Essex Property Trust Q1 2024 Earnings Call Transcript

Austin, it's Angela here. You kind of cracked up in the earlier part of the question, but I believe you're asking whether the LA Alameda overhang is going to continue on new lease rates?

Okay. Great. What we're expecting is that L.A. is going to continue to provide -- be an overhang on the delinquency. Alameda improvement is steady, and it's a smaller part of our portfolio. So the heavier influence is really coming from L.A. just because when you have such a large volume that we're working through, it's going to take a longer period of time. The good news is that we are not seeing that bleeding into other markets. So it's really more focused in L.A. and our other markets are doing quite well.

Yes, sure thing. No, we have not reforecasted yet just because it is important to see how peak leasing season activities progress and because that's where the bulk of our leases occur at that point in time. So our data is with a few months into the year and a smaller set of leasing terms is turning. It's more limited. But having said that, what we're seeing right now is that Seattle and Northern California are trending slightly ahead of our original market rent forecast. Southern California is generally planned, but there is an LA drag.

And so because it's not a huge outperformance relative to plan at this point. The outperformance is really mostly in the benefits from delinquency that we're getting the -- recovering the units much faster in other income, it's once again, it's just too early to try to reforecast where market rents is going to be. I do want to say that with our performance on delinquency and our ability to essentially turn those units quickly. It speaks to the underlying fundamentals of our market, so that is quite solid.

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, it's a good question there. We are seeing anecdotally hybrid workers moving closer to the office to essentially trying to reduce the commute because traffic has picked up. And -- we are seeing also the top 20 tech openings increasing, although it's very gradual. And so what we're seeing is that these job openings bottomed last year during the first quarter, and the opening was only about, say, 8,000 jobs. Today, in March, it's about 16,000 jobs.

So it doubled but it is well below our pre-COVID average. The three year run rate was about 25,000. So hopefully, that gives you some sense of how things -- what we're seeing is that the fundamentals are moving in the right direction. But in order for acceleration to occur, we really need to see a more robust pickup on the high-paying jobs. And we do believe that we have the fundamental backdrop for that to occur. It just it's all about when, and that's the big question on our mind.

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.

Downtown seems to be doing okay. It's holding its own. And what we expect is the cadence of supply to occur some more time between now and next quarter in terms of the bulk of the delivery. But as we've all experienced in this market that can get slightly pushed by a month or two in our markets, but that's what we're expecting at this point in time.

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

Nick, I think there's a higher degree of caution as it relates to what we're seeing in L.A. Thankfully, a double edge or we have a lot of exposure to that market. So I think we have pretty good data. And as we've shown over the past year or two, we know how we are turning these delinquent units back into rent paying units and how quickly that can occur. So I feel like we've got pretty nuanced underwriting as it relates to L.A. market, but it is something that we're certainly factoring in.

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.

Yes, that's correct, Nick.

Thank you. Appreciate it.

Alex, that is an excellent point and, good job. You've been paying attention. What we are seeing is that the supply definitely is a significant benefit for our markets, and it's something that we've been stating for several years now, in that we don't need much demand for us to achieve our plan and to have a healthy performing market. And so these other incremental benefits are great signs in terms of whether it's moving a return to office.

We are seeing continued improvements in both domestic and international migration and in fact, we're showing a positive population growth for the first time in three years. So all these little anecdotal data on the margin is hopeful. But in terms of really driving acceleration, the other -- the high-paying job growth will need to kick in. But our markets are going to do just fine.

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.

Jamie, it's Barb. Yes, that's really driven by L.A. and Alameda between March and April. And once again, it's delinquency-related challenges which is ultimately a benefit to our revenues because we get those units back and can lease into a rent-paying tenant. And -- but if you pull out those 2, we did see a sequential increase. So I think it was primarily just driven by L.A. Alameda.

