Essex Property Trust, Inc.

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

Welcome to our fourth quarter earnings conference call. I'm very pleased to acknowledge the promotions of Angela Kleinman and Barb Pack to their new roles at Essex, and greatly appreciate their contributions for many years of dedicated service. Both Angela and Barb will follow me with prepared remarks, and Adam Barry, our Chief Investment Officer, is here for Q&A. At the end of last year, we announced John Bookhart's retirement, and we thank John for his tireless efforts and numerous contributions to the company's success over nearly three decades. As we reported last night, our fourth quarter and full year 2020 results continue to be significantly impacted by the COVID-19 pandemic, resulting in lower same property revenue and core FFO per share for both the quarter and the full year. Similar to the last few quarters, pandemic-related regulations have had two primary consequences. First, shelter-in-place and related orders have resulted in unprecedented job losses, and second, anti-eviction and related laws prevent us from maximizing property performance. Government mandates are constantly changing, and they intensified during the fourth quarter given surging COVID-19 cases. Navigating the pandemic involves extraordinary efforts and I thank the Essex team for their tireless dedication amid these challenges. Overall, our fourth quarter results reflect stability in sequential debt effective rents beginning in October and as discussed during our third quarter earnings call. Sequential revenues improved 30 basis points in the quarter with market rents mostly flat in the cities and modestly positive in suburban locations. Therefore, we are cautiously optimistic that we have or will soon reach the bottom in market rent declines. As of December 2020, preliminary three-month trailing job losses in the Essex markets were 7.9% year-over-year, 150 basis point improvement compared to minus 9.4% for September 2020, and outperforming the nation, which had 100 basis point improvement from September to December. Even with the recovery of jobs in Q3 and Q4, the nation had 9.2 million fewer jobs year over year for the month of December, roughly equal to the number of jobs lost at the worst point of the financial crisis. Our data analytics team prepared S-17 to the supplemental, which is our base case scenario underlying our expectation that net effective rents will decline 1.9% in 2021. The range of potential outcomes is extraordinarily wide for 2021, given many unknowns that relate to the pandemic, including the pace of vaccine deployment and changes in regulation. Our modeling further assumes 4% GDP growth, which should lead to positive momentum in the second half of 2021. Apartment supply will continue to be a challenge, especially in the downtown locations of Los Angeles and Seattle. Our data analytics team expects approximately 34,000 apartment deliveries in 2021, a modest increase compared to last year. Also similar to 2020, we don't expect much for sale housing production going forward. It's our experience that affordable for sale housing competes directly with rentals once rents rise to a level that approximates the monthly payment of an entry-level for-sale home. And there is little risk of that occurring in the Essex markets any time soon. Page S17.1 of the supplemental highlights 13 recent multi-billion dollar tech initial public offerings for companies headquartered in the Essex markets. Overall, 2020 was a great year for IPOs with 147 tech sector offerings completed during the year. It's our view that the IPO market is essential to recharge the tech ecosystem, providing growth capital to early-stage investors and to generate liquidity for reinvestment. Page S17.1 also illustrates a reacceleration in job openings for the top 10 tech companies, which has increased 38% since the August trough. Our analysis indicates that nearly 60% of the total job postings are located in California or Washington, with the next largest state, Texas, accounting for just 7%. Page S17.2 of the supplemental package demonstrates that venture capital investments continued on a record pace in 2020, with approximately $130 billion invested in the U.S., with the ethics markets continuing to receive the dominant share of VC investment. Success in the knowledge-based economy requires a critical mass of highly skilled workers creating a network effect that draws companies to the Bay Area and Seattle. While