Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust Third Quarter 2020 Earnings Conference Call. As a reminder, today's conference call is being recorded. Statements made on this 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 filing 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, Mr. Shaw. You may begin.

Thank you for joining the call today. Once again, we would like to offer our best wishes to all of those impacted by COVID-19. On today's call, John Burkhart and Angela Kleinman will follow me with comments, and Adam Barry is here for Q&A. Our results continue to be negatively impacted by the COVID-19 pandemic, including extraordinary local and state government responses. Our reported results for Q3 reflect these unprecedented challenges, resulting in a 6% decline in core FFO and 6.7% lower same property revenues. Despite a variety of challenges, we were mostly successful in our goal of maintaining occupancy and rental rates to the extent possible, which John Burkhart will discuss in a moment. Our first priority continues to be the safety of our employees and residents, while deploying technology throughout our portfolio, given a strong consumer preference for touchless interaction. Regulatory hurdles have been pervasive across our markets, creating a new level of complexity and administration for our property teams. As can be seen on page F16 of our supplemental package, California has developed a four-tier system applied to each county for determining the severity of COVID-19 restrictions. Fortunately, recent changes have been mostly moving Essex markets into less restrictive tiers. San Francisco recently reached the least restrictive yellow tier four, allowing offices and indoor dining to reopen, among other improvements. Similar positive changes have occurred across several of our markets in recent weeks, which represents welcome news for local businesses and residents. We have previously noted that the apartment business closely follows local housing supply and demand trends and seasonal patterns. Given the pandemic, these normal seasonal patterns were disrupted by massive job losses resulting from the pandemic and related shelter in place orders. In April, year over year job losses were 13.7%, followed by a solid job growth in May and June. Job gains then moderated again this summer as shelter-in-place orders were extended upon a surge of COVID-19 cases. By September, job losses in Essex markets were still down 8.7% year over year, a positive trend from April, but still lagging the 6.4% national average job loss. For perspective, in the financial crisis, Peak to trough U.S. job losses were 9.1 million over 20 months. This year, the nation lost 20.8 million jobs in just two months. We attribute the greater job loss and slower economic recovery in California and Washington to very restrictive shelter-in-place mandates. We see the recovery path ahead as reversing the job losses in the cities and industries that suffered the greatest impact from the shutdown. Tourism, travel, leisure, and hospitality sectors were among the hardest hit, and they are concentrated in the urban core of various cities. The restaurant industry provides a good example. Using open table data as of last week, the number of dining reservations in Los Angeles fell by 66% compared to one year ago. while Seattle and San Francisco both declined 78%. This compares to other large cities like Miami, Denver, Dallas, and Atlanta, with only 30 to 40% decline. Similarly, employment in hotels, live entertainment, and local transportation activities are down 37 to 50%, and they should have a strong recovery as cities reopen. In Southern California, The TV and film industry is a significant wealth creator, and it was decimated by COVID restrictions. In the third quarter, the number of shoot days began to recover from a near shutdown but remained down 54% year over year. The industry is now trending in the right direction, and production permits have steadily increased since June, suggesting employment will continue to rise. Younger workers have faced many challenges in the pandemic, including greater job loss and higher unemployment rates compared to more experienced workers. Employers often delayed hiring and reduced the number of job openings during the pandemic as offices and small businesses closed from shelter in place orders. Many college graduates chose to move home rather than relocate in proximity to their new employer as a result of work from home flexibility. As a result of these conditions, the share of 18 to 29-year-olds living with a parent increased to 52% this summer, up 500 basis points year over year, and the highest level in over 100 years. The combination of lower immigration from new graduates and higher out migration from young singles has played out in different ways across our markets. We have seen pockets of strength in Ventura, Orange County, San Diego, and outer suburban markets in Seattle and Northern California. By contrast, our urban and tech-centric submarkets are deeply discounting to attract residents. Meanwhile, tech companies are speaking with their pocketbooks. Companies including Google, Facebook, and Amazon continue to expand their real estate footprint in our markets, Notably, Facebook's expanded campus in Menlo Park and their acquisition of REI's new headquarters in Bellevue, Google's continued plans for an urban village in San Jose, and Amazon's continued growth in Bellevue and other submarkets in the Seattle area. As always, we continue to monitor the pace of job openings amongst the top 10 tech employers in our market. And while these numbers are down year over year, we are encouraged by recent increases in openings for nine of the 10 companies in our survey. While today's 17,000 openings are significantly lower compared to the pre-COVID period, today's level is consistent with the pace of hiring they experienced in 2016 and 2017. It appears that the most successful tech companies in the world remain committed to our markets, and most of them have announced work return to office plans in 2021. Turning to our initial thoughts about 2021, we plan to provide annual guidance as part of our fourth quarter earnings report. There are many moving parts to the guidance discussion, including the impact of the winter's coronavirus trajectory, the timing of vaccines and improved therapeutics, and any new government stimulus measures. With that said, we base our modeling on the consensus of third-party economists for next year's GDP growth, which is currently around 3.7% and compares to this year's minus 3.6%. If that proves accurate, we would expect to benefit from positive tailwinds in the form of steady employment growth and rising consumer confidence. In addition to the boost from an improving job outlook, the potential for a COVID vaccine to become widely available next year is an obvious positive that would reduce the need for social distancing and shift the work from home dynamic from a requirement to a lifestyle decision that comes with several negatives such as potential pay reductions for remote workers, lack of face-to-face collaboration and networking, and potentially fewer career advancement opportunities. Finally, with respect to our year-over-year growth trajectory next year, we would expect to hit an inflection point during the second quarter as we anniversary the steep COVID-related declines. This could set the stage for a gradual improvement in rental growth in the back half of 2021, again, assuming further easing of COVID-related restrictions. Our data and analytics team completes its own fundamental research on supply, indicating around 33,000 apartment supply deliveries in 2021, which is similar to 2020. While that continues to represent just below 1% of our apartment stock, it's still too much supply until the pace of job growth accelerates further. As with the past several years, the 2021 apartment supply estimates from third-party research providers are well in excess of our expectations, implying a ramp-up of deliveries that we do not believe is feasible given skilled labor constraints within the construction industry in our markets. Turning to the apartment investment markets, we have now sold four apartment properties with a total of 670 apartment homes per $343 million, all of which were placed under contract subsequent to the implementation of shelter-in-place orders in March. Given the wide discount in valuation for public rates compared to the private real estate markets, we continue to market additional properties with the goal of funding, at a minimum, all of our investment needs through dispositions. Other than the AIMco sales that were part of its announced reorganization, very few sizable apartment transactions occurred during the quarter. Generally, the number of properties being marketed has been extremely limited since March and is now slowly increasing. Therefore, it remains too soon to draw conclusions about cap rates going forward. In the suburbs, where rents have remained relatively stable since the start of the pandemic. Cap rates and property values should not change materially compared to the pre-pandemic period. In those suburban areas, we expect high-quality properties to sell in the low to mid 4% range in terms of cap rates. Given significant concessions in hard-hit cities, recent price talk around possible sales indicate a 5% to 10% discount to pre-COVID valuations. with the few sales that we've seen in these markets assuming a fairly rapid rent recovery. As with previous recessions, Fannie Mae and Freddie Mac have continued to provide very attractive financing with seven-year fixed-rate financing in the mid-2% range. Significant positive leverage and active sources of debt significantly limits the amount of distress of the markets. Finally, I'll end with a brief comment related to California Prop 21, including the extraordinary opposition effort coordinated by the Californians for Responsible Housing group. I would like to commend the leadership of this group, including our own John Yudy, for their unrelenting focus and steadfast effort in opposing this flawed proposal. Prop 21 would surely make housing shortages worse in California, The Know on 21 campaign has assembled an amazing constituency consisting of hundreds of organizations, including veterans groups, affordable housing advocates, the California NAACP, the State Chamber of Commerce, and scores of others, along with Governor Newsom. Almost every newspaper in California supports defeating Prop 21. We all greatly appreciate your efforts. And now I'll turn the call over to John Burkhart.

