Essex Property Trust, Inc.

Good day and welcome to the ESSIC Property Trust first quarter 2020 earnings conference call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Mr. Michael Shaw, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.

Thank you for joining our call today. John Burkhart and Angela Kleiman will follow me with comments and Adam Berria is here for Q&A. These are challenging times as we manage through unprecedented events in our nation's history. We'd like to offer our best wishes to all those impacted by COVID-19, their caregivers, and those participating on the call today. We reported a strong first quarter results last night, exceeding the midpoint of our FFO per share guidance by 7 cents, with the results for the quarter mostly unaffected by the COVID-19 pandemic. As noted in the press release, we withdrew our 2020 FFO guidance ranges. Generally, we believe providing FFO guidance and related assumptions is an important aspect of investor communications. However, in the current environment, We believe that the range of probable outcomes for Essex is too wide to be useful to investors. Since the initial shelter-in-place order in the Bay Area was announced on March 17th, the nation has experienced over 30 million unemployment claims, and economic uncertainty is as great as I have ever seen. Key variables in the government's policy response are impossible to model, such as the duration of the shutdown, the possibility that a second wave of infection could occur, and the effectiveness of social distancing during a phased reopening of the economy. After a prolonged debate, we made the difficult decision to withdraw our core FFO guidance. In my prepared remarks today, I will cover three topics, a recap of actions taken in the past two months in response to the pandemic, a review of our updated estimates for rent growth in our markets, as can be found on page S16 of the supplemental, and insights into what we're seeing in the West Coast property transaction markets. Turning to our response to the pandemic, we have been very impressed with how the Essex team has responded and adapted to the dynamic and unprecedented conditions created by COVID-19. As the scope of the pandemic became more clear in early March, we created a COVID response team comprised of senior leadership to gather information and act decisively. To maintain essential property operations, we implemented a variety of social distancing practices at each property, provided incentives and tools to push nearly all transactions online, over the phone, or through the mail. We acquired and distributed PPE to our onsite staff and expanded training for safety protocols. We transitioned five corporate offices to work from home and implemented a virtual management process with daily contact via teleconference. In addition, we conducted weekly live video conferences that were available to all Essex employees to ensure consistent messaging and unity in a chaotic time. Communication is important during periods of uncertainty, and on March 23rd, we issued a press release to outline for investors, employees, and residents how the company is going to assist those that are financially impacted by COVID-19, including protection from eviction and late fees, creation of payment plans, and dissemination of information about governmental and community resources. The past two months have required urgent responses to many complex issues, including many unknowables related to the pandemic itself, a plethora of well-intentioned but imprecise government regulations, and properly balancing our obligations to stakeholders in the spirit of corporate responsibility. With that backdrop, it's essential to recognize the tireless efforts of the Essex team amid great concern for the health and safety of their families to rapidly and thoughtfully react to the crisis. Well done, Team Essex. Turning to the West Coast rental markets, we have prepared a scenario for our 2020 rent growth expectations on slide S16 of the supplemental, that incorporate macro U.S. forecasts for GDP and job growth that are prepared by a broad spectrum of industry and Wall Street economists. While the span of forecasted outcomes is wide to an unprecedented extent, there is a common expectation that the U.S. will experience double digit declines in second quarter GDP growth and an overall contraction in the economy in 2020, with job losses for the year estimated at around 7%. In summary, we expect approximately 900,000 job losses or 6.6% in our West Coast metros in 2020 compared to the net addition of 207,000 jobs from our estimate last quarter. An approximate 14% reduction in estimated total housing deliveries from last quarter is not sufficient to offset the impact of negative job growth, leading to our belief that market rents overall will decline an average of 2.8% in 2020 versus last quarter's estimated 3% increase in market rents. The extraordinary fiscal and monetary stimulus programs that have been implemented by the federal government have already helped stabilize capital markets and should limit the risk of financial contagion. If you consider by contrast the major stimulus programs from the Great Recession, they occurred roughly a year after the recession started. But in today's case, they were just days and weeks into the crisis and have been much larger in scope. On page S16.1 of our supplemental, we highlight the impact of the $600 per week federal supplement to unemployment insurance that was part of the CARES Act. While the effectiveness of the program has been muted by processing delays at state unemployment offices, the weekly checks have started to arrive and will substantially offset the income loss for a large segment of the population that has suffered from job losses and furloughs. We highlight this program because it hasn't received much attention. Given these benefits, the income shortfalls for lower to middle income workers are much less severe than they would have been otherwise. And in