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.

Thank you, Angela. I'll start with a few comments on our fourth quarter results, followed by key assumptions in our 2021 guidance, and finally an update on our recent capital markets activities and the balance sheet. As expected, the fourth quarter was a challenging period with core FFO declining 12.5% compared to one year ago. This was primarily driven by an 8% decline in same property revenues as a result of higher concessions and delinquencies. As we noted last quarter, we report concessions on a cash basis in our same property results because we believe this is more indicative of true market conditions. However, we are required by GAAP to treat concessions on a straight-line basis in calculating consolidated revenue and FFO. As Angela mentioned, during the fourth quarter, we provided $5 million fewer concessions than the third quarter, which helped improve same property revenues sequentially. However, core FFO declined by 4% or $0.13 per share compared to the third quarter, of which $0.16 is attributable to lower straight-line rent concessions. We expect this line item to continue to be a headwind to cold FFO growth in 2021, which I will discuss in a minute. Please note on page S8 of the supplemental, we have detailed the quarterly impact of non-cash straight line rents. Turning to delinquencies. We continue to take a conservative approach to reserving against uncollected rents, especially given the surge in COVID-19 cases in the fourth quarter, which resulted in extended lockdowns in our markets throughout much of the quarter. As such, we reserved against the entire net delinquency balance during the fourth quarter. Our receivable balance currently stands at approximately $7 million, including joint ventures at ColoradoShare. Based on past collections, we feel this receivable balance is consistent with our ongoing conservative approach. We will continue to assess our delinquency reserves and our net receivable balance each quarter based on collection history and market conditions. Turning to our 2021 guidance. Key assumptions are available on page five of the earnings release and S14 of the supplemental. We've provided a wider than normal range for same property revenues and core FFO, given the significant uncertainties that remain surrounding COVID and the recovery ahead, including vaccine distribution and eviction moratoriums that are outside our control, but could swing guidance in a variety of ways. That said, we felt it was important to outline our key assumptions based on information we have today. For the full year, we expect core FFO per diluted share to decline by 5.1% at the midpoint. The key drivers of the decrease are primarily related to the following two items. First, we expect same property revenues and NOI to decline by 2.5% and 4.6% respectively at the midpoint. While current operating fundamentals remain steady in our market as compared to several months ago, we will continue to feel the negative effects of the 2020 rent declines throughout most of 2021. In addition, due to the eviction moratoriums and regulations that remain outside our control, we expect delinquencies will remain elevated in 2021 and will be a drag to core FFO by an estimated 45 cents per share at the midpoint. The company has a long history of excellent record collections, and we expect this temporary delinquency headwind to become a tailwind to FFO growth once the various COVID-related restrictions are lifted. Second, we also face significant headwinds from our straight-line concessions. We expect this non-cash item will result in 41 to 56 cents per share decline in course of flow, representing about a 4% reduction in growth on a year-over-year basis. As it relates to concessions, we expect they will remain high in the first half of the year before moderating in the second half of the year as the economic recovery takes hold. As such, we expect the impact from straight-line rent concessions to be minimal in the first half of the year, with most of the negative impact we forecasted to fall in the last two quarters of 2021. Lastly, on to capital markets activities and the balance sheet. During the fourth quarter, we closed $206 million of new preferred equity investments and bought back $46 million of common stock at a significant discount to NAV. These investments are being funded with three asset sales totaling approximately $275 million that are under contract and expected to close in the first quarter. This is consistent with our guiding principles of match funding investments on a leverage-neutral basis. For the year, we were able to arbitrage the difference between public and private market pricing by selling 343 million of assets at prices generally consistent with pre-COVID levels and buying back 269 million of stocks at an average price of $225 per share, all while maintaining our balance sheet strength and creating value for our shareholders. Our balance sheet remains strong with minimal near-term funding needs and sound financial metrics. While our net debt to EBITDA has increased this year, this is primarily the result of the significant decline in EBITDA caused by the pandemic. As the economic recovery takes hold and the West Coast economies continue to reopen, we expect our net debt to EBITDA ratio will improve. With ample liquidity and a well-covered dividend, our balance sheet remains a source of strength. With that, I'll turn the call back to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your questions. Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your questions. Thanks. I appreciate the commentary on kind of the dynamic nature of your markets as well as the slides in the supplemental. But I'm just wondering, as you think about kind of post-COVID, right, if we're in a more flexible work environment, putting aside any kind of migration trends outside of the states, But just if there is more flexibility, you know, and commuting times change, how does that change how you think about your exposure within your markets, either urban, suburban, or even further out? And could there be opportunities that you're exploring today? Okay.

Hi, Nick. Thanks for the question. It's a good one. And this is Mike. You know, we think that there will be more work-from-home flexibility, but at the same time, we think that employees will be tethered at some level to the office, you know, as I think about the three other very capable people here today, knowing them and trusting them, and, you know, all these things are a great team effort, and teams are better when you really know the people and can trust the people. So I think that is a key factor that I think, and as noted in the prepared remarks, will keep employees relatively close to their jobs. So having said that, I would think the winners in this scenario will ultimately be the high-quality cities that are near the jobs but also offer maybe a little bit more affordable housing and good schools, low crime rates, et cetera. So I think that that... will play itself out. And I think those areas with a lot of cities that are among the major metros that qualify for that. And some of them have been pretty hard hit. So I guess I would add to that. Some of the cities that are high-quality cities, their rents have been highly impacted by COVID. Certainly when I think about Northern California and the tech markets, the peninsula, San Mateo, even suburban parts of Santa Fe would be major beneficiaries of that because, you know, we view that technology is going to continue to be a very strong economic driver, and the tech ecosystem in the Bay Area is incredibly unique, and therefore we think it will do well.

That answers the question. That's very helpful. And then just one quick question, I guess, on the rent relief programs. Is ethics helping residents who are behind kind of fill out or navigate the ability to get rent relief? And is there any kind of rent relief from the government assuming guidance?

Yeah, noted on the call that last week the state of California, using federal stimulus dollars, started a program or announced a program, $2.6 billion, potentially, of rent relief. And the way it would work is the landlord would be required to forgive 20%. And so the reimbursement from these programs could be 80%. That will be predicated on percentages of median income, average median income. So it will provide the greatest benefit to those that are at lower income levels. And it's hard to tell exactly what that means. We just haven't had enough time to evaluate that program. So I'm guessing that we will have a pretty significant positive impact from it, but again, it's too early to evaluate.