Jamie, Rylan here. On the first point, we do have significant opportunities to continue to acquire from our joint venture partnerships. What we are going to do, however, is try to make the best capital allocation decision we can at any given point in time. So at the start of this year, this was a joint venture that was maturing, and we had the opportunity to purchase our partner's interest and it made sense. It was accretive for our shareholders, and that's why we decided to elect that route.

So we have a pretty deep joint venture business that we can continue to look for opportunities, but we are not solely focused on one or the other. We're trying to find the highest and best returning investments that we can find. As it relates to the transaction market, I think what you've been hearing is generally correct. The volumes continue to be very low as they were all of last year approximately 1/5 of the transaction volumes we saw in '21 and '22.

What we're seeing this year is there was an ample amount of capital looking to be put to work in particular, from our focus on the West Coast in multifamily. So there's a bit of a scarcity premium for well-located suburban product that's coming to market. And so you are seeing very competitive bidding pools for the few transactions that have made it to market.

And our expectation is that, that is going to continue. So we're tracking a couple of deals right now. We have very deep bidder pools, both levered and unlevered buyers and I think some of our public investors would be surprised at where these transaction cap rates are going to come out. So more to come there.

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.

Josh, we are slightly ahead of schedule. And what we haven't done is because we have not reforecasted, it's a little too early to talk about the actual cadence. And -- but I will say that we're ahead of schedule everywhere else except for L.A. and Alameda. So I do want to caveat that. But the things are doing fine right now.

Yes, it could range anywhere from 0 depending on market strength to, say, close to 100 basis points depending on what else is going on. It could be supply, it could be jobs environment, a whole host of things.

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

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.

Haendel, yes. It's Barb. So on our last call, we had five 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 four assets, three of them have loans maturing in the next two to three 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.

On that one, we will likely have more information on our next call on that one. So net-net, it's trended a little bit more favorably in terms of the amount that it's on our watch list. Nothing new was added. The book continues to perform. None of them -- none of our sponsors are in default with the senior lender or with us. And so the sponsorship really does matter here and we have really good sponsors. So no new updates.

Yes, that includes adding anything new. We go through a comprehensive review of the portfolio every quarter. And we scrub it. And so yes, that does include that process. So there was no new added to the watch list this quarter.

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.

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?

Yes, it's about the same.

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.

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.

Yes. Sure thing, Adam. Our tech exposure hasn't changed too much. it's about somewhere around mid 5% of our total portfolio, of course, much higher in Seattle than Northern California and very little in Southern California. And so when you look at our portfolio as a whole, it's actually quite diversified. And what that means is a job is coming through all the different industries. And so recently, the growth -- in job growth has really been in government and health and education services. And so we see that the impact throughout our portfolio.

Well, Adam, I think what I was trying to say is that our tenant pool is pretty well diverse and there's employers from all job sectors. It mirrors the U.S. pretty well with the exception of higher professional services, generally speaking. And so we're not going to be that different. And of course, with the Northern region having a higher concentration in tech, that's the one benefit.

Yes. This is Barb. No, it's a good question. I mean you have seen us in the past, buy back stock when we're trading at significant discounts to NAV. And and we can accretively sell an asset and ARP the difference between public and private market pricing. I think today, we don't love our stock. We haven't issued a stock or common stock in many years because of where we're trading relative to where we think the value is trading.

And to Ryland's point, where we're seeing private markets trade our cost of equity capital is not an attractive source for us, and we will look to other alternatives. We have free cash flow, the preferred redemptions and then look at where we can sell assets or JVs, if our stock price is still not where we like it, if there's an alternative acquisition opportunity or alternative source of use of those proceeds. So we've done this for -- since the founding of the company, we've always looked at all the sources of capital and will remain disciplined on that front.

Yes. So our yield is 4.75%. It is a high-quality condo-style property. And Essex because we own the property next store, we can operate it much more efficiently than the prior owner. And then in terms of the debt payoff, it was about $32 million in debt that was paid off.

If -- for the four assets that are nonaccrual, I don't have that in front of me. I would have to -- I have to follow up with you offline on that.

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.

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.