Essex Property Trust, Inc.

for the remainder of the year, including factors that lead us to believe that 2021 will be a year of recovery from the pandemic, and then conclude with an overview of the transaction market. I'm pleased to note that Essex was founded 50 years ago in 1971 by our chairman, George Marcus, and we are very proud of all the company has accomplished. George remains keenly focused on the company's mission, strategy, and business plan execution. I also want to recognize the extraordinary effort of the Essex team, which has allowed us to emerge from the pandemic in a position of strength and ready to seek opportunity that often comes from associated uncertainty. The board and senior leadership team greatly appreciate this collaborative effort. Finally, the company's commitment to the balance sheet's strength and a growing dividend was reaffirmed with our recent announcement of our 27th consecutive annual dividend increase. Turning to our first quarter results, severe lockdowns in California and Washington remained a headwind in the quarter after intensifying last November amid a surge in COVID cases and hospitalizations that has only recently abated. are very strong results in the first quarter of 2020 and a plethora of pandemic related regulations and associated job loss were significant impediments to the company's performance this past year. As reflected in this quarter's results with same property revenues and core FFO down 8.1% and 11.8% respectively compared to a year ago. On a sequential basis, same property revenues improved by 10 basis points driven by growth in several suburban areas, and particularly in San Diego, Orange, and Ventura counties of Southern California. As noted in our earnings release, we reaffirmed our full year 2021 guidance ranges, and we continue to expect improvements in same property revenue growth driven by job growth and easier year-over-year comparisons. apartment demand continues to be strongest in properties farthest from the urban centers and weakest in the cities both being a function of new apartment supply and pandemic related job losses on a trailing three-month basis as of march 2021 year-over-year job losses were 9.2 percent and 5.4 percent respectively for the essex markets and the nation marking significant progress compared to the 14% decline we saw in the Essex market shortly after the onset of the pandemic, and also suggesting that our markets remain early in the recovery process. Fortunately, the recovery of jobs appears to be accelerating as reflected in preliminary job losses for the month of March 2021, which were down 7.9% for the Essex markets and 4.4% for the nation. On a sequential basis, California and Washington outpaced the nation in March, gaining nearly 150,000 jobs, representing over 16% of the U.S. job growth with less than 13% of the employment base. As we suggested several quarters ago, we expect rents to recover on the West Coast as we recapture pandemic-related job losses that were directly impacted by shelter-in-place orders including hospitality and service sectors, entertainment, including filming and video production, and tech jobs that were displaced to remote locations. Hospitality and service jobs were disproportionately concentrated in the urban areas and wealthy suburbs. For the nation, jobs in hospitality and other services have recovered about two-thirds of their post-COVID job losses. By comparison to date, Essex metros have recovered less than one-third of these losses. Given the widespread recent reopening of California cities, these service sectors are again growing and their potential upside represents a promising differentiator for Essex markets over the next several quarters. Film and video production was disrupted once again by the COVID shutdowns over the winter months, followed more recently by a surge in film permit applications. Overall production activity remains below normal for this time of year, however, data released last week from from film la highlighted a 45% month over month increase in film permit applications for March. As the industry benefited from the recent relaxation of stay at home measures in Los Angeles county. We expect the rebound in production to continue this year due to pent-up demand for content that has been disrupted due to COVID-19. This recovery should provide a positive tailwind for the industry and for rental demand in the LA market. We are also pleased that many of the top tech companies have announced return to office plans, supporting our belief that the hybrid model for offices will prevail, with most employees spending a significant amount of time in the office for team building, collaboration, career advancement, and related necessities. The largest tech employers in our market had significantly reduced their hiring plans early in the pandemic, while also allowing many of their employees to work from home. With the cities largely shut down, many tech workers moved to suburban or rural locations or back home with their parents. This trend began to reverse late last year, and we expect to see further momentum in the coming quarters as more tech employers reopen their offices. As before, we tracked the announcements of the largest tech companies, and we have provided a timeline of planned office reopenings based on public disclosures on slide S17.1 of our supplemental. We also provide a graph indicating the strong recovery in job postings for the top 10 tech companies with open positions in the Essex markets now above pre-COVID levels. We also track the job locations for open positions, noting that about 57% of their U.S. job postings list California or Washington as the office location. As of last week, California and Washington have dispensed at least the first dose of the COVID-19 vaccine to approximately 47% and 45% of