the early 1990s. Growth of the Internet and e-commerce soon emerged and then later boomed and busted capping the dot-com era from which many believe tech would never recover. Instead, a wave of social and mobile products emerged 20 years ago, including Facebook, YouTube and the iPad and iPhone, setting up a much larger and more profitable era of growth. Then following the Great Recession, cloud computing and machine learning added to the next period of rapid growth, both for new start-ups and for sector leaders like Amazon, Google and Microsoft. And now despite a very similar set of concerns, many of you will have followed the explosive recent adoption of new AI products such as ChatGPT and DALL·E.Consistent with the transformative technologies of the past, the innovators and investors in artificial intelligence are overwhelmingly concentrated in our markets including OpenAI in San Francisco and Google Brain in Mountain View. And despite a broad BC slowdown last year, funding for AI increased 70% and is now poised to grow vastly more in 2023. In a recent search of the leaving 100 start-ups in artificial intelligence, we found that more are headquartered in the Bay Area than in the entire rest of the United States. Thus, it is a combination of entrepreneurial spirit, financial capital and technical talent down on the West Coast as well as housing supply constraints that drives our expectation for the West Coast to generate superior rent growth over the long term. Turning to the apartment investment markets. We continue to see muted deal volume in our West Coast markets as buyers and sellers seek to compromise on their expectations for property values and yields. A relatively small number of apartment sales indicate that property values and cap rates have not changed materially since last quarter, and cap rates generally are in the mid- to high 4% range for high-quality suburban apartments. At this point, we've seen pockets of distress mostly focused on owners subject to variable rate debt and maturing short-term loans. It's possible that an extended period of elevated interest rates and slower rent growth could create new opportunities to generate FFO and NAV per share. We sold 1 property in the fourth quarter, and we are working on other potential sales. In conclusion, assuming my math is correct, this is my 115th consecutive conference call on behalf of Essex, which will be my last given my pending retirement as CEO at the end of March. I am incredibly grateful for the opportunity to be part of the highly skilled, disciplined and focused leadership team for this great company. I'm taking a step back with full confidence in Angela's ability to lead the Company along with her determined and like-minded team. Thank you all. Finally, I have enjoyed working with so many of you in the investment community, and I thank you for your trust and support over many years. I remain confident that many great years for the Company are on the horizon. With that, I'll turn the call over to Angela Kleiman.

Barb Pak:

Thanks, Angela. Today, I will focus on our 2023 guidance, followed by comments on investments and the balance sheet. Our 2023 guidance assumes same-property revenue growth of 4% at the midpoint on a cash basis. Overall, we expect healthy top line growth and stable occupancy to be partially offset by 70 basis points of higher delinquency. The reason we believe delinquency will be higher than 2022 is due to uncertainty around the timing of evictions in all of our markets. In addition, we do not expect to receive much in the way of Emergency Rental Assistance as compared to $34 million we received last year on a same-store basis. As it relates to operating expenses, we are forecasting a 5% increase at the midpoint, which is above our historical run rate. There are a couple of reasons for the higher-than-expected increase. First, controllable expenses are forecasted to increase 4%, which is driven by wage inflation and elevated eviction-related costs, partially offset by savings we achieved via the rollout of our property collections model last year. Second, we are experiencing elevated cost pressures within utilities and insurance. In total, we expect same-property NOI growth of [3.6%] at the midpoint. In terms of core FFO, our midpoint assumes 1.6% growth. The primary reasons for the modest increase include higher interest expense and delinquency and lower structured finance income, which are outlined on Page 6 of the earnings release.In total, these items equate to a $0.57 per share headwind, representing nearly a 4% reduction to growth on a year-over-year basis. Turning to investments. Given the challenging investment environment and our elevated cost of capital, we have not provided specific estimates for new acquisitions as it is difficult to generate accretion today given the significant disconnect between public and private market pricing. Given this disconnect, the best way to create value today is through asset sales and share buybacks or via preferred equity investments all of which we completed in 2022. It should be noted that we have a long track record of finding ways to create NAV and FFO per share in all environments, and we will maintain that discipline going forward, while at the same time, match funding our investments on a leverage-neutral basis. As it relates to the structured finance portfolio, during the quarter, we completed a comprehensive review of our investments performing a wide range of sensitivity analysis on a variety of key metrics. The analysis confirmed the portfolio is performing as expected with the exception of two investments, both located within the Oakland submarket. One of the investments was redeemed in the fourth quarter, resulting in a $2 million impairment. For the other investment, we took a conservative approach given the uncertainty around fundamentals in Oakland due to high apartment deliveries, which is leading to an elevated concessionary environment. As a result, we stopped accruing on this investment during the fourth quarter, resulting in a $0.06 reduction to our 2023 guidance. Overall, we have a long successful track record of investing in structured finance investments. Over the past 12 years, we have invested approximately $690 million in structured finance investments that have been fully redeemed, achieving a 13% average annual return for our shareholders. Lastly, on to the balance sheet. During the quarter, we saw a continued improvement in our credit metrics with net debt-to-EBITDA returning to pre-COVID levels at a healthy 5.6x, with no debt maturing on our consolidated balance sheet until 2024, limited development funding needs and ample liquidity, our balance sheet remains in a strong position. I will now turn the call back to the operator for questions.