Thank you, Mike. I want to start by thanking the E-team. Throughout this period of extreme volatility and complex regulation, they acted thoughtfully and tirelessly to serve our customers. We were successful in our objective of building occupancy during the third quarter by using various pricing strategies, including concessions, along with leveraging our technological advantage. We've significantly improved our response times and the overall customer experience. Our strategy of using upfront concessions, when appropriate, reduces the impact of the market dislocation on the rent roll. As noted on the table on the bottom of page two of our supplemental, our scheduled rent for Q3 2020 is down only 40 basis points from the prior year's quarter. This positions us favorably for revenue growth as concessions continue to abate and our year-over-year comps become a tailwind. As of mid-October, we were offering concessions of three to four weeks on less than half our portfolio, compared to over 75% of the portfolio in the third quarter. No material concessions are being offered in Orange, San Diego, Ventura, and Contra Costa counties. Occupants in these four counties currently average 97.9% with an availability of 2.5%. Despite the fact that we are seeing solid signs of stabilization in many of our markets, I do want to acknowledge that we continue to hear anecdotal stories of owners who reacted slowly to delinquency and rapidly changing market conditions and are now attempting to improve their occupancy position during a seasonally slow demand period. As a result, there may be upcoming challenges in various markets. Consumer behavior related to COVID-19, including consumer preference for larger units, private outdoor space, stairs instead of elevators, and communities with within commuting distance to employment hubs yet located in proximity to outdoor recreation amenities continues to impact demand in the marketplace. Turning to our Q3 2020 results as presented on page two of our press release, year-over-year revenues declined by 6.7%. While the year-over-year revenue growth continues to decline due to the change in the rental market post-COVID, the improvement in the sequential revenue decline is consistent with the signs of stability that we are seeing in the market. Although we're not currently giving guidance, I want to remind everyone that the combination of a very tough occupancy comp of 97.1 from Q4 of last year and the fact that least transactions on average are below last year, it is likely that a year-over-year fourth quarter revenue growth will decline from Q3. Turnover in the quarter increased 73 basis points from the prior year's quarter. Communities with certain attributes were the key contributors in this increased turnover. Specifically, high rises, communities with markets with a greater demographic of college students and Silicon Valley contract and consultants. On the regulatory front, various governmental bodies have enacted anti-eviction and other resident protections. California recently passed AB 3088, which is a positive step toward replacing the patchwork of local ordinances for COVID-19-related delinquency. In part, AB 3088 prohibits eviction for nonpayment of rent between March 1st and August 31st of this year, establishes a minimum future payment threshold to protect against future eviction, and establishes access to small claims courts to pursue collection of past due rent. Washington State has similar regulations expiring at the end of this year. While we continue to see many residents paying down prior balances, we also continue to work with our residents on solving delinquency issues. Lastly, expenses in the quarter were negatively impacted by increased property taxes in the Seattle market and COVID-19 related impacts such as PPE and higher utilities driven by increased usage from residents for longer periods of time. Utility increases in Q3 were offset by year-over-year reduction of 12% in electricity costs, a result of the various green initiatives we have executed. Turning to our markets, in the Seattle market, year-over-year revenues in Q3 were down 1.6%, while year-over-year occupancy for the period was flat. The greatest decline continued to be in Seattle CBD, where revenues declined 5.6%, followed by the east side with a 1.1% decline. Revenues in the South and North submarkets saw increases of 30 and 60 basis points respectively for the same period. Seattle job growth in Q3 declined 8.1% year-over-year. However, Washington unemployment in August remained 60 basis points below the U.S. average of 7.7. It's worth noting that Seattle home purchasing activity increased during the third quarter. On a trailing three-month average from August, Year-over-year home prices were up 12% in August. In August alone, home prices were up 17.4% on a year-over-year basis. Moving to Northern California, in the Bay Area market, year-over-year revenues in Q3 were down 8.5%. Occupancy for the period was 96.2, a year-over-year increase of 30 basis points. Oakland, CBD, and San Francisco continue to be our most challenged submarkets in Q3, with year-over-year revenue declines of 16.5% to 17.1%, respectively, compared to San Jose, where revenues declined 7.2%. In the same period, Contra Costa saw a decline of 4.6%. However, sequential revenues in this submarket increased by 1.6% from Q2. Bay Area job growth declined 9.7% year-over-year in Q3, mainly driven by job losses in leisure and hospitality and trade, transportation, and utilities, all heavily impacted by the state's required shutdown. However, there are positive signs of growth in the market. Several Bay Area tech companies filed for IPO during the third quarter, including McAfee, Airbnb, Snowflake, and Unity Software. In addition, Google unveiled their plans for a 1.3 million square foot tech village in Mountain View. This new development will have a capacity for almost 6,000 additional employees. Barrier home purchase activity picked up during the third quarter. On a trailing three-month average from August, year-over-year home prices in the Bay Area were up as much as 8.6%. In August alone, San Jose market home prices were up 20% year-over-year, while San Francisco and Oakland were up 14% for the same period. The increases in home prices makes the transition from renting to homeownership even more difficult, and it shows the continued long-term demand for housing in our markets. Down in Southern California, year-over-year revenues in the third quarter declined 7.3%, while occupancy declined only 20 basis points. The L.A. market continues to be a challenge. In Q3, our West L.A. sub-market saw the greatest year-over-year decline of 16%, while our remaining LA submarkets declined between 9.1 and 12%. LA job growth was minus 9.7% in the same period, while unemployment remained the highest of our markets at 15% in August. In Orange County, Q3 year-over-year job growth declined 10.8%, while revenues declined 2.6% and occupancy increased 1.4% in the same period. I do want to note that quarterly sequential revenues in our Orange County submarkets actually increased by 1.9% in Q3. Finally, in San Diego, our year-over-year revenues declined 2.1% in Q3. The Oceanside submarket, however, continued to grow revenues by 2.3% in the same period. San Diego job growth declined by 8.9% for the period. Currently, our same-store physical occupancy is 96.4%. Our availability 30 days out is at 4.5%, and our fourth quarter renewals are being sent out with no increase. Thank you, and I will now turn the call over to our CFO, Angela Kleiman.