Thank you.

Thanks, Dick. Thank you. Our next questions come from the line of Jeff Becker with Bank of America. Please proceed with your questions.

Great. Thank you. First, I want to say congratulations to Angela and Barb, and we wish John a great retirement. Thanks for the time today. Mike, in your opening remarks, You commented that you have or soon will reach a bottom in market rents, and I know you're fairly conservative, and so I take that comment pretty serious. I guess what gives you comfort to say that? Can you just talk about that a little bit more, please?

Of course, Jeff. I think that's a good question, and it's, I think, probably maybe the most important question out there. So if we look at net effective rents for the fourth quarter sequentially, they were down under 1%, so net net. That's all the markets. Now, there's pretty significant variation between market to market. And part of that is, you know, even though we have high occupancy overall, there are parts of our portfolio that have lower occupancy. For example, San Francisco is still at, you know, 92.5%. Seattle downtown is at about the same level. And so there are areas that were very... Very highly occupied that are offsetting areas that don't have the same occupancy and actually below the average occupancy level. And most of that, as Angela alluded to, is related to the supply level. As you can imagine, if you've got negative job growth equivalent to right now, still as of December, equivalent to the worst part of the great financial crisis, it is not... not a great time to be delivering apartment units, and therefore the cities are getting the bulk of the supply delivery. So you have this confluence that Angela spoke about, which is negative demand growth and lots of supply, and the cities are understandably hit from that. Offsetting that is we do have markets that are, doing very well. You know, for example, Ventura, where rents are up almost 10% year over year on a market basis. And so, you know, we're doing pretty well in a lot of these suburbs. Now, that leads to this issue that I've talked about many times, which is rent to income. And it's interesting that Ventura, with its, I think it's more like 8 1⁄2 to 10% rent increase, is now about 17% above its long-term historical average of this ratio of rent to income, which is incredibly important to us. whereas in Northern California we're 7% below the long-term average of rent-to-income. So, you know, everyone looks at this like, hey, the suburbs are going to do a lot better, but when rents go up a long ways, I would question that. And conversely, when the rents are essentially hammered in the cities, it changes the consumer's view of where the opportunity is. And so our view is, you know, a little bit longer term that you're going to see a very significant movement back towards the areas where, you know, rents are high-quality cities where rents are pretty affordable. Thank you. That's very helpful. And is that what ultimately led to, you know, Essex providing the Well, there's a number of things. We have a whole – I kind of have a philosophy on guidance, being an ex-CFO. And if I weren't here, I'm not sure that Barb and Angela wouldn't have come to a different decision, to be perfectly candid. But, yeah, you know, our preference is to always provide what we can and to be pretty open with the market. And, you know, you all can disagree with us, but, you know, presumably we have better information than you have, and therefore it's up to us to, you know, sort of lead the way. So that's the philosophical position I took, and it prevailed. Thank you.

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

Hey, good morning, guys. Thanks for all the transparency you provided in the release and the prepared remarks. One of the things that struck us is that you guys did a really good job early on of valuing occupancy over rent, and I think that's one of the reasons that you're really starting to see some sequential growth. And you've alluded to this a little bit, but I do want to maybe drill down a little bit more on the leases that are coming due and what's historically the peak leasing season and how you think you're going to manage through that. I recognize that you said 1Q is going to be tough, 2Q is going to be challenging as well. But how do you think through that? How do you think your occupancy sets you up to manage through the leases coming due when demand is still not going to be back to where it is?

Yeah, hey, Sandra here. That's a good question, and it's certainly something that we actively debate internally with, you know, the tactical strategy, right? Well, I don't think I want to, you know, go through our playbook in detail. I would just say that that we focus on maximizing revenue, and we do so by optimizing occupancy whenever possible, and we meet the market. And so... given where we are, and you're right on point, that we did, you know, in the third quarter, focus on entrepreneurship, which allowed us in the fourth quarter to pull back on concessions as we see the market stabilize. And so as we continue to see how the market performs, you know, we'll continue to use that strategy. And the goal of this play is really to try to – pull back on concessions whenever possible. And, of course, keep in mind that that's subject to, of course, the supply, which I mentioned, and the savings use will continue to be pretty heavy.

And they're assuming a recovery in the back half of the year. So all those come into play.