Nick Joseph:

First of all, congratulations again, Mike and Angela. Mike, I appreciate the comments on kind of the tech cycle and future thoughts there. But what gives you the comfort that the benefit for any recovery or the eventual recovery, I guess, in tech will accrue mostly to the West Coast markets like we've seen in the past versus maybe some of the more newer tech markets or Sun Belt markets given population and job growth trends that we've seen there?

Nick Joseph:

Yes. AI innovation is pretty exciting. And then just on the structured finance program, I guess two questions. Just number one, for the asset in Oakland that you're not accruing income. Can you walk through how that potentially could play out going forward in terms of your role there? And then it sounds like you're in an analysis across everything and everything -- all the other are performing as expected. But are there any on the watch list or potentially maybe could become issues?

Operator:

Our next question comes from the line of Anthony Paolone with JPMorgan.

Angela Kleiman:

It's Angela here. On the concessions, we have seen it essentially taper off throughout the portfolio since December, which is basically I've mentioned earlier that our portfolio trough late November and it significantly improved as an overall average in the fourth quarter, particularly in December. We were running about two weeks concessions. And right now, it's a portfolio average, we're running less than a week. So that gives you an indication of directionally how things have improved pretty quickly.

Barb Pak:

Yes, Tony. For 2023, we're expecting bad debt as a percent of schedule rent to be 2%. Now keep in mind, we don't expect any Emergency Rental Assistance in 2023 as compared to the $34 million we received on a same-store basis in 2022. And so that's why the net number is going to increase. We were at 1.3% in 2022, and it's going to 2%. Now the underlying gross delinquency is improving because we are able to evict. It's just taking longer than we had initially expected, but we are making progress on that front, as Angela mentioned in her script.

Wesley Golladay:

Good morning, everyone, and congrats again, Mike. I'm curious how the supply pressure changed throughout the year? And at what point did you start to push rate?

Wesley Golladay:

Got it. And then just curious, what happened to all these people that are evicted, if you have a new tenant coming in, say, in June, will you know if they were a nonpayer if they're a prior apartment? Or is just everyone going to swap non-paying tenants?

Wesley Golladay:

Okay. So that would be a relatively timely event. I guess there's like the ties that are not paying -- it's already in the books for you as a delinquent tenant?

Operator:

Next question comes from the line of Austin Wurschmidt with KeyBanc.

Angela Kleiman:

I'll just touch on the delinquency population.It’s Angela here. In the past, L.A. is about 40%, and it's ticked up to about 50% L.A. delinquency, and that doesn't surprise us given the eviction moratorium has not been lifted. We had expected L.A. to continue to accrue under the delinquency basis. However, the good news is that the new tenants coming in, we're not seeing those tenants [indiscernible] prior tenants.

Austin Wurschmidt:

That's fair. Just trying to understand what sort of the earnings power going into 2024 is, but we'll haveto revisit that later this year. Second question, you referenced your shift to favouring occupancy late last year. And you highlighted some month-over-month improvement from December to January. I guess what would it take for you guys to pivot towards going back to pushing rate? And would that mean that the 5.5% renewal rate growth that you are at in January could stabilize or even reaccelerate from here or would the benefit accret more towards new lease rates?

Austin Wurschmidt:

And is it safe to assume that Northern California has a similar setup as Seattle in terms of some seasonality, maybe and the opportunity being to be able to push a little bit harder as we come out of the seasonal low, if you will?

Operator:

Our next question comes from the line of Steve Sakwa with Evercore.