Thank you, John. I'll start with a few comments on our third quarter results, followed by an update on capital markets and funding activities. As noted in our earnings release and earlier comments, this was a challenging quarter with declines in both same property revenues and core FFO per share. The 6.7% decline in same property revenue growth is primarily driven by concessions and delinquencies. We report concessions on a cash basis in our same property results because we believe this approach provides a true picture of current market conditions. The cash impact of concessions was 500 basis points. So excluding this, our same property revenue decline would have been 1.7% instead of 6.7%. Conversely, on our consolidated financials, we straight-line concessions in accordance with GAAP in calculating core and total SFO. Keeping in mind that when concessions abate, our approach will impact the future performance in two ways. First, our year-over-year comparison on same-store revenue growth will be favorable. Second, the opposite effect will occur on our SFO growth because there will be a headwind as we continue to straight-line concessions over the life of the lease. On to delinquencies. We are encouraged to see total delinquencies decline during the third quarter relative to the second quarter. On the other hand, given the current environment and the related uncertainties, we maintained the same approach as last quarter and reserved against 75% of our delinquencies for the third quarter. This may prove conservative if California law allows a clear path to collection of COVID-19-related delinquencies as temporarily provided in AB 3088. The negative impact from our delinquency reserved to same property revenue and core FFO growth was 1.6% and 4% respectively. Please see the bottom of page 2 of our press release and S15 in our supplemental for additional details. Turning to capital markets. In August, when interest rates dropped down to a level close to the 52-week low, we opportunistically issued $600 million of bonds consisting of two $300 million tranches, an 11-year and a 30-year maturity, and an effective yield of 1.75% and 2.67% respectively. The yield on our 30-year bond was the lowest on record of any BBB Plus rated issuer at that time. Since then, we have repaid a $300 million bond to mature in 2022 and have plans to pay off all remaining 2021 maturities at par. The net result is a very low-risk maturity schedule for the next two years, with only a $350 million term loan to repay in 2022. As for funding plans for investments and stock buyback, our structured finance investments are funded by the Redemptions, and our development commitment is less than $73 million over the next two years. Incidentally, because the pandemic has caused delays in development deliveries, our development NOI for the next year will be lower than we expected because we are not as far along in our lease-ups as we had originally planned. On the stock buyback, year-to-day we have repurchased around a million shares at an average price of about $226 per share. We have match-funded the stock repurchase with $343 million of property sales, which is comparable to our pre-COVID consensus NAV of close to $290 per share. While we have been opportunistic in arbitraging the compelling discount between our public and private NAV, we paused our share repurchases when COVID-19 caseloads and hospitalizations surged this summer and severe shelter-in-place orders were issued. Even though we have transacted on a leveraged neutral basis and have reduced our net debt, selling assets also reduces EBITDA. Accordingly, we continue to be mindful of the impact on the debt-to-EBITDA ratio in the context of our stock buyback strategy. In summary, with minimal near-term funding needs, nothing drawn on our line of credit, and approximately $1.7 billion in total liquidity, our balance sheet remains strong and we continue to have the flexibility to be opportunistic while maintaining our disciplined approach to capital allocation. Thank you, and I will now turn the call back to the operator for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. In the interest of time, please limit yourself to one question and one follow-up so we may get to everyone's questions. Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thank you, and appreciate all the operating updates on the call. If I'm looking at page S15 of the supplemental, the operating statistics for October, I know they're done on a gross basis and not taken into account. Concessions, I know you said concessions were abating, but I'm wondering if you can give the operating numbers new, renewal, and blended when taking into account concessions for both October and then the third quarter.

Well, let me see if I can give you some more information. I may not give you everything there, but let me give you some more information. Number one, on that note, it shows that the market rent, the decline in market rent has improved. And that is true, but the fact is, is last year, we had an easier comp. So I want to make sure we have the context. Whenever, you know, it's always a challenge with transparency, giving out more information and then not having all the context. So there's a little bit of a head fake when it shows how the October rents have improved year over year. But that said, our markets are doing well and across the board and showing signs of stabilization or they're actually improving. So I want to make sure we get the right message across. As we get to nay reading further, you'll see that number reverses a little bit. I don't want people thinking, oh, now things are getting worse. It's not the case. It's just year-over-year comps. But as we get into what's happening in October, as far as for concessions go, we started the October reducing concessions, and this is off of Q3, which is over 75% of our transactions had concessions of roughly a month. And then we moved into October the first couple weeks, and we were at less than 50%. And then as we move into the second half of October, we're actually now at less than 25%. So we're doing that while maintaining occupancy or improving occupancy and while maintaining low availability. So all those pieces are going in the right direction at Essex. Again, we're not the market. We're part of the market, but we're performing very well within that marketplace. When we look at the break between renewals and new leases, there's definitely more leasing incentives on the new leases, typically running 3.3% is what we have in there is accurate. On the renewals, it's usually less than a week. Obviously, there's less of an incentive. This is already people already in the property. Does that answer your question, Nick?

That does. That was very helpful, and especially the color on the year-over-year trend. And then maybe just the second question, Angela. I appreciate the commentary on the share repurchase program. What would get you to restart it? And I'm wondering, obviously, the stock is below where you are purchasing, and it's for some of the reasons that you discussed. So what would get you more aggressive there? Is it price, or should we expect it to be paused for the near term, regardless of price?

Yeah, I think, you know, Nick, if you look at how we manage our capital allocations, we're not really going to deviate too much from that plan. And so the key commentary I have is really to make sure that we also at the same time preserve our debt to EBITDA ratio. And so it'll be a little bit of all of the above. You know, what are we selling and what price and what's the impact on the EBITDA reduction? At the same time, what are our opportunities to reinvest the sale proceeds? So if we have, you know, more prefer equity, for example, then that certainly would be an important piece. And, of course, the other piece is where the stock is trading, right? And so it's all of these things that gets factored in.

Thank you. Our next question comes from the line of Nick Higgins. Eliko with Scotiabank. Please proceed with your question.

Hi, this is Sumit here with Nick. Just a question on cash delinquencies. I know they're at 2.2% of scheduled rents and you recently at a conference earlier in September spoke about positive delinquencies. So could you provide us with an update on how collections are trending on the delinquency side and how much of this 2.2 will likely head into mid-2021? Also, do you have any delinquencies creeping into your utilities expense side, like some of your peers?

Yeah. Okay. So, overall, delinquencies are definitely improving, and you can obviously see that from, you know, Q3 versus Q2. There are some underlying trends there that occur, and so what's happening is we are collecting a little bit more in... prior delinquencies, which is a good thing. Again, I've said all along, we're working with all of our residents, and the great, great, great majority are showing very good behavior. So we are getting a little bit more on the current month's delinquency. It's a slight uptick. It kind of ties in with the reduction of the federal aid, but it's really not that material. Overall, again, the picture with delinquencies is improving, and so my expectation as we move forward. We continue to have the economy opening up. We have – although we still have negative year-over-year job comps, they're getting better and better. And so if on a local level we actually had seasonal job comps, it would actually show seasonal growth. So things are actually improving out here, and my expectation is that delinquency will continue to improve as we move forward. as it relates to utilities or any other line item, they're really running a similar path to the rental delinquencies. People who are unable to pay rent are really, you know, not paying delinquencies, but, you know, they're not paying all of it. Or they're paying a percentage, but the percentage ties the same. So it's a very parallel path, if that makes sense.