Okay. I think that I have appreciation for you not wanting to give the playbook away. I would love for you to, but I appreciate why you might not want to. On the other side of the equation, just the job growth. One of the things that, believe it or not, I think is misunderstood about your portfolio is your class AB mix in urban versus suburban. I'm not sure that's always appreciated by the investor base. So when you think about job growth, can you maybe break down those job growth views relative to, you know, like our high-class, high-paying jobs in urban markets versus maybe the type of renters that would rank Class B in the suburban markets? This is Mike, and there's a lot to that question, so I'll try to unpack it as best I can. Every recession is a little bit different, and normally we view Southern California as more typical of the U.S. average, and therefore it's less volatile. In this recession, it has been incredibly volatile in a certain sense. sector, and that is the motion picture sector. We didn't talk about it this time. We held on prior calls. And, you know, it's effectively shut down. And this is like the big multigenerator in Southern California. And so Southern California is probably the biggest surprise relative to prior recessions. For example, in the financial crisis, market rents went down in Southern California about 10% versus about 15% for the Essex portfolio in total. So this time, Southern California looks a lot like Northern California, and I think it's because of the two key parts of it. Again, the filming and entertainment business plus marketing. All of these low jobs, when you look at the sectors of jobs that have been demolished, it's all the lower income segments of the job base. You know, mainly it's hospitality and restaurants and other services. Those jobs are down. On the metros, you know, somewhere in the 20% range, which means in the cities which are even higher concentrated, they're even more impacted. So, you know, as Angela said, you know, You've got more supply coming into the cities. You also have worse job growth. Again, when we give you the averages, these are averages. They're more concentrated in the cities. And then when you go north into the tech markets, I think that you have two things that are happening. You have all those service jobs in Seattle and the Bay Area. But you also have, I would say, greater work-from-home flexibility that on the margin has allowed the areas that are suburban in nature. You know, most of San Jose is suburban. It has a very small downtown up the peninsula, you know, through Mountain View where... Facebook is located, and Google, right in that area. Those areas have been much greater impacted, and I think a lot of that is the work-from-home phenomenon. So I think the recovery looks like a couple of things. You know, there's nothing funny going on with any of these businesses. The motion picture business is still high demand. The technology companies, as noted in the prepared remarks, you know, a lot of venture capital money being invested, lots of investments being made by the big tech companies into locations and buildings. And so everything, you know, I think... In terms of the broader economy, it looks fine. We need those companies to come back to the office to some extent. We also need, you know, there's always people that are retiring and, again, selling their expensive California home, going somewhere else. And then backfilling comes from college graduates coming to take high-paying jobs. So I think that there's a mismatch there. I think that the people that are leaving have left. The lower-income can't afford to stay. They either have left or are staying collective in anti-eviction laws, but we haven't seen the backfill yet. And I think you're going to see the backfill starting in the next, you know, relatively soon. And I think that they will, you know, start to solidify it because, you know, we're 90-something percent occupied. It doesn't take that many jobs to sort of fill things up, tighten things up, and then concessions start abating pretty quickly. So... That's how we see it. Hopefully that helps. That does help a lot. One final thing from me, you know, it strikes a chord with me when you say you have more information than us. I think that's very true. You know, I would encourage you, if there was anything that you could provide on population migration trends that you're seeing in your specific markets, you know, in the coming months, I think that would be really well received. But thanks, guys. I really appreciate, as always, the dialogue. Hey, we're happy to give it. And, yeah, I can give you a little bit of, you know, migration information. And, again, you know, similar to prior recessions, you know, where everyone focused on the very short term, which is, you know, recessions happen about every 10 years, about every... 10 years, you know, I was 50, now I'm 60. I make a different decision when I'm 60 than when I'm 50 about where I live and how hard I want to work and various things. And so that's part of it. And so lots of people make changes in their life based on what they're doing and how close they are to retirement and a variety of other things. So I would say a lot of what you're seeing is just the first leg of what always happens about every 10 years and typically around a recessionary period. But in terms of inflow-outflows, it's a little bit different by market. We still, the migration into our markets is still dominated by New York and Boston and even some other California metros. So there's quite a few people moving from San Francisco to Los Angeles, for example, maybe for better weather or whatever. In L.A., the outflow is really Las Vegas, Phoenix, and other California cities. And in San Francisco, it's Seattle, Austin, Sacramento. And Seattle is Phoenix, Boise, Austin in terms of outflow. And, again, all three benefiting from highly skilled workers, you know, probably in a lot of the eastern metros and from some California cities. So hopefully that helps. That's LinkedIn data, but our experience is pretty consistent with that. Thanks, guys.

Thank you. Our next question comes from the line of Amanda Spicer with Bear. Please proceed with your question.

Great. Thanks for taking the question. I want to dig in a little bit more on just the near-term demand you've seen, kind of as you've had occupancy pick up. Do you have a sense of where that demand is coming from? Are you taking share from other properties in the market, or have you really seen renters moving up in quality like you have last cycle?

Well, you know, Angela, I think, put a happy face on it, and I'll let her comment in a minute, but it's a battle out there. So I wouldn't say we're taking it in from anyone. I'd say we're all competing fiercely to – and we all have maybe a little bit different focus, you know. And, again, as we said before, our focus is – Maintain high occupancy. Protect the coupon rent. We'll use concessions when we have to. Try to be aware of what time of year it is and what that battle is going to look like and plan ahead. I think we do a good job of that, but I don't think there's any winners in this current situation, so we are trying to turn the battleship toward a better day, but it's not quite here yet. Obviously, apartments, we look ugly, but it's getting better. We lag. One-year leases cause us to lag, and the all-time high in terms of our achieved leases We'll hit Q1 and Q2, which is why the year-over-year will look so ugly. But things are definitely slowly getting better, and I think we'll see that down the road, as Andrew said, in the second half.

Okay, that makes sense. And then turning to the dispositions you have lined up, can you just provide more color on kind of the profile of those assets, either in terms of age or location, and then as well as the buyer pool and if that buyer pool has changed at all from pre-COVID?

Sure, yeah, this is Adam. Happy to answer. So for those three, they're situated throughout our portfolio. And so there's really no kind of general overview of the type of app that they are. In all three cases, these were actually three exchange buyers. So to say there's one in the area, I'll just use it as an example. It's in a heavily concessioned Bay Area market. And the way we're underwriting it, as you can imagine, it's kind of tough to peg cap rates given where current net effective rents are.

So we're underwriting it based a couple different ways. One is on kind of pre-COVID in-place rents and then looking at current net effective today. On current net effective, that deal, again, this is a heavily concessioned Bay Area market. It's in the low threes, so call it 3-2, something like that.

And on pre-COVID numbers, that's about a 3-8 or so, and so that's the spread. And that was underwritten in the fourth quarter, so concessions have varied before that and since, but that's the ballpark. And there still is... There's enough of a transaction market out there where a market has been set.

The buyers are a little different than during your typical cycle, but there continue to be deals that go down.

I appreciate all that detail. Thanks.

Thank you. Our next question has come from the line of Rich Anderson with SMBC. Please proceed with your question.

Hey, thanks. Good morning, and congrats, everyone, and congrats to John, too, if he's listening.

On the topic of eviction moratoriums, I'm feeling like that could be a messy time when they start to expire. I wonder if you agree. I mean, some people just start paying again, but then perhaps a swath of people say, oh, I've got to leave now because they're making me pay.

Is there a risk that we could see some...

when those things start to, you know, burn off and, you know, we kind of try to get back to some sort of normalcy. Hey, Rich, it's Mike, and maybe Andrew will want to comment as well, but I think Messi was a good way to describe it because I think we're looking, you know, we evaluate it very much the same way. You know, back in when AB 3088, which, again, was supplemented by this SB 91, 3088 was passed in August and required residents to pay, COVID-affected residents to pay at least 25% of their rent by January 31st, and then SB 91 ruled that January 31st date to June. So the 25% is getting larger, and it definitely will add pressure to that whole situation. And I'm definitely not smart enough to figure out how that's all going to play out. We're all hoping that this... Federal stimulus money, you know, we have mostly a B type of portfolio, and so, you know, we don't have any qualification of it whatsoever, but, you know, that would certainly help a lot because, you know, that would potentially pay 80% of unpaid rent, and we would have to walk away from the other 20%. but that's a whole lot better than what we've assumed in terms of our delinquency. So, yeah, I think we're covered in terms of, you know, the normal to kind of probably slightly conservative case scenario, and maybe there's a little bit of upside here given SB91. So that's how I'd answer it. But you're absolutely right. I don't for sure know the answer to it. Okay. And then, you know, you kind of talked about the portfolio sort of characterization, B quality.