Barb Pak:

Yes, Steve, it's Barb. I would say the first half we expect to be higher than the second half. We're about 5% in the first half. The first quarter will probably be north of that, and then it will trend down throughout the year with 3% on average in the second half of the year. And that's really a function of the year-over-year comps because last year, while rents accelerated, it didn't fully hit our revenue growth line.And so, we expect to capture that this year. First half will be higher than the second half.

Angela Kleiman:

So from an occupancy perspective, we're not running at a whole lot different than prior periods. The one caveat is really more focused on Southern California particularly L.A. because we're anticipating some vacancies there from eviction. So for example, we saw the similar headwind in Northern California in the fourth quarter, and we anticipated that. So we employ the same strategy. So it's really more focused on some of these unique situation as we come out of COVID related legislation really to position us for better growth.

Michael Schall:

Yes. Let me just add one more quick thing. Steve, a big question here is what is going to happen to the pace of employment. As I noted in the prepared remarks, job growth has been really strong. However, maybe some of the layoffs or the warm notices haven't actually showed up in job growth yet. So our expectation for the year -- just to remind everyone, on S-17 was for minus 2% -- 0.2% job growth for the U.S. And so, we're going to be watching job growth over the next several months. But it seems like we are running stronger than we expected, certainly with respect to January's job growth number. And if that continues, then you get to a point where maybe our U.S. job growth estimate on S-17 is too conservative. So we'll watch that closely.

Alexander Goldfarb:

Good morning out there and just joining in. Mike, congratulations on your tenure,on your last earnings call; and Angela, best on taking the helm next quarter. So two questions. First, maybe just sticking with that job rebound, Mike, you had mentioned early on in COVID when everything in California was shut down, a lot of the service industries, those jobs literally had a fleet because they were closed down. They could work whereas a lot of tech people could work from home. As you talked about that really strong job rebound in December in the benefit, California has recovered all of its jobs. How would you rate -- when we see these headlines of the layoffs versus it sounds like there is pretty good job growth. Is it more of the job growth coming from the service jobs and maybe that's what you're seeing more demand in your apartments? Or as you look at your resident mix profile, you're like, look, our resident mix profile today is really no different than it was back in 2019.

Alexander Goldfarb:

Okay. And then the second question is just getting back to the delinquencies, I think you guys have highlighted obviously L.A. and Oakland. Is that the bulk of what's driving delinquencies this year? And then as a consequence, especially in L.A. with the good cause of eviction, should we assume that you guys will look to pair your exposure to L.A. County?

Barb Pak:

Yes, Alex, on the delinquent unit front, L.A. and Alameda are the bulk of our delinquent units over 60% our delinquent units long term greater than three months or in LA Alameda. And so that's a factor as well as the slowdown in the court, courts are really bogged down. It's taking longer to vice in our other markets, and that is a factor as well in the '23 guidance to recapture those units.

Brad Heffern:

Mike, last quarter, you said that the 2% rent growth forecast seemed pretty dire at the time, and it was more based on what the Fed was doing and projections from economists and what you're actually seeing on the ground. I know you reiterated the 2%, but your commentary around employment seems to suggest that you still think it's a somewhat pessimistic outlook. Am I interpreting that right?

Brad Heffern:

Okay. Fair enough. And then non-revenue-generating CapEx seemed elevated in the fourth quarter. And I think the 2022 total was up about 40% year-over-year. What's driving that? And can you give any expectation for where '23 will shake out?

Operator:

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Adam Berry:

Sure. John, this is Adam. So, beginning with Anavia. Anavia was, I'd say, an opportunistic sale to -- there was a very specific buyer and which -- that's reflected in the pricing. Generally speaking, we're seeing cap rates kind of trading in the market in the mid- to high fours. So Anavia, I'd say, outperform that by a bit again just because this very specific situation. Regarding the mansion tax in L.A., so we've seen a slight elevated potential transaction volume in L.A. due to the mansion tax coming into effect April 1. For the most part, I think most of those deals probably won't trade just given they were all on very short runways and pricing expectations just doesn't seem like they are being met. Going forward, I think we've seen this in Washington when they their transfer tax up. It actually did not affect transaction volume generally at all. I think the one thing that may be an outcome of the L.A. management tax is, it could potentially hinder development within Los Angeles, any significant headwind to development returns, especially from merchant builders, that's just going to affect their back end and make it that much harder to build.