only a limited number of venture-backed companies will go public, some will experience extraordinary growth similar to Snowflake, DoorDash, Airbnb, and resulting in thousands of high-paying jobs. The environment today has many similarities to the previous recessionary periods, including the financial crisis and the bursting of the dot-com bubble. In both cases, migration out of California was often front-page news. In 2020, we experienced higher out-migration than normal, especially in our West Coast urban centers. In our experience, people make different housing choices during recessions, and it's not surprising to see many in the large baby boomer cohort monetize the value of an expensive California home to move to less expensive areas as part of a retirement plan. This recession is unique with respect to the extraordinary loss of jobs that involve lower-paid service workers, jobs that are concentrated in the city centers, and affected employees often had only two choices, move immediately to find work or stay in their homes shielded by eviction forbearance laws. As with previous recessions, we expect most of these trends to reverse. We expect that the demand for restaurants, services, and travel will recover swiftly as vaccines are administered, bringing back related service jobs. Workers in the Essex markets earn more than in most parts of the country, and the draw of higher-paying jobs combined with lower recent rent levels makes rental housing on the West Coast the most affordable it has been since 2013. A recent McKinsey study estimates that only 22% of the American workforce can work from home without any productivity loss. We have been tracking many companies that have adopted work from home models during the pandemic and we remain confident that the vast majority of companies will ask employees to return to the office when it is safe to do so, likely with increased work from home flexibility going forward. Google, Netflix, and Apple are among the largest companies to have expressed a desire to return to the office. Many others were followed. Turning to the regulatory environment, a third wave of COVID-19 cases beginning in November and related concerns about hospital availability led to the imposition of severe stay-at-home orders in all of our California markets. Some of these restrictions were eased last week, but all of the Essex markets remain in California's most restricted category. Recently, with the passage of SB 91 last week, The state of California has extended COVID-19 related eviction protection from January 31st to June 30th, 2021, including pushing back the requirement to pay at least 25% of pandemically related rent. In addition, the law established a state rental assistance program to allocate $2.6 billion in federal stimulus funds using income levels to prioritize payments and accepting related applications in March. As with similar laws, there are many related requirements and complexities which we are evaluating. Turning to the apartment investment markets, during 2020 we sold four properties with a total of 670 apartment homes worth $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 leads compared to the private real estate markets, Property sales remain a preferred source of funds for investment. Since the onset of the pandemic, a relatively small number of apartment sales support our belief that property values have not changed materially since the onset of the pandemic. However, extraordinary changes in rent, increasing in the case of most suburban markets and decreasing sharply in some urban locations, makes it difficult to draw conclusions about cap rates. In the suburbs, where rents are generally at or above pre-pandemic levels, property values have modestly increased and cap rates are somewhat lower compared to the pre-pandemic period. Given low rents and significant concessions in hard-hit cities, recent price talk around possible sales indicate about a 5% reduction in value versus the pre-COVID period, resulting in cap rates for high-quality properties below 4%. 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, potentially supporting lower cap rates. Vaccine distribution should remove uncertainty with respect to apartment operations and property values. As a result, we believe transaction volumes will begin to accelerate. As we've indicated before, improved cash flow from positive leverage in apartments has historically led to a robust transaction market. With that, I'll turn the call over to Angela.