some cases, again, at lower and middle income levels, some workers will receive more in unemployment benefit as compared to their compensation. Finally, I'll turn to the apartment transaction market. Yields or cap rates for apartment transactions generally exceed interest rates on related debt, and the resulting positive leverage is a powerful force in the market. Unlike the great financial crisis, large banks have maintained relatively conservative lending standards and strong liquidity and capital positions, and interest rates have declined further since the crisis began. As an example, We recently received a quote for a seven-year Fannie Mae loan on a joint venture property with a fixed interest rate of 2.75%. We believe these factors will be sufficient to avoid widespread distress in the apartment space. Unlike REIT stocks, private market values in terms of cap rates are generally sticky, meaning that they don't change immediately in reaction to events, but rather seek to reflect the longer term financial performance of a property. Generally speaking, many potential buyers are seeking a higher cap rate as a result of the pandemic. However, apartment owners generally have no distress and exceptionally low interest rates provide the opportunity to improve cash flow through refinance to take advantage of record low positive leverage. As a result of these factors, The spread between buyer and seller expectations has widened, and the gap separating them is probably around 30 to 60 basis points, likely resulting in fewer apartment transactions in the near term. If our stock price was higher, we would be an aggressive buyer in this environment. Historically, periods of disruption have resulted in great opportunity for Essex. I am confident that we have the team resources, and strategy to thoughtfully act on these opportunities consistent with our long-term track record about performance. And now I'll turn the call over to John Burkhardt.

Thank you, Mike. I would like to start by echoing Mike's sentiment and recognize our associates who are working hard to provide our customers the best service in its essential business of providing housing. Over the past few weeks, We have seen countless demonstrations of the ethics spirit throughout our community. Our teams have shown grit and determination in the face of rapidly changing working conditions. But even more, they have shown compassion to each other and to our residents, from proactively reaching out to those in need, buying residents groceries, and even obtaining and distributing personal protective equipment. In addition, we have published resources on our website to assist residents in finding the financial assistance they may need during this time, as well as created a library of resources for residents whose children are home from school or who are simply looking for productive ways to use their time during this crisis. Most residents and prospects have been understanding of the changes we've needed to make at our communities and appreciative of the great efforts of our team to continue to provide exceptional service during this time. A big thank you to our E team, our residents, and the community. We are truly all in this together. Turning to our first quarter 2020 results, we achieved 3.2% revenue growth over the prior year's quarter. The results were in line with our expectations. Although this is the Q1 call, I believe everyone is more interested in recent events post-COVID shelter-in-place orders. Therefore, I will be focusing on specific April metrics and recent market activity. I'll begin with general comments and move on to the markets. As this situation is unprecedented with numerous key variables impacting both supply and demand, my commentary on the future market expectations and conditions relies on numerous generally positive assumptions, such as the relaxation of the shelter-in-place orders in the near future, a reduction of new supply entering the market, and a restart of the economy in an orderly way. Currently, the rental market is disrupted. There is a gap between the bid-ask price for rental transactions at certain properties in the market. Rental transactions are disproportionately occurring at stabilized properties, offering two to four weeks free rent, while other properties are losing occupancy. April 2020, year over year, same-store economic rents were up approximately 1.5%, while financial occupancy declined 1.3% compared to the prior year's period. We are currently offering various leasing incentives, which includes two to four weeks free rent. I expect the market will move back to equilibrium in June as the shelter in place requirements are relaxed and we enter the summer leasing season. Historically, during periods of reduced demand, Our portfolio has benefited from people taking advantage of lower pricing and moving from the outlying areas to the core areas where our portfolio is located. I expect the same market dynamics to play out in the coming months. Looking at operations post shelter in place, leasing applications in our portfolio bottomed the first week of April and have increased each week since that time. Our same store financial occupancy decreased 1.3% in April from March. Roughly half of the decline in occupancy was due to COVID-19-related lease breaks. The remainder was related to reduced leasing velocity. This last week, we have seen activity increase dramatically. Our tours increased 47%, and our applications increased 62% over the prior four-week period average. The initial shock appears to be over, and now the market is moving to equilibrium. Now we will turn to April delinquencies. Delinquencies in our total portfolio on a cash basis was 5% in April compared to 33 basis points for the full first quarter of 2020. As the magnitude of this crisis became more apparent in March, we acted immediately to form a resident response team to engage with our residents in understanding their situations, identifying resources for them, and partnering with them to get them back onto firm financial ground. As noted in S15, approximately 4,600 tenants representing 7.4% of our total portfolio completed our online request form in April confirming that they had been financially impacted by COVID-19 and requesting assistance. 