I guess I'm a little surprised that the portfolio didn't, you know, do a little bit better. You know, with the disruption going on in the urban core, you would think that your portfolio, you know, being, you know, larger ones removed from those environments might have captured a bit more in terms of flow of residents and it's easy for me to say obviously there's a lot going on in markets but perhaps maybe it's that very characteristic of your portfolio again sort of B quality not necessarily downtown locations that gives you the feeling to say something like cautious optimism I'm wondering if that's a driving factor to some of the optimism that you're kind of trying to say today?

Well, you know, I mean, optimism is... I'm not sure we're... If optimistic is, yeah, it looks like we've hit bottom after being pummeled, then yeah, I guess that's optimistic. But I wouldn't say that. I mean, I think that... As I said in the opening script, and the reason why I put it in there is, hey, we're still at a point where the nation has lost as many jobs as it lost in the financial crisis. And in the financial crisis, our average market rents were down 15%. Seattle was a little worse, about 20%, and Southern California did a little better. So I think we are kind of where we are, where we would expect to be, given the extraordinary number of jobs lost. Now, it's not the same as the financial crisis in that, You've lost these low-end service jobs, and they're mostly in the city servicing at various levels, very wealthy clientele with lots of money. So it's different, but mostly the same. I would say I'm not surprised about where rents have gone in general. I hope for a robust recovery with vaccine distribution and all that stuff because it seems like a lot of this is really focused on COVID direct outcomes. Losing service jobs is because of COVID because those service jobs just aren't there. They're shut down by the government. So I think they'll come back pretty quickly because I think people do want to want to, you know, go out to eat dinner and that type of stuff. And so I think it's going to come back, and I hope so, obviously. Okay. And just real quick, on the delinquencies, you know, kind of just taking a reserve against all the 45-cent hits to this year, I mean, when you really look at that, what's your experience in terms of them, you know, actually not –

deserving the bad debt tag, and they actually become collectible. Is it 50% in past cycles, or is it hard to say because this one is so different?

Yeah, this is Barb. This cycle is very different than any other cycle. Even during the financial crisis, our delinquency was only 50 to 60 basis points of scheduled rent. So being at 2.7%, which has really been the last couple quarters, it's Obviously, a lot higher. I think in the fourth quarter, you know, we did take, we reserved against all of it, and that was really due to the environment. We were in a severe lockdown state for most of the quarter and into January, not really knowing when any of that was going to lift. We decided to take a pause. And we'll reassess in Q1 and see where things are at as that goes. And then the 45 cents that I alluded to in my script, that's really compared to our historical run rate. So, you know, for the foreseeable future, we do expect delinquency to remain elevated. This eviction protection moratorium, SB91, goes until June. And then we don't know what's going to happen after that. So we have assumed. that we don't make a lot of progress on the delinquency. It's not because we can't collect. It's a combination of both. People not paying and collections kind of are getting us to that, you know, mid-2% range of scheduled rent.

Thank you. Our next questions come from the line of Rich Hightower with Ed Reporter ISI. Please proceed with your questions.

Good morning out there, guys. Just a quick one from me. We've covered a lot of ground. But just on this disconnect between, you know, reported same store and FFO given the, you know, the cash concession, accounting treatment versus GAAP with respect to revenue and FFO. So if we, you know, if we sort of assume the concessions, heavy concessions shut down, you know, on June 30th, let's say, which I think is sort of implied in the outlook. You know, help us understand the cadence thereafter, you know, when you would sort of stop seeing that disconnect between the two series, just as we think about modeling that, you know, into 2022, it sounds like.

Well, I don't have 2022 guidance at this point, but in the back half of the year, we do expect concessions to moderate, not to abate completely, but to moderate. And that's where you'll see it will benefit same-store revenue growth, but the offset will be on core FFO growth, given that we'll have to amortize the straight line of concessions. that will mute our core FFO growth relative to the same property growth that you'll see. And we expect that to happen in the last two quarters of this year. And then, you know, 2022 is not something I can give at this time.

Yeah, right. Thanks, Barb. I guess that part of it for, you know, while the concessions are still heaviest, but I mean, is there a way to walk through, you know, the timing, you know, assuming a 12-month lease or something like that that would say, okay, by this point in 2022, you would see you know, same store and FFO converge or correlate, you know, more in the way they have historically? Is there a way to frame that out, or is it just sort of reaching too far at this point?

Yeah, Rich, this is Mike. Let me add something here, and, you know, Angela's in the middle of this, so she can comment, too, but it's more like a battle every day because we are constantly increasing or pulling back concessions changing rent levels, trying to find the optimum for net effective rents. And so it's impossible to model that. And so I'd say, you know, trust us to do a good job of trying to figure that out. We have people that are, you know, spending very... I'd say senior people that are spending a lot of time in the trenches, pricing units, every month is a little bit different, as you can imagine. Supply and demand changes on a daily basis, and we just can't tell you what's going to happen. We can't tell you. Our guidance is based on something, but the reality is... We can't tell you that that exactly is going to happen. And the mix of concession and rent differential, it could change. And this is, you know, I've been here for a really long time. Many of you probably say too long. But it's unlike any other period I've seen. And as a result, it's very difficult to be too granular with respect to answering these questions.

Thank you. Our next questions come from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.

Oh, hey, good morning out there. First, we'll continue the congrats. So, Angela and Barb, Mazel Tov, as we say here in New York, on your new rules. It's wonderful. But, Mike, to the point of CEO succession planning, I mean, obviously, we saw Avalon Bay do it. You guys did it a number of years ago. When Keith handed the reins over to you, it did seem from the outside that John was being groomed. Maybe that wasn't the case. But again, on the outside, that's what it looked like. So can you just talk a little bit about, you know, CEO succession? Does this impact anything? Does it not? And, you know... just any other impact that may come of this, or maybe this opens up spots in the senior ranks to allow you to groom more people to raise the more senior roles at Essex.

