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.