Yeah. Hey, guys. Nick here. Just a question, bigger picture question maybe for Mike. You know, what is sort of the biggest selling point you can give investors right now about, you know, your portfolio and, you know, addressing some of the, you know, bigger worries out there such as potential increase in rent control in California, the fact that, you know, tech workers are working remotely and they are in some cases moving to other states like Washington where there isn't a state income tax. You know, with all that being said, why is, you know, what are people missing about the Essex story right now? And I guess... The other thing I'm wondering, as you talked about, it sounds like transaction cap rates staying low, much lower than where your stock price implied cap rate is right now. So how do you think about asset sales in this environment as well?

Yeah, Nick, those are great questions. And I guess I would start with the latter point you made, which is the disconnect between public real estate markets and private real estate markets and trying to monetize assets. And as Angela stated, we paused a bit in the quarter when the COVID cases were increasing. And it's interesting. We think that's just an obvious benefit. You know, if we're operating the machine in a forward direction, we are issuing stock and incurring debt and buying property at a positive differential or arbitrage. And, you know, we think that that works pretty well in reverse situations. direction as well. So I'd say that is an obvious way to add value, add NAV per share, add FFO per share to the company given the current dislocation. I'd also mention that when we look at the amount of job loss we've had, the rent growth or the rent reductions that we've seen are really, I guess I would say, to be expected. And I know everyone is focused on this work-from-home issue But if you just look at, you know, L.A. jobs still as of September down 9.6%, San Francisco down 10%, and Oakland down 11%. You know, and largely driven by things that will, a big portion of them will come back, like, for example, the tourism, restaurants, hotels, the motion picture business in Southern California. You know, those are... the tech industries, there's nothing fundamentally wrong with them. And I think that most of the rental revenue loss that we've incurred is just directly attributable to job growth. And so I think that this will unwind itself and has already started to unwind itself, you know, as Mr. Burkhart just outlined in numbers that are, you know, slowly getting better. We're still, I would say, in, you know, a pretty tough spot with respect to employment. We need that to recover, but the balance sheet is incredibly well positioned, and we do have some ways to add value to the company. And so we see opportunity there. So I guess that's how I'd answer your question.

All right. Thanks, Mike.

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

Thank you. My first question actually was similar to that last question. But Mike, maybe we could dig a bit deeper into the work from home part. Because, you know, as you stated, that seems to be the number one concern for the stock. I believe you said, again, as Nick said, cap rates are flat in the suburbs. And did you say talk at least is only minus 5% in the cities versus I think your stock is implying more of a 20%, 25% discount. So the work from home, I guess, can you just talk about that a little bit more and why you're so comfortable that that's not going to impact Essex?

Yeah, again, it's a great question, Jeff. Thanks for joining the call. You know, I guess our thesis is that the hybrid model will likely prevail. And, you know... Many of the jobs that are in the cities require a physical presence. I would make that point. Virtually everything that connects with a customer from hotels to restaurants to bars, et cetera, the motion picture industry where it's pretty hard to film without people being present, et cetera. And so we see that as probably there's too much focus on, let's say, the tech community and not enough focus on the number of jobs that are required to actually physically be there to do your job. But, you know, I guess in thinking about this and in looking at what others have said, it's pretty interesting. There's obviously a big debate out there. And, you know, the Netflix CEO, for example, said he doesn't see any positives from working from home. And another CEO, the Zillow CEO, says, you know, the easy part of the process of working from home is, making the decision. The hard part is actually implementing it. And I think what he means by that is there are some pretty serious issues that come along with work from home that are going to take a lot of time and effort to work out. And I would mention, let's say, potential for less pay to the employees. How does the compensation issue work out? The productivity issues. How do you continue a culture of collaboration and and a vibrant culture when people don't see each other. And I think it's, you know, we found, you know, we're largely remote at this point in time. We found that it's pretty difficult to resolve, you know, significant business problems where, you know, senior executives have different perspectives on things when in a work-from-home type of environment. You're much better off together. So, again, we are thinking that the hybrid model is, is probably going to be the main path going forward. The hybrid model will require some tethering to an office at some point in time to try to keep those collaboration and the vibrancy and the culture together. And so we still see ourselves as being pretty well positioned. Someone may not live in a city, let's say, but will live somewhere potentially nearby, certainly within driving distance, and we don't see that as a bad thing. We have properties. In fact, most of our properties are actually out in suburbia, and so we think we're well-positioned for that. And by the way, the other key point here is we're not producing a lot of housing, and there's not going to be a lot of housing produced out there. So already, as John said earlier... Already we're starting to see rents increase now in suburbia as that dynamic plays out. And they're reducing in the cities and the areas that have previously had higher rents. And so the market is compensating for all of these issues, as it always does. And the decision a renter might have made six months ago is very different from the decisions that they're making today. So net-net, we think we're very well positioned. And, again, we have properties throughout these markets and throughout the commutable locations near the job centers, and we think that's still the right strategy.

Thank you, Mike. My follow-up would be, you mentioned, I believe, that nine out of the ten companies you're tracking are you're seeing an increase in job postings. Are you able to track for those postings, you know, I guess if they're advertising, you know, hybrid, work from anywhere? Is there a way to quantify that or not? It's not possible.

Yeah, it's, Jeff, it's hard to do. I mean, you know, we, in our September presentation, we gave out the... the dates for office reopenings of some of the top 10 tech companies. But the reality is that they are moving back to some degree, you know, as, you know, if there's another phase of or surge of COVID cases, you know, maybe those get pushed back. It's, you know, it appears in looking at there was a recent Microsoft announcement that gave greater work from home flexibility, etc. But I guess from our perspective, most of the top 10 tech companies have return-to-work dates out there. And I think that's significant because if all of them were going 100% work from home, as a couple of smaller tech companies are doing, that would be one thing. But most of them have return to work dates. And even if they get pushed back a little bit, I guess the significance here is as long as they ultimately are going back to the office in some way or another, I think that will solidify the connection to the office. And, you know, by the way, no one's going to pick up the Apple spaceship and move it somewhere else. So, you know, it's there for a reason. There are a lot of services there, including, you know, daycare and all kinds of things. And, you know, it's there for a reason. And I don't think that that motivation goes away anytime soon. I guess you're back to the top 10 tech companies and the job outlook. You know, those are data that we take off their websites and do our own survey and, you know, have tracked what they're doing for many years because they're so important to our mission. And, you know, they, as I said, they're, you know, they're off their peak, which was actually in March of this year, you know, By a reasonable amount, I think it looks like somewhere around 27,000 jobs in March opened for the top 10 tech companies down to about 17,000. About 18,000 is the most recent number. But now starting to move back in the other direction. So it looks like that is starting to get better, not worse.

Great. Thank you.

Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.

Yeah, hey, good morning out there, guys. Covered a lot of ground, but I guess, Mike, just to follow up maybe on a prior thread, as we think about COVID cases rising here in the U.S. and globally, and you're seeing renewed lockdowns in places like Europe, I mean, how does that make you feel about California potentially being, you know, first in line to take a similar posture in the months ahead, you know, if current trends continue. And then I guess on the flip side, I mean, given just lower seasonality in terms of leasing volumes, do you think the impact of that happening would, you know, be a lot less material than what occurred during the sort of the second and third quarter?