Yeah, Alex, thanks for the question. It's a good one, really important. You know, we take succession planning super seriously. I am really pleased that I have, you know, three very, very capable executives around me, and I think, you know, even beyond them, we have a pretty deep bench. And, you know, you're right, I was somewhat surprised. When John contacted me late third quarter, early fourth quarter about sort of a change of plans involving him, and, you know, I asked him to reconsider and, you know, we all need to live our lives and make decisions. And so we decided on the course, and it probably took too long to – come to agreement about what his role was going to be going forward. We ended up with the press release after Christmas. It could have been much earlier. It just took time to, you know, finalize what that was going to look like. So I apologize for the optics of it. Having said that, you know, John is always in our minds and our hearts, and he's forever a part of the company, and, you know, certainly we wish him well. He's done a tremendous amount of good So as we think about succession planning, you know, the basic philosophy is, you know, the doors to or the paths to the CEO job are always open. And, you know, the historical path has been mostly through finance. I came through finance and then ran ops and then up. But, you know, we want other paths to be open, too, including, you know, maybe through operations or through investments. So wherever we see talented people, it's one of my primary jobs to keep those paths open and don't let them be blocked by people that don't have interest in being CEO. That's kind of the key to the whole thing. And then backing off of that, looking at the people below and making sure that they have diverse experiences in a group around the organization. And, you know, in the case of Barb, Angela, John, all of them wore a variety of hats on their way to, you know, up the organization. So we expect to continue to do that. And I think that's the way it has to be in order to have, you know, a proper succession process.

Okay, and then the second question is, one of the hallmarks of Essex has been, you know, investing when there's abnormalities in the market. And, Mike, you mentioned something interesting that in these suburbs, the rent affordability index was at, you know, perhaps the all-time high or definitely below. whereas the urban areas are, you know, below the average, more affordable. However, you guys have sold out of the urban areas and been more suburban. So does this make you want to switch and now, you know, sell more suburban, get back into the urban? Or are there other dynamics at work where, you know, with this pricing affordability imbalance, you wouldn't do what maybe you would have historically done, you know, prior to the pandemic? Yeah.

Maybe I'll have Adam comment on that, and then I'll fill in when he's done, because he looks at this stuff in a lot of detail. And, you know, I give him a lot of credit because he's out there transacting when no one else is. And, you know, some of the transactions he's done, you know, we're so close to the pre-COVID period, and I think it's – it's pretty exceptional what we've been able to accomplish. So, Adam, do you want to comment on that? Sure, yeah. And, Alex, hopefully this is the gist of what you're looking for. We're always – we're looking at all of our markets at all times. And so during this recent – during COVID period, we've been primarily sellers. And most of those we've sold in the CBDs. And – We've done that for a variety of reasons, and that dates back to, you know, we sold 8th & Hope in downtown L.A., sold Masso in San Francisco prior to COVID. And pricing on those deals was significantly above what our in-place NAV was at the time. And so we felt at the time the right decision to make from an arbitrage standpoint was sell those and reinvest in either our existing portfolio, buyback stock,

or in other assets in suburban locations.

The really heavily impacted CBD locations, quality of life, especially say in downtown LA, in Soma, in San Francisco, has been challenging and will likely continue to be challenging here for the foreseeable future. Many of the, what we consider, what we call suburbs are

are very densely populated suburbs and that's where we see opportunity and that's where we see much of the market coming back sooner rather than later. So, like I said, we're constantly assessing where we are and if there are opportunities in CBD where we can buy at a good basis and we see significant rent growth, we'll do that. But, yeah, I mean, like I said, we've been net sellers here and we've sold... All the deals that we've sold last year and then into this year have been within 2% of our pre-COVID NAV, some above, some slightly below.

So that's been the right philosophy and the right strategy, and we'll assess as we go along. Mike? I think it says it well. You know, Alex, maybe I'll add one more thing just real briefly. You know, the walk score issue is pretty interesting to me because, you know, the areas with the best rent growth have the worst walk score. And then in the CBDs and some of the places that have the best walk score have been hammered in terms of rent. So everyone needs to ask themselves a question. Will walk score ever matter again? And my view is it will. And it will be nuanced, and, you know, it may not be the highest walks or the best rents, but, you know, I just have a belief that having a nice location, low crime, pleasant surroundings, lots of entertainment and food options, et cetera, is going to continue to be important. And those are in sort of the high-quality suburbs that Adam just referred to.

Our next questions come from the line of Zach Silverberg with Mizuho. Please proceed with your questions.

Hi, good morning out there. Just a quick one for me. Just to follow up on the earlier one, in your supplementary when you were preparing remarks, you talked about the VC investments and job postings and ethics market. Maybe can you give a little historical context around that? Is there a specific correlation that you're looking for on bag time or how do you sort of quantify this momentum in terms of lease up or lease rates? Yeah, this is Mike.

I have the experience of living through the dot-com bubble and then bust. And I would say that what I see relative to that is not even close. During the dot-com bubble period, rent surged about 40% in 2008. years, it set our all-time high in terms of rent-to-income level, so rents being a very high percentage of income level. And contrast that to what I said earlier, which is rents appear very affordable. San Francisco real rents down somewhere around 20%. Northern California in general is about 7% below our long-term average of rent to income in terms of affordability. If I take a look at that number and compare it to the financial crisis, I think we got to about 90% of the long-term average. So now in California, we're at 93%. So it's starting to feel pretty affordable. Again, these are areas that support high income, you know, high jobs, high paying jobs, et cetera. And the rent levels are now at a point where I doubt that the tech companies are going to bat an eye all that much at the cost of living because, you know, affordability has changed pretty dramatically overnight. I can change back. You know, it doesn't take... That many new apartment units of demand come in and take 96% occupancy to 97%, and then it's a whole different game. But that's the way that we look at it. We've said the band between the rental income, the band between 90% and 110% is kind of the green zone that we do well in. And in the markets that have been the hardest hit, We are closer to the 90% of the long-term historical average. And, again, in Ventura, we're above the 110. So it will change the choices that renters make, I believe. Gotcha.

I appreciate the color. I just have one quick follow-up. In your guidance, you're not really guiding for any development. Can you maybe just comment if there is any future opportunity that you guys are looking at, anything that right now you guys just sort of haven't contemplated in guidance, any color there?

Yeah, Zach, this is Adam. We're constantly looking at different development opportunities, and we do get exposed to quite a few through our press pipeline as well, and they kind of can both feed off of each other. We have a couple of deals right now where we're looking at fairly seriously in pre-development stages where we're spending minimal pursuit dollars. We actually did, we walked away from a pre-development deal last year, but there continues to be some potential there as well. So we're looking for unique opportunities. Development yields right now aren't generally speaking, but these two or three that we're looking at, one's a really well-located, high-quality-of-life suburban location. One is a really good job center, TOD, and then the other one is also a very good job situation with some existing income.

looking at everything, and, you know, one or two might set the tone.