Thank you, Mike. First, I would like to express my appreciation to the Essex operations team for their diligent effort to serve our customers amidst a challenging environment caused by the COVID pandemic. Thank you for all your hard work. As for my comments, I will begin by discussing our 2020 results, followed by our outlook for 2021. Overall, our market performed as we expected despite the headwinds of new COVID-related closures and seasonal decline in demand. The urban core, particularly in tech-centric markets, continue to remain more impacted by COVID-19-related job losses and office closures. In addition, the change in quality of life resulting from the closures of restaurants and public amenities has driven a temporary shift in consumer preferences. High-rise buildings or communities located in areas with high walk scores have been the most impacted by this shift in demand. Conversely, communities with private outdoor space or more affordable residences outside of the urban core continue to experience greater demand, which benefit many of our properties in Ventura, San Diego, Orange County, and the East Bay in Northern California. This temporary shift in demand continued in the fourth quarter, where we experienced a 7.6% and 9.9% year-over-year increase in quarterly turnover in CBD Seattle and San Francisco, compared to the portfolio average turnover of only 1.3%. Furthermore, our CBD locations also had a greater concentration of apartment supply deliveries, typically accompanied by very high concession levels. During the fourth quarter, we continued our leasing strategy of leveraging concessions and stabilized communities and building occupancy. There have been encouraging indicators from a sequential perspective in that more than half of our same property portfolio grew revenues sequentially, driven in part by increases in occupancy and decreases in concessions. We have provided year-over-year net effect rent changes for our portfolio on page S16 of our supplemental. New lease rates were down 8.9% in the fourth quarter, stable in January and an improvement from the negative 2.2% achieved in the third quarter. Concessions on the same property pool improved from approximately $18 million in the third quarter to $13 million in the fourth quarter. This reduction in concessions is noteworthy considering the fourth quarter has seasonally lowered demand and historically concessions increased during this period rather than decreased. Key highlights of the same property performance of our major markets in the fourth quarter are as follows. In Seattle, 4.9% year-over-year revenue decline was primarily driven by Seattle CBD, which declined by 13%, while the remaining sub-markets averaged a 3.2% decline. Year-over-year job growth in Seattle declined by 7.3% in the fourth quarter. In Northern California, the 10.4% year-over-year revenue decline was led by CBD San Francisco and Oakland, averaging an 18% decline, contrasted with a 4.2% decline in Contra Costa County, while Santa Clara County performed in line with the regional average of a 10% decline. Year-over-year job growth in Northern California declined by 8%, with San Jose Fairfeather at a 6.4% decline. In Southern California, the 7.2% year-over-year decline was primarily driven by LACBD and West LA suburbs, averaging a 17% decline, offset by an average decline of 2.4% in our suburban markets of Ventura, Orange County, and San Diego. Fourth quarter year-over-year job growth in Southern California declined by 8%. Moving on to our 2021 outlook, as indicated on S17 of the supplemental, multifamily supply as a percentage of stock remain low at 0.9% for our portfolio. While we expect a percentage of the year-over-year growth to remain flat, new conclusions will once again be concentrated into CBDs and urban submarkets, where supply is projected to increase by 2.1%, compared to just 0.7% across the rest of the portfolio. The confluence of minimum supply and extraordinary job losses remain a significant headwind in our urban markets. In Seattle, we expect multifamily supply as percentage of stock to increase in 2021 by 1.6%, driven by 2.9% in the CDD, offset by a 1% increase in the suburbs. where we have the majority of our units. We have also seen positive office activities by major tech companies as they continue to push forward on expansion projects. In Seattle, Amazon received approval for a 1.1 million square foot project. In Bellevue, Microsoft has continued with their campus expansion. And in Kirkland, Google acquired a 10-acre site for a large campus. In Northern California, we project overall multi-family supply as percentage of stock in 2021 to decrease by 10 basis points, although Oakland and San Jose CBD are expected to increase by 1.8% and 3% respectively. Despite the impact of COVID, tech expansion plans have continued in the Bay Area. Amazon purchased a six-acre site near downtown San Francisco. Facebook last month submitted an updated plan for its 1.25 million square foot campus expansion in Monroe Park, and Google continued to work with the city of San Jose for its major new campus at Teodon Station. In addition, the biotech sector continued to be a strong source of office demand, highlighted by the recently approved expansion of Genentech's headquarter in South San Francisco, which would add up to 4.3 million square foot of new office space. In Southern California, we project overall multifamily supply as a percentage of stock to remain flat. The most notable increase is 4% LACVD. And deliveries in West LA will remain elevated once again this year. While many uncertainties remain as to legislation and the timing of the vaccine, based on current market conditions, we assume our scheduled rent for the same property portfolio will drop in the second quarter of this year. Because leases are typically one year in duration, our year-over-year revenue growth will be negative in the first half and positive in the second half, leading to our same-store four-year guidance of 2.5% of revenue decline at the midpoint. Lastly, our current same-store physical occupancy is 96.4%. Our availability 30-day out is 4.7%. Thank you, and I will now turn the call to our PAC.