Yeah, Rich. Hey, you know what? I got to say, I greatly appreciate the work that... Evercore ISI has done on this issue, on the COVID tracking, et cetera. It's been fantastic and we all use it. So, you know, thanks for that. You know, I think that California has been super conservative when it comes to dealing with COVID. And as I said in my prepared remarks, that means that, you know, it accomplished two things at once. It really curtailed the number of the case spread throughout California and And at the same time, it muted our recovery very significantly. So we're now, I think, at a place in California where things are actually in pretty good order, not that it can't change. And I believe that what will happen is the state will be very vigilant in terms of pushing us back into a more restrictive tier if they have to. But I think as we sit here today, I think we're in a better spot than some of the areas that have been more open. and have let their economy flow more freely. So we'll take this on a day-by-day basis, but it looks like California and Washington are actually very well positioned. And I don't think that you would see this with the chart on page S16. I don't think you would see this pretty significant movement to reopen the economy if that wasn't the case.

Yeah, that makes sense. And then just for quick clarification, I think John mentioned 4.5% availability 30 days out at this particular moment. Just give us some context around that. How does that compare to sort of normal for this time of year or year over year or, you know, along those lines?

Sure. Yeah, that's actually... very good overall. Going into this part of the season, ethics is a general rule. We like to have higher occupancy and lower availability going into the season where there's a decline in demand seasonally. Sitting at 4.5% right now, availability is a good spot. It's consistent with where we've been in the last several years. The team has worked very hard to meet the market and varying tactics, trying to understand what the consumer wants and offer that and lease our units up and get quality paying tenants. And I think they've done a terrific job. You can see it in our higher occupancy even into October at 96.6. I mean, that's just really, really doggone good. Now, again, as I mentioned in my prepared remarks, in Q4 of last year, we were at 97.1. The market was very, very strong there. and so we'll still have some headwinds. But, you know, in context, I think the whole portfolio is doing very well. It's either signs of strength, you know, in some markets like Ventura, Contra Costa, Orange, and San Diego, or we see good signs of stabilization in many other markets. Or I'll mention, say, in San Francisco and Oakland, for example, you know, we see... the beginnings of this backfill that's starting to happen. And we mentioned this before, how in our markets, they are desirable places to live. And so when it's really a value proposition. So when the price gets to the right point, consumers make changes. So what we're starting to see now from January through September, the average was about 6% move-ins came from the outlying areas. And this is, far-off commuting places, like, say, Antioch, that were moving into the Oakland area and or San Francisco. And the numbers vary, but they're fairly close to that 6% average all the way through, pre-COVID, post-COVID, all the way through. Now, in October, that number jumped to 14%, literally just jumped. And you look and you say, okay, what's going on there? I would say this is the super commuters, the people that have, you know, they're tethered, as Mike said, to the employers. Employers are opening up. And they're looking and saying, now my value proposition is to move into San Francisco, move into Oakland at a lower price point, avoid the commute. This is a great deal. It works for me. And we're starting to see that. That's a real thing that actually happens. So when I look across our markets, again, I get to strength in certain markets, I get to stability in others, and I get to very positive signs in the most challenged places like San Francisco and downtown Oakland. Okay, got it. Thank you.

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

You provided some helpful commentary on the incentives in response to Nick Joseph's question, but I was wondering if you could provide some additional granularity as far as the effective blended rate growth rates in the third quarter and October?

Well, if I'm going to look at effective, one month is 8%, right? And so if we go three weeks or three quarters of that, it's about 6% off of our lease rates. And that would be one way to look at it to get down to that number. But the reason why I'm not going there is I think it's a little bit misleading, to be honest. I mean, we tend to get into this almost bond mentality of doing a calculation. And if we did that, I would have gone back and the last several months said, gee, rents fell this huge amount, net effective. And today I would be saying, oh my gosh, rents have moved up this huge amount because concessions are abating. And I think both of those can be a little bit misleading. You know, as Mike has said for years, concessions can come into the market and go out rather rapidly. We've used them as a tool to increase occupancy as leasing incentives and to a much lesser extent as in renewals. And so my preference in this case is to really look at it and say, okay, what's going on with our street rents, our market rents, our coupon rents, and then concessions, where are they at? They came into the market in a really big way in June. We used them to increase occupancy pretty dramatically. That's worked. The concessions are abating. We're pulling them back. And I think that's the bigger story. But if you get lost in the net effective rents, I'd say you'd have to go all the way back and say they fell a lot, and now they're increasing. And I think, you know, I don't think that's the best way to look at it. Should we be adding the free rent period to the 12-month lease, or is it 12-month inclusive of the free rent?

In other words, is it a 12-month lease or a 13-month lease?

Typically, 12-month leases. And, yeah, if you're trying to get to net effective, again, as I said, you just take the concession amount and say, okay, if it's a month, it's 8%, and you'd make that adjustment. So that's the simplistic way to get there. But again, I just don't think that's the best way to look at what's happening in the marketplace right now. Okay. And my second question is on your suburban portfolio. I was wondering if you could categorize what percentage of your suburban portfolio is transit-oriented or densely populated suburban versus, I guess, your more typical garden-style suburban portfolio.

And if you do have the breakdown, is there a difference in the performance between the two?

Well, I don't have the details of the breakdown with that, but I will tell you as it relates to performance, transit-oriented is really not what's driving anything right now. Basically, a lot of people aren't taking the transit, so they're not on BART and they're not on Caltrain. If they're commuting, they're on the road. We've seen that in many different ways, but we've also seen that in how much used cars are getting bid up. People are opting to drive. But what we do see is, you know, again, the walkability, as I've mentioned previously, the higher the walkability typically relates to the higher the price per square foot in rents. And that, if you were to look at one correlation, that would be the units that are negatively impacted the most. And on the other side, the lower dollars per square foot or lower walkability are the units that have benefited the most in this. situation, if that makes sense to you.

And, hey, John, this is Mike. You know, in our September presentation that's on the Internet, there actually is a chart that describes exactly what John shows you, which is the change in asking rents by walk score. It's on page 21 of that presentation. So hopefully that will help. And if you have any follow-up questions, give us a call.

Very helpful.

Thank you. Thank you. Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Hey, guys. Thanks for taking my call. Hey, John, I have a question for you because I think we maybe have a little bit different take on some of the questioning on this call. Look, I think the market understands that apartments are under pressure. You know, it's one of the worst kept secrets in the market right now. And I frankly don't think that the market is surprised that same-store revenue is going to get worse in 4Q and 1Q. I think what the market's looking for is things to be less bad. And if I think about what you reported last night, particularly for October, you showed that, right? Occupancy has improved, leasing spreads were less bad. And so I think you were making some really important comments about demand as rents come down. So my questions are really, I guess, a really simple one in theory. Have we seen the bottom? Do you think that rents have come down enough to attract that incremental demand? And are we going to start to just re-accelerate from here? Because I really think that the market just needs to see less bad, stable to improving occupancy and less bad leasing spread. So if we're there, I think that's a real positive.