Thank you. Our next question has come from the line of Neil Malkin with Capital One Securities. Please proceed with your question. Thank you.

Good morning, everyone.

Two questions, one for Mike, one for Adam, and also congratulations, Angela and Barb, as well. The first, you know, looking at the sort of recovery that you guys are sort of talking about, you know, starting in the second half, I guess I just want to kind of understand what you think that looks like in terms of the timeline to get back to like, I guess, quote, unquote, covered. I ask because you look at your main, you know, ethics markets, about 1.1 million jobs have been lost in 2020. and you're assuming like 3.4% or around 400,000 jobs. So, you know, a little under three years of that kind of growth would be needed to get back to a level commensurate with pre-COVID. So, you know, just based on those things, you know, Mike, how do you guys see that sort of, you know, quote-unquote recovery? I understand the comps in the second half of this year are going to be very easy. But, you know, after that, you know, what do you guys kind of think about when we're at, you know, again, like pre-COVID type pricing?

Yeah, that's a great question. Well, you know, for example, you know, based on the job losses in San Francisco, we should be a lot lower occupied than we really are. And so what happens during a recession is people move closer into the better areas. You know, plenty of people will say, hey, you know, I would live in San Francisco, but the rents are too high. And so they live, you know, within the... proximity around San Francisco and commute in. And then once this happens, they make a different choice. And they say, hey, with those rents, there's a backfilling approach. And so I would agree with you. What happens, you know, the natural consequence of that is obviously there's another way beyond that and another way beyond that. And somewhere out there on the hinterlands and the very periphery, The Bay Area, you have areas that are not 95% occupied. They might be 80% occupied because people make different choices, you know, based on pricing. And, again, this has been one of the absolutes in my career and why we harp on this rent-to-income ratio as being so important. So, you know... The number of people who moved out of San Francisco has been backfilled largely by people that have moved in from, let's say, Oakland or further out and want to live in the city. And then this backfilling process is ongoing. So here we are at 96%, having lost all those jobs that you just mentioned. And so the question is, when those jobs come back, how does this – How does this reverse itself? And, you know, some of these people will be happy to live in the city for a year, and then maybe it will be priced out of the city and will be moved into, you know, one of these secondary markets. So you're absolutely right. And, again, we price it. This is part of why we price things to keep occupancy high, because if we keep occupancy high, We'll draw people out of the, let's say, the less desirable suburbs and wait for demand to come back, and that is our way of maximizing revenue during the recessionary periods.

I totally appreciate that strategy. I think it's the right one. I guess I'm just trying to get at, like, I totally, you know, it's great that you have, you know, 96 above occupancy, but the market rents are still, you know, terrible. So... Yeah, I guess, I mean, by, like, 2022, I don't know, I'm just saying, like, 2023, are you back? I'm just trying to, you know, kind of assess, you know, what that looks like for the portfolio. I don't know if you can't get that or that's hard. I apologize. Yeah.

No, you're spot on. Unfortunately, we won't be able to be all that specific about this. I would tell you that part of the reason why we do what we do is because concessions can abate pretty quickly. And I can't tell you how quickly and I can't tell you how many jobs it's going to take in order for that to happen, but I can tell you that... That is typically what happens, that concessions as quickly as they came, they can go away just as quickly. We're going to have the overhang from the straight line rent issue, which is a different factor. But our hope is that we get enough. you know, those tech companies continue to hire people, you know, decide to live somewhere close to the major urban centers where most of the job locations are. And, again, it just doesn't take that much. But how long will it take to get back to where we were? I mean, it's a battleship, and it's going to take a year or two at least to get back there is what I would guess. I mean, the trajectory, as you point out, you know, we lost – a whole lot of jobs in the nation and we've gotten some of them back, but we're still gonna have a shortfall and we're delivering some apartment units. I'd argue that the single family component is so muted And a lot of markets have, you know, a lot more single-family as a percentage of total stock, housing stock, than we do. And, you know, that at around, I think it's like 0.3% production level will help a lot. And so I think, you know, I would guess that as the restaurants open up, we're going to see a surge of people coming back into the cities in these service jobs, and concessions are going to abate pretty quickly. That's what I think would happen, and there will be updating as quarters go by, but it's hard to tell exactly when this is all going to happen.

Thank you. Our next question has come from the line of Austin Worshman with KeyBank Capital Markets. Please proceed with your questions.

Thanks, guys. Appreciate you keeping this going.

So, and also, you know, a lot of great detail in the release on jobs posting and some of the macro forecasts, despite all of this uncertainty.

You know, your response to a question on, you know, migration patterns, that some people left aren't coming back, you know, certainly seems to be the case.

But, you know, how are you contemplating or does your guidance explain account for, you know, the portion of residents that didn't lose their jobs or even students that temporarily left your market or campuses, you know, in these markets?

It really doesn't. I mean, you know, we assume that there's sort of a tailwind, a demographic tailwind, in that, you know, people live longer and, you know, they retired about the same time that they used to retire, so that lower retirements. People who live longer, you know, consume houses without consuming jobs. And so there's sort of a presumption that that is a demographic tailwind that's going to be with us as long as people live longer. In terms of being more granular than that, you know, we're really not. And, you know, we know those people are out there. There's lots of contractors and, you know, that – So I don't have that data. That was something that John used to focus on a lot. But a lot of contract workers that left amid COVID and, you know, connected with both the entertainment industry and the tech industry. How many of those come back remains a question, too. So, you know, I... I view it as when uncertainty unfolds, everyone kind of pulls in. Companies become less aggressive at hiring. We saw that. We saw the drop off of tech jobs by the top 10 employers there. And all the contract workers go home. If there's, you know, a little bit of a bright spot here, the Trump administration was pretty negative on H-1B visas. That will probably open up a bit, and immigration might open up a bit here, which I think will help somewhat. But, you know, we don't try to get more granular, you know, other than to look at the supply-demand ratio really represented by drought and job deaths, probably 80% of the total picture or something like that. Well, that's helpful. I appreciate the thoughts there.

And then, you know, Barb, I think you mentioned kind of concessions run high in the first half of the year, but I was wondering if you could put a finer point on that.