36% of those residents paid their April rent in full. Another 36% made a partial payment, averaging about 50% of their rent. And 28% were unable to pay their April rent. Residents representing 60 basis points of our portfolio requested to move out immediately, which we allowed, enabling the residents to move forward with their life and the company to potentially avoid future delinquency. Of the residents who stated they were financially impacted by COVID-19, 16% were in the food and beverage industry, 9% each in retail and personal services, which relates to fitness, massage, or beautician services. and 7% each in healthcare, transportation, construction, and professional and business services. 2.2% of our residents are delinquent, and we have been unable to contact them. However, some of them have made partial payments. Interestingly, the delinquency at the property level within a selected market had fairly large variations. Certain properties were substantially more impacted than others. I believe this disproportionate impact is the root cause of the market dislocation. I would compare it to randomly located new lease-ups aggressively attempting to increase occupancy. Owners at the highly impacted buildings with respect to occupancy and or delinquency, as well as those who are struggling to compete in this new virtual sales world, are likely to be the ones aggressively offering concessions. On to expenses. As Mike has mentioned, we have withdrawn our financial guidance. However, I want to note some expense considerations. Utility usage and related expenses will be higher due to the shelter in place mandates. In addition, we expect a significant ongoing increase in expenses related to personal protective equipment and cleaning supplies, as well as related increased labor costs due to new cleaning protocols. Finally, to protect our employees and residents, we have stopped performing non-emergency work orders in occupied units. We've provided residents with self-help videos and other resources to help them fix many of their own issues. However, we expect that there will be some level of pent-up work orders as conditions change. Moving on to our operating strategy in this new environment, our technology vision and related operating strategy that we have been executing positioned us well going into this rapid change. Our cloud-first strategy enabled a relatively smooth transition as the stay-at-home orders were implemented. We remained fully operational while rapidly transitioning to working from home. The new operating environment of social distancing requires a solid digital presence, including video tours, digital maps, self-help information, and related videos, as well as smartphones for FaceTime tours and other similar tours. We made the decision early on to rapidly accelerate our technology-enabled transformation, completing the implementation of our mobile maintenance app 2.0, our sales lead management system 2.0, and several other initiatives, shaving four to 12 months off the original rollout plans. As the restrictions are relaxed, we are positioned well for this new environment. Our operating strategy going forward will balance occupancy and market rent, maximizing revenue. We will likely operate at a lower occupancy than we have over the past several years. We will continue to leverage our technology platform and operate consistent with the social distancing protocols by using a combination of virtual tours and live video tours where our sales associate is either onsite touring a prospect via phone or the resident is on-site and the sales associate is live answering questions and explaining various features and benefits of the particular unit and amenity. Our smart lock digital entry systems enable us to provide access to vacant units for self-tours, thus eliminating the need for agents to be on-site to provide access. These were very challenging weeks for certain, but we are emerging from this challenge stronger and we are well prepared for the future. Turning to our markets, in the Seattle market, April 2020, year over year, same-store economic rents were up 6.1%, while financial occupancy declined 80 basis points compared to the prior year's period. Delinquency in the northern technology-driven markets were lower. In April, delinquency in our Seattle same-store portfolio was 1.8%, the lowest in our same-store portfolio. Moving to Northern California. In the Bay Area, April 2020, year-over-year, same-store economic rents were up 17 basis points, while financial occupancy declined 1.2%. Delinquencies for the same period in the Bay Area were 3.9%. Our Santa Clara County submarket had the lowest delinquency at 2%, while Alameda, San Mateo, and Contra Costa Counties were 4.1%, 6.3%, and 7.9% respectively. Consistent with the rest of the market are four Bay Area lease-ups, 500 Folsom, Station Park Green, Milo, and Patina at Midtown had very little activity since late March, which was the result of both the construction challenges as well as reduced demand in the marketplace. Continuing south, Southern California same-store economic rents were up 1.1% year-over-year in April 2020, while financial occupancy declined 1.6%. In the same period, our Southern California region had higher delinquency overall in our same-store portfolio at 7.5%. Ventura and San Diego delinquency was at 4.4% and 4.5% respectively. Orange County delinquency was 7.5%, and L.A. County delinquency was 9.4%. Our L.A. CBD and Woodland Hill submarkets were the hardest hit at 12.1% and 13.8% respectively. As of April 30th, our same-store portfolio's physical occupancy was 94.4%, and our availability 30 days out is 6.5%. Thank you, and I will now turn the call over to our CFO, Angela Kleinman.