Yeah, I wish you could ask me this in June of 2021, which was the third quarter of the bottom. But, you know, obviously, I don't know the future. What I'm trying to point out is we do have signs of strength that a third of our portfolio is actually moving, you know, increasing occupancy, rent, stability in large portions of the portfolio. We are not the market. We're a participant in it. And there's some you know, others in the market that are trying to play catch up right now. So I see volatility going forward. And then recognizing that seasonally, usually Q4 and Q1 are the low points. You know, it would be hard for me to say that I would believe that Q3 is, it turns out to be a low point. But, you know, there's just volatility in Q4. A lot of pieces out there. No one knows what's going on with COVID and everything else. But We're feeling good. Certainly things have improved from what we saw in June and July, which was a tremendous amount of activity trying to find where the market was. We found the market where the consumers are interested. To your comment, San Francisco and Oakland, I brought that comment up because we are starting to see that people from outlying areas, the super communities, are now moving in. that value proposition works for them, and that is a very good sign. You know, I'd call it a leading sign. So that is a good thing. Those markets are still tough, and the word acceleration gives me heartburn, but, you know, the stability, yes, strength in some other areas. Certainly we're starting to see, you know, sequentials improve in those four counties that I mentioned. So... Overall, I feel much better than I did last quarter. Let's put it that way.

Hey, Rich, let me just add one additional item to that. And that is, you know, normally this time of year, we feel pretty good about giving guidance for the next year. And as John said, you know, we don't this year largely because of the COVID uncertainty or unknowns that, you know, we talked about in the opening script. It's just the world can change so rapidly. And, you know, for the better or for the worse. And it's not – it's things that are completely outside of our purview of understanding. So, you know, we regret not giving our, you know, normal guidance on page S-16 for next year. But we just can't. There are just too many unknowns. One thing that we're focused on, and it's so important on page S-9 of the supplement, you know, our average monthly rental rate is down 40 basis points. And we're trying to hold occupancy. We're trying to hold rate. And if we can do that, again, with jobs still down 8.7% on average and down 11% in Oakland and 10% in San Francisco, trying to hold rate while we have that much job loss, worse than the financial crisis, I think is an amazing feat. So that's what we're trying to do. And we remain focused.

Yeah, that's really helpful, guys. And look, I would just reiterate to you, given where valuations are right now, I don't think the market needs to see you get back to where you were in 1Q20. I think the market just needs to see less bad. And I think that's why October was encouraging. That's maybe a long way of saying if we're not catching a falling knife anymore and it feels like there's some stability emerging, that sounds like a positive. So look forward to future updates, guys. Good work on the quarter. Thank you.

Appreciate it.

Our next question comes online. I'm Polowski with Green Street Advisors. Please proceed with your question. Thanks.

Just one quick question for me, John. As your private competitors play a little catch-up on the occupancy side, and as larger rent resets kind of ripple through sub-markets outside of your portfolio, do you expect occupancy to slide here coming into the next several quarters?

I wouldn't say that I expect it to slide. I think the team is doing a phenomenal job. We are very aggressive getting data. We have proprietary data hub and We pull all the data together. We have daily meetings, pricing and strategy meetings, and it is just an amazing team with leadership all the way through it. And so we're meeting the market. So we know that a unit that's vacant does not earn any revenue. And it's just we for years laughed at the proud and vacant concept because it just doesn't get you anywhere. So we typically are doing 12-month leases. and we meet the market and, you know, try to understand it, meet it, and stay occupied. So I don't see, you know, the occupancy declining a lot. 96.6 is high, but, you know, maintaining, I'd say, 96 and north of 96, I think, is what I would expect to see for the next couple of quarters. And then, you know, normally as we start to get into the 2Q, 3Q period, there starts to be more turnover, and that has an impact on reducing occupancy just because of the nature of the turnover. But we will continue to try to maintain higher occupancy. And I just expect there to be volatility, and I brought that up because I don't want people to be surprised by headlines from different vendors saying this is happening here and that's happening there and all of a sudden think that the whole market's going away. There's just individual players that are really struggling right now. Some people even lost occupancy in the third quarter, which was probably not the best strategy. And now they're trying to figure out, you know, what to do. One follow-up there.

Are any markets, Northern California, where you've taken concessions off and you think you'll have to put them back on into the winter?

No. Yeah, I mean, it floats around. I mean, right, we're going to use them where we need them, but we have, you know, it's Again, we're meeting on a regular basis to figure this out and figure out where the market is and what's happening. But I'm not looking right now and expecting huge obvious weakness in one spot or another. I expect volatility. And so to that extent, what I mean by that is, yeah, we'll make pricing adjustments as necessary if things pop up. But it's more like whack-a-mole in trying to maintain a good position throughout the situation. Hey, John, one quick comment.

Just one quick follow-up to what John said. Generally, nothing great happens in the fourth quarter because hiring, which is also affected by COVID, but generally in Q4, companies just wait until Q1 when they have new budgets and business plans in order to resume hiring activities. So you end up with sort of the the worst of both worlds. You end up with less hiring and, of course, the supply deliveries keep coming. So keep in mind that that dynamic is definitely, is probably, you know, greater this quarter given the pandemic-related issues than it has been in the past. So, you know, really I think we need to get into the new year before we have really a great sense of, you know, what direction we're going to be going in.

Got it. Thank you.

Our next question comes from the line of Austin Werschmidt with KeyBank. Please proceed with your question.

Everybody, thank you for taking the question. First, just curious, given you guys were more aggressive with concessions over the summer to the extent that others are playing catch-up, curious where you kind of peg your in-place effective rents today versus market rents. All right. In place of effective rents? Well, you mean like lost to lease? Where are we at? So if you take into account concessions, looking at your effective rent today, how far below or at market are you? So to the extent things do soften further, you've already put in some cushion and to the extent the market is coming to you versus you having to cut further ultimately. Sure. Again, most of our cuts have really been along the lines of concessions, and we've backed away from those. As we noted, our market rents are down about 5.8% in Q3 20 over Q3 19. So we've made adjustments down. It varies by market, obviously with San Francisco being greater and other markets much less. But the The market as a whole is really hanging in there. As a general rule, what the consumer has been looking for is concessions, leasing incentives, and we've continued to structure our pricing along those lines to meet the consumer where they're at. But what we've seen is that over the recent times, certainly over the summer, things were pretty intense, and as we got into the fall... the need for concessions backed away. And the more we backed away, the more we're able to continue to maintain occupancy and low availability. So, you know, if necessary, we'll adjust, but right now we've already dropped our market rents by say 5.8%. Okay. Yeah.

I guess I'm just generally looking for sort of a loss to lease type number. You know, you're more full today. And at one point, you know,

Yeah, our loss to lease is like 3.6% if we look at it that way. Upside down. Yeah, upside down. Okay. Yeah, gain to lease. Sorry. Got it. Gain to lease.

Gain to lease.

Got it. I'm not even used to saying that. I'm used to saying loss to lease, but yeah, gain to lease. Right. Okay. Fair enough. And then, you know, your comments on work from home and you think things kind of get more back to normal over time. You guys are more suburban residents.