Do you expect the net effective pricing that you provided in the release this quarter, do you expect the pricing you achieved in 4Q in the early part of the year, that that reverses?

because we don't see the demand come back until, you know, maybe later in the year, or does it kind of hold around current levels and then improve, you know, in the back half of the year?

Are you referring to S16, the new and renewal, when you talk about net effective pricing?

Yeah, correct. I think you were doing gross before and, you know, provided some net effective data this quarter.

I think Angela can talk about pricing. But, yes, in the guidance, we do assume concessions remain relatively consistent with Q4 for the first half of the year and then moderate in the second half of the year.

Yeah, and that's a good question. It's Angela here. On the pricing, I think, you know, the way we think of it is that Mike talked about market rents troughing. you know, kind of currently, fourth quarter or December, January. And I talked about schedule rent troughing in the second quarter because I was looking at year over year. And so there's a couple of different factors, which may be a little confusing. So as far as pricing is concerned, we currently do see, you know, a lump. what we reported in January to hold. Keep in mind, this is also, you know, towards a lower peaking season. So as we progress and, you know, as the economy continues to improve and roll back, That's why we talked about second quarter, I'm sorry, second half is a little better. But it's hard to talk about it kind of month to month. I think right now we're in a good position because we had employed the strategy of higher occupancy, which allows us to reduce our concessions. And so we're able to continue to do that. And that's what we're targeting for our guidance for the year.

Thank you. Our next question has come from the line of Nick Yelico with Scotiabank. Please proceed with your questions.

Hi, guys. This is Timothy here for Nick. And I apologize. I know we all ask the same questions differently, but I just want to sort of understand how you guys look at this problem. 2020 wasn't a normal year for leasing. The cadence actually changed. Most of your occupancy gain happened in Q3. And in Q3, I thought, looking at the month-to-month stuff, July was the peak year, sort of occupancy burst, and then a little bit, sort of 50-50% split in August, September. You also offered more concessions in the Labor Day period. So I guess if everything, you know, the concessions aside, vaccine aside, everything is sort of, if you look at it from a normal lease expiration schedule perspective, things are weighted toward Q3. How does that sort of reset to a more normal kind of cadence of turnover and leasing, unless, you know, you invite in shorter leases? I'm just inquisitive on that.

This is Angela here. I think you're asking about the cadence of our leasing season. And if that's the case, if that is your question, we would expect that cadence itself for 2021 to be somewhat similar to prior years. And so we would expect, you know, depending on our markets, for the most part, they start peaking, say, around June, and then Seattle peaks later, say, closer to July. And that's during those times we tend to have the least amount of concessions, but because our lease is also, more leases turn during that time, we would probably end up with slightly lower occupancy just by the way the numbers work. So that kind of gives you the trajectory in terms of our business. But, you know, the reason we're talking about When things trough and the year-over-year are comparable because that does impact what happens for the whole year. And that behaves differently because of COVID last year. Well, because second half of 2020, I'm sorry, first half of 2020 was much better than second half. And so you kind of have that flip effect. in terms of theory of growth, where first half of 2021 will be much harder and second half will be easier.

Got it. Okay. Yeah, yeah. A little more clarity on the cadence is what I wanted to hear, so thank you. And in terms of, like, when we look at your macroeconomic forecast, you know, kudos to Mr. Paul Morgan and team, I guess. It appears that not only California has the highest job growth of 3.4%, but the lowest rent growth of minus 3.6%. So there's a lag. I assume that the lag is related to the hyper-concession activity we saw in 2021 and 2020, and so you're sort of building back from there. But I'm also wondering whether you guys have any sort of factors or discounts for jobs that are created by companies domiciled in California. but have offered the employees the flexibility to work from anywhere. So, you know, is that factoring into your kind of negative 1.9% rent growth forecast, effective rent growth forecast?

Let me comment on the minus 1.9. So what that represents is each month, year over year, what the effective rent differential is year over year. So, again, if you look at January of this year, the prior year rents were going up. and obviously we've had a big decline in current rents. So you start with a large negative number in January year over year, and then as you go through the year, those lines are going to cross because we're going to end up with a lot easier comps in the second half of the year. And so it really is the trajectory of rents year over year. So it's going to start with a big negative in January, and then it's going to go to a, you know, mid-single-digit positive by the end of the year. And averaging all that out, so January over January, February over February, projected market rents, average all that out to minus 1.9. So it's not intended to be because of concessions. It's really because we've had – we start the year – again, the prior year rents were all-time highs. rents have rolled down a lot, so we start in a hole for the first half of this year, and then we start hitting much easier comps as we get into July, August, September, and then our year over year will be positive. When you average all that together, month by month, you get minus 1.9%. Does that make sense?

Yep. Got it. And then as far as your job growth forecast, as being a driver of that model, does that factor in any work from home flexibility versus, let's say, a model that you built in early 2020?

You know, I didn't ask Paul that question specifically. But he's a very thoughtful guy, and he's well aware and very concerned, as well are about this work from home scenario. But, again, our base case scenario is that people will have greater flexibility working from home. But, again, as a CEO of a company, you know, being able to have this team dynamic where we're trying to accomplish, you know, there's so many pieces. through this organization all have to act in unison, you've got to know the people. And so that's what really makes us believe that, you know, this hybrid model where greater flexibility of work from home, but people that are going to be in proximity, you know, unlikely to be far, far away from the office because they're going to have to report from time to time, let's say, you know, we think that that is probably what's going to happen for, you know, for a lot of workers. Again, and I'm excluding all the workers that have to show up, which I think was estimated at about 60%, you know, including, you know, for example, all of our property teams, you know, anyone that works at a restaurant, et cetera. There's a lot of jobs. There's no work from home flexibility. There is no such thing. And I think that the, you know, if you read a lot of these, you know, you know, reports and news clippings on this subject, they kind of forget about those people. And so, you know, I think it's going to, again, we will have more work from home flexibility. So maybe the city centers are a little bit less desirable, even though that's where the great restaurants are going to continue to be and that's where the tourism is going and all those other things. But maybe the suburbs do a little bit better in that scenario.

Thank you. Our next question has come from the line of John Falowski with Green Street Advisors. Please proceed with your questions.

Great. Thanks for taking my question.

Angela, just a few questions for you on your Northern California portfolio.

So I'm just curious your thoughts on the quality of occupancy heading into spring and summer leasing when a lot of leases are that were given one to two months free come and expire. Are you assuming occupancy, meaningful occupancy slippage in the peak leasing season in Northern California?