So as restrictions get lifted, concerns around the virus, e-services are back up and running.

Perhaps the urban cores take a little longer so the concessions remain elevated there. Is there a risk that you lose residents that had moved out to more suburban locations but ultimately want to move back into urban cores and closer to their offices as things do begin to return back to normalcy?

Yeah, Austin, this is Mike. And John alluded to some of this a minute ago when he was talking about the October movement of other Northern California markets back into San Francisco and Oakland doubling from the previous number. So definitely there is movement. And largely it's because of the price differentials. We've discounted now so much in the cities that they are a relative value compared to the suburban areas. And suburban areas, you know, rents more recently have actually increased, which again, as long as that price differential continues to expand between the cities and the suburban areas, you're going to see more people moving back in. So we think this is just a normal operation of the markets and compensating for, you know, find the rent that, you know, sells the units in the marketplace. And so... Most people don't focus on that relationship of what rents are doing in the suburban markets versus the urban markets. The reality is it very much affects consumer choice. And so now more people are choosing to live in the cities at a lower price point.

Yep, makes sense. Okay, thanks for the thoughts. Our next question comes from the line of Daniel Santos with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking my question. Most of my questions have been answers to just two quick ones from me. I was wondering if you could comment, sorry if you've covered this already, on any sort of future or further operation or balance sheet initiatives that you could look to for cost savings just in the face of continued revenue decline. And then second, I was wondering if you could comment more specifically on whether or not you've considered investing in markets outside of California, just given all the issues California faces, both near-term and long-term.

Yes, this is Mike. Actually, I would say the pressure on costs have increased in COVID. As you can imagine, we had a relatively small collection department. It's now much larger. As you can imagine, selling and changing price and strategy is much more complicated now. So I'd say the business, in terms of operating the business, it's more complicated. But as noted in our Again, our September presentation, there are some bright things that are happening, and one of them involves technology, where we said that technology will probably lead to 100 to 200 basis point improvement in margin over time. And, you know, as I said, my prepared remarks that the consumer has accepted technology, actually prefers technology given COVID-19, And that has allowed us to move pretty strongly into deployment of various different types of technologies. And so there is definitely promise there for reduced cost. And I'm sorry, what was the second part of your question?

I was just wondering if you could comment more specifically on whether or not you considered investing in markets, you know, outside of California.

Yeah, you know, it's... We've come to believe that advocating for good housing policies in California is something that we're going to do. We're going to be active in it. We're going to spend a lot of time and some money doing it. We think that overall it makes sense to do that because it's pretty hard to find what we have here. The combination of supply constraints and very vibrant businesses that are growing rapidly which is really what drives rents. It forms this virtual cycle of rents push up wages, and then wages allow higher rents, and you will find that in very few markets. So we do have a process involved in our strategic planning activities that look at other markets that are similar to the West Coast. We don't think any of them are quite as good as the West Coast, But we continue to look at it. Obviously, we're just interested in one thing. We're interested in adding value for shareholders and growing the company. And so if we see the right set of conditions, we would be compelled to take a hard look at it. Got it. Thank you.

Thanks. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Thanks, guys. Good morning. Thanks for staying on. Appreciate you giving me the time. First one's on the preferred equity side. You know, you continue to be active in that. It looks like you originated a couple. One was stabilized. I think that was the first time I've seen you do that. Can you just talk about, you know, what that market kind of looks like? I thought that, you know, Stabilized assets are easy to finance with agency debt. But if you could just maybe talk about if that's a new trend you're seeing or maybe overall what kind of opportunities you see in that part of your business.

Sure, Neil. This is Adam. So, yeah, we've definitely seen we're still very active in the market and have seen more as there is ample debt out there for stabilized assets. But underwriting has definitely has been more challenging for some sponsors. So we are seeing more and more opportunities on the stabilized side. And you saw the one that we just funded this quarter and probably a couple more in the pipeline coming down.

Okay, great. Appreciate that. And then I guess the next question is for Mike. People have talked about the coastal issues, but you're talking about Amazon and Google growing in Seattle, Northern California, putting their money where their mouth is with office space. I just, again, kind of maybe want to go back. I've looked at some subleasing data. It looks like the square footage available for sublease has gone from like 1.5% to 4% in Northern California. You look at companies like Facebook and Google who have talked about like around 50% of their workforce being, you know, remote or in regional locations. And then, you know, Reddit said they're not going to adjust compensation based on location. Usually these companies follow each other's moves. So I guess, you know, I guess how do you think that the framework around, you know, the tech markets or at least in those areas in the West Coast isn't at least partially impaired? given those main driving forces from those large companies.

Well, I guess this is the moment that I would say I'm glad I'm not an office company because I agree with what you're saying. Definitely there's plenty of lease space out there, although the vacancy rates that I have don't show huge increases this quarter versus last quarter, but obviously these things take time to play out. And, you know, I guess I'd be cautious to say that, you know, it seems like things are changing rapidly, but I still think that we should take some time to wait and see what happens because, you know, right now on the work-from-home thing, again, as noted in the script, it's pretty much a mandatory thing right now as opposed to a choice that it will be, you know, sort of in a post-COVID period. So... I think there's a lot of changes being forced upon us. Again, we believe in the hybrid model and we think that that's what will take place going forward. And in fact, we think we'll adopt that model as a company as well because there are definitely some benefits to it. But at the same time, I'm hyper-focused on the culture here and the vibrancy of the company as we all are, everyone in this room is. And, you know, that is critically important to us. I just don't see how you maintain that, you know, with exclusively a work-from-home type of format. So I don't know. I don't know what's going to happen exactly with these things. But, again, I think there's good reason and a lot of issues that need to be resolved on the work-from-home model, you know, for it to be successful. And no doubt there will be some bumps in the road. So, yeah. As long as those employees remain within the major metros, I think that we're in good shape. We may not get the rent growth in San Francisco, but we will get it out in the suburban markets and we'll continue to do pretty well, I think. I appreciate the feedback.

Thank you. Our next question comes from the line of Alexander Kalmas. with Zellman and Associates. Please proceed with your question.

Hi, thank you for taking my question. Just trying to wrap my arms around going back to public and private values. If we think about in the opening remarks, you said that there's a 5% to 10% discount in the pre-COVID pricing. But if I think about where volumes are today, there's a significant drop-off from last year. So If we were running at a hypothetical normal rate, would that imply a deeper discount if we were there right now?

Hey, Alexander, this is Adam. So I think to Mike's comment in the earlier script, the 5% to 10% discount that he was talking about was more urban core markets. We've actually seen valuations on suburban assets be at or above pre-COVID levels. You're right in that volume has definitely been off of what it historically is. That being said, we're constantly in the market talking to potential buyers on potential dispositions. And there are enough out there that the market is being met, I'd say at that kind of at or above pre-COVID pricing. Just as an example, the deal we just sold in Glendale this week, that sold on pre-COVID pricing or pre-COVID rents at about a 3.8 cap. And that was about 4% above our pre-COVID value. Tack on concessions and you're in the low threes. So yeah, we're still pretty confident that the spread and what Mike had mentioned, that 5% to 10% discount on core markets we think that still kind of flows through despite the lack of volume.

Got it. Would you call it even a scarcity premium, sort of, you know, those assets? There's definitely that potential, yes. Got it. Thank you. And just in some of the tax plans we're seeing in the Biden administration, if he were to win, he'd think about 1031 exchanges and eliminating that. I just want to gauge just how big of a factor that would be in the California transaction market. Do you know what percentage that would be?

This is Mike. It's hard to tell. I mean, this year, given lower revenue, which is not a good thing, we have plenty of room in terms of taxable income to sell some properties and not have a REIT or dividend issue. But it'll vary from year to year. And they're already, given Prop 13, it's already a headwind in selling some of our California properties as well. So it's hard to tell. That's more of a hypothetical question that it depends on the circumstances and what we see going forward. So it's a difficult one to answer.

Okay. Thank you for the call. Thanks.

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

Great, thanks. Just a quick one from me here. Have you seen a change in tenant credit quality as you've had more of those value-seeking tenants move in, including some of those super commuters you referred to? And then, just for context and past downturns, do you see greater turnover among those value consumers when you do eventually look to raise rent?

Yeah, so as far as the tenant credit quality, no, we have not seen any decline there. It's a situation where if you have a job, you continue to maintain going forward, and then you're able to rent. And if you don't, it's a terrible situation, but you're not going to become a new renter. So we haven't seen any declines there. As it relates to turnover, from that type of a situation, yeah, the answer is yeah. There are some times... I can think of almost a funny story where we had a resident that moved from one of our outer properties up in Seattle to downtown. They transferred within Essex. And then as the market picked up, this is after the last financial crisis, they moved back into the property that they had started with. And they're a very nice person. And they wanted to stay with Essex as an Essex client. But they really did take advantage of the pricing changes and Again, it's that value proposition that they were making personally between their commute and pricing and everything and making that decision. And that's what we do see goes on. Of course, you know, the backdrop there was the rents in Seattle went up because the economy was growing. Demand was increasing because of jobs. And so the fact that, you know, that person moved out, it really didn't impact the overall economic picture. It was a rising then.

Makes sense. Thanks.

Sure. Our next question comes from the line of Handel St. Just with Mizuho. Mizuho, please proceed with your question.

Yes, good morning out there. Good morning. Good morning. First question for me, and I'm sorry if I missed this, but did you guys discuss what drove that $8 million increase in non-residential revenue from second quarters up to $19 million? And I guess I'm curious what was behind that as well, and if it's on the level we should I'm going to be forecasting your term for that line item.

Um, hey, Hendelle, it's Angela. I'm not sure I see a $19 million increase. I have on the other property revenue... $8 million increase.

It's sequentially.

It's from $11 to $19 million this quarter, so $8 million.

$11 to $19. You know what? I'll have to get back to you, because when I look at our S2, from quarter to quarter, from second quarter to third quarter, it goes from $5 to $6.3 million, so it's a Where are you looking? Yeah, where are you looking?

I'm looking on the second page, S8.

S8, looking at the non-residential other line items in third quarter, $19.8 million versus second quarter, $11.4 million.

We can follow up on mine. I was just curious if that was something you had readily available, but certainly can follow up.

if it's going to take a bit more digging.

Oh, no, no. It's straight-line rent. I think that's where you're looking at. Straight-line rent.

Non-residential, other income, $19.847 million.

Right, so... It doesn't look like a... In either event, we need to follow up.

Mike, maybe I guess following up on... Yeah, it's straight on commercial. I think that's what it is. But we'll follow up with you. But I think that's what that is.

Okay, fair enough.

A question then following up on Daniel's question about new markets. We've talked about this over the past few quarters, few years. I guess I'm curious, you know, one of your peers mentioned Salt Lake City specifically, so I'm curious, you know, how a market like that ranks on your hypothetical list, and maybe could, you know, disposition proceeds, could that be a use of a source of capital for entering new markets, given what seems to be a hesitance here for more stock buybacks?

Yeah, Handel, it's a good question. Actually, there's a bunch of cities that you could put in that category. There are smaller metros. Boise would be another good example. But there are others as well. I guess from our perspective, we want to see enough liquidity in the market from an investment perspective, enough local buyers and sellers to create a pretty strong market. And that's one of the issues in each of those markets. The other issue is relatively inexpensive single-family homes and you know I think everyone should be very careful with this about this point in the cycle because we're starting to see rapid increases in single-family home prices and as soon as you get to a level where you know it's more attractive to buy a home than it is to rent an apartment those markets tend to get hit pretty hard so this is why you know the supply constraints we you know measure very broadly to include all types of housing and for sale as well as rental housing. Because we've learned that lesson before. We were once upon a time in the city of Portland, another good example of this, although it's a bigger metro than Salt Lake City and Boise. But in the city of Portland, we made some investments based on an urban growth boundary that surrounded Portland that limited the amount of housing production. And we exited Portland actually because they expanded their urban growth boundary to allow for the production of 10,000 single-family homes at a relatively inexpensive price, which made our apartments much less attractive in the overall housing choice that were available to consumers. So I hear you. You know, we like those markets. They're growing very rapidly. There's definitely money to be made, but there's definitely a higher risk associated with them.

Yeah, thanks for that, Mike. And one final question, not to split hairs, but I guess I'm curious on what you guys are seeing on the demand side for studio apartments, given that they tend to be, you know, the younger, more nimble renters and the people that fled from the city certainly search for more space. Curious how the... incremental demand or any pricing power emerging in that part of the portfolio?

Thanks. Well, I wouldn't use the word pricing power and attach that to studios. Basically, what we see, and we look twice and dice it numerous different ways, but as it relates to, say, just unit type, clearly the three-bedroom have higher demand than two-bedroom than one-bedroom than studio at the bottom. Generally, what we see within the marketplace is the studios now have lower occupancy. And again, this ties back to some of my comments where when we look and see where turnover was or where there's demand issues, this is connected in part to, say, students. It's also connected to Silicon Valley consultants and those types of things. It also connects to the COVID preference where people want more space and lower price per square foot. They want more private outdoor space. Usually studios have limited private outdoor space. So, yeah, there's no question that studios are impacted more than the other unit types, if that answers your question.

Certainly, but also curious if there's been any incremental moves. Certainly the idea that we're looking for, you know, some improvement in the second derivative. Curious if you're starting to see any at all on that more challenged piece of the portfolio.

Fair enough. We're doing a little bit better, but we're also doing everything we can to figure out the best way to market those units, whether they be, you know, as a second office or whether it be, you know, at different discount prices. So, yes, there's a little bit more incremental demand. You know, in context, I would, you know, say that it's a balanced picture because we're working very aggressively to figure out how to market those What I would say is the decline has stopped. You know, there was a noted decline that occurred in the spring on studio occupancy. That stopped. It flattened out. And we're now improving a little bit. But, again, I think there's other factors involved.

Fair enough.

Thank you, guys. Thank you. If there are no further questions, I'd like to hand the call back to management for closing remarks.

Very good. Thank you, Operator. And thank you, everyone, for joining the call today. Hopefully, we'll have a chance to meet with many of you at the upcoming NAREID in November. Stay safe out there. Thanks for joining us. Good day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.