Yeah, that's a good question. At this point, not likely because the occupancy shortage that we've seen last year has, you know, that we're driven by, say, the consultants which didn't come or people who lost their job. They already lost their job. They're not going to lose their job. And so Northern California already is sitting at one of our lower occupancy levels. And so I don't, you know, we don't expect significant further deterioration from that. We have been able to build occupancy there, and so that's a good sign. And so I expect that we will continue to do that.

Yeah, but 96.5% is well north of market occupancy, and so there's a lot of private competitors that have an eight-handle in occupancy, so it remains concessionary.

I know a lot of the pain is out of the system, but is there any kind of reset in occupancy in your portfolio coming up?

I don't see that, but keep in mind, you know, some of the major pain points relate to CBD, where you have a lot more supply, and we don't have as much in the CBDs. And so while it's still going to be competitive out there, you know, so I'm not dismissing that, I just don't see further meaningful occupancy deterioration for our portfolio.

Okay. And then on the rent side, can you share what you think doing the leases right now in the Northern California portfolio, if you include concessions? You're making me cry, John.

It's not a pretty number, I can tell you that. So in January, where? Oh, I don't have a January number. I have a February.

So gain-to-lease for Northern California as a whole is about 80%. But I do want to also give a little context, right? Because while loss-to-lease is an important metric, during seasonally low or slow periods, like in the first quarter or in the fourth quarter, and market rent has much higher volatility, so it negatively impacts this metric. It's just not as meaningful. It's not something we would want to have happen, which is why whenever people ask us, we always point them because it's not too hot, not too cold. You know, this number isn't great, but typically during this time, this number isn't great. Obviously, it's a larger magnitude, but there is a lot of volatility. And, you know, smaller number releases turn during this time, so that magnifies that volatility.

And let me add a little color, John. So overall, it's about 4.6 on the portfolio. And typically, there is a gain to lose almost every December, you know, more like in the 2% range. So, again, you're picking the worst part. Bad boy for that. You're picking the worst part of the portfolio. And so I wanted to give you that broader context so that, you know, It was taken with a little bit of a broader view of what that looks like.

Thank you. Our next question has come from the line of Dennis McGill with Xelmit. Please proceed with your questions.

Hi, this is Alex Gellman for Dennis. We talked a lot about migration, but curious, If you guys know where the tenants that have come, where they're coming from, like their previous living situation, so are there a lot of apartment to apartment moves or have you also seen some pickup in potentially younger adults living with parents backing back to apartment situations?

That's a very good question, and I don't have the data I wish I had on that. You know, we noted, I think, last quarter that the number of adults living at home was something like 100-year hypo. So there's obviously a lot of people out there that work from home flexibility, et cetera, and I'm pretty sure that that will uncouple itself in due course. So most of us don't want to live with our parents forever. But I'm sure that that's a piece of it. I don't have the sense that really hiring is picked up quite yet, but typically what happens is the new year, comes with new budgets and new business plans and, you know, things get going really after Super Bowl Sunday and then we'll have a much better sense probably in a quarter about what's happening. And, you know, one of the key ones, you know, how many adults are living at home with a parent, you know, recent college graduates, for example, that have work-from-home flexibility and can work from home, save some money, that's one piece. But there are other pieces, the contract employees coming back, which are, you know, big-time part of the high-tech industry, H-1BVs, those people that were, you know, forced to go home, you know, because of COVID and, you know, potentially can come back. So there are a number of possible pieces of demand that are out there that we can see coming back. I just don't have a way to monitor them or follow them. Okay.

Thank you for the caller. And just hitting on that last point you mentioned on the H-1B visas, and forgive me if you talked about this earlier, given the overlapping calls today, but is the new administration's potentially more immigration-friendly policy, do you see any benefit there? Have you seen any benefits so far, and are you expecting any job growth or movement from those changing policies? I do.

I'd say the Trump administration was very tough on the foreign workers coming into the U.S. A lot of the technology jobs and a lot of the technology CEOs have indicated that they need to draw the best and brightest from around the world and that it's good for America. for that to happen. Some of the policies that the Trump administration followed were not giving work visas to the spouses of foreign workers and just in general not accommodating them you know, making the renewal process, you know, more challenging. They also tried to make actually the process more fair as well, so it's not all negative. But I would expect by the administration, I think I saw something recently. I don't have anything that I pulled for the call, but I think I saw something recently that they will open up in addition to, you know, not building any more walls, et cetera, that they're They will open up the immigration process to foreign workers, which would mean, you know, a lot of workers went home because their spouse couldn't work or they didn't have another occupation. So it changed the dynamic of that program. So I do look for, I do think that that will be a positive, you know, whether it's a material positive remains to be seen.

Thank you. Our next question has come from the line of John Kent with BMO Capital Markets. Please proceed with your questions. Thank you.

Is it your understanding that tech companies are going to follow people's lead and not require employees to return until September? I'm just wondering what's your assumption and guidance as far as the timing of workers returning to your office?

It's a good question. We're not making any assumptions about that, and that remains one of the unknowns. You know, all the COVID-related items, I guess, remain unknown. Again, our core belief is that for the employees to come back to the office. They've been a whole series of pushing back the office dates, allowing workers, you know, being concerned about, in the Google's case, being concerned about making sure their workers have enough flexibility to plan their lives and lease an apartment, for example, somewhere else that they wanted to. One of the big tech companies, I don't remember which one, asked all of their employees to come back into the current country, into the U.S. That was a good, positive start and a step toward normalization. But again, you know, There's no basic assumption that we've made with respect to that. We're just assuming that with virus, with vaccine distribution, that the world will become much more normal as we approach herd immunity. And as soon as that happens, you know, most of these companies will come back to work at the office.

Okay, and Angela, in your prepared remarks about an hour ago, you mentioned the strength of the life science office market.

I'm just wondering if there's an opportunity to focus more in some of the biotech clusters that you operate in.

I think that's an Adam question.

There are a few markets that we've targeted on the development side and investment side that are heavily driven by life sciences and biotech. So absolutely, we see that as a continued driver to the economy.

It continues to grow. Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

Thank you, operator. And thanks, everyone, for joining the call today. We look forward to participating in the city conference coming up in about a month, and hopefully we will meet with many of you there remotely. But I also hope that sometime in the not-distant future we can meet once again in person. Have a nice day. Again, thank you for joining the call.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.