their adult populations, respectively. Overall, accelerating vaccine deployment and pent-up demand for services gives us confidence that we are now on a solid path to recovery. California's counties have begun to remove restrictions on commerce, and Governor Newsom recently announced that California is expected to effectively reopen on June 15, including key indoor and outdoor activities such as conventions and sporting events. These plans are subject to several protective measures tied to continued low hospitalization rates and sufficient vaccine supplies. On the supply outlook, total housing permits, both single and multifamily, in our West Coast markets have declined 9.2% on a trailing 12-month basis compared to the national average increase of 6.4%. The national increase in permits is being driven by a 13.9% increase in single-family housing permits, mostly in markets with low barriers to entry and rising home prices. In California, the median price of the single-family home increased 12.4% year-over-year as of February. Normally, one would assume that higher home values would lead to increased production. However, single-family permits in the Essex markets are down 7.7%. which we attribute to a challenging regulatory environment and limited land availability, ultimately leading to fewer deliveries in late 22 and 2023. With large increases in foresale housing prices, down payments have increased, and the transition from a renter to homeownership has become more challenging. At the same time, the combination of lower rents from the pandemic and higher average incomes in the Essex markets has improved apartment rental affordability. We have seen these forces in previous recoveries, and they often result in periods of higher than average rent growth. Turning to the transaction market, we successfully sold three apartment communities in the first quarter for $275 million at values that were similar to the pre-COVID period when our consensus NAV was almost $300 per share. As a result, we used property sales proceeds to fund preferred equity investments and repurchase common stock. both accretive to per share core FFO and offsetting a portion of COVID-related NOI declines. The strong rebound in REIT valuations over the past six months makes stock buybacks less attractive today, and we are now looking for undervalued or mismanaged property in our core markets to grow externally. There were relatively few property sales during the pandemic and most were completed by highly motivated buyers using 1031 exchange proceeds and other sources of attractively priced capital. Several of our suburban markets have rent levels that have increased on a year-over-year basis and recent transactions have priced in the high 3% cap rate range. In the hard-hit cities, buyers appear to be looking beyond the COVID impacts with apartments selling near a 4% cap rate using pre-COVID rents and NOI, roughly equivalent to a cap rate in the low 3% range based on current rent. Strong apartment values have led to a greater level of redemptions in our preferred equity portfolio, the impact of which Barb will discuss in a moment. As conditions normalize, we are starting to see more properties being listed for sale. The unprecedented changes and uncertainty experienced during the pandemic will likely lead to a robust apartment transaction market as property owners adjust their strategies going forward. I will now turn the call over to our COO, Angela Kleiman.

Thanks, Mike. First, a special recognition to the Essex operating team for their continued focus on delivering solid results under these extraordinary conditions. Thank you for your efforts. As for my comments, I will focus the discussion on our first quarter results and current market dynamics. In general, our markets continue to improve as the economy gradually reopens with the vaccine rollouts, easing of COVID restrictions, and the recent announcements for a phased or partial office reopening by the major employers, which has contributed to job growth. Our goal amidst the pandemic was to focus on maintaining occupancy and managing scheduled rent, which will position us favorably for revenue growth in the future. Accordingly, we adjusted our concession strategy to match the improvements in demand, which has enabled our same property revenues to perform slightly better than our expectations. We have been successful with this strategy and as a result, we maintain occupancy with schedule rents decline representing only 3.2% of the 8.1% total revenue decline for the quarter. You may recall the underlying fundamentals in the first quarter of last year consisted of a strong economic backdrop prior to the COVID pandemic. In fact, our first quarter year-over-year same property revenue growth back then was 3.2%, with revenue levels at historical highs throughout the entire portfolio. The strength of first quarter last year created a more difficult year-over-year comparable, which is also the reason why our new lease rate declined by 9.7% in the first quarter, as shown on the S-16, compared to the fourth quarter, where the new lease rate declined by 8.9%. Consistent with the discussion on our last earnings call, the year-over-year decline in our major markets was primarily attributed to combination of job losses from the pandemic, particularly impacting urban CBDs, which also had a greater concentration of supply deliveries. Here are a few key highlights of the first quarter year-over-year performance by market. In Seattle, The 7% revenue decline was primarily driven by Seattle CBD down 15.7%, whereas the remaining submarkets averaged a 5.2% decline. In Northern California, the 10.9% revenue decline was led by CBD San Francisco and Oakland and San Mateo, averaging a 15.9% decline, contrasted with a 5% decline in Contra Costa County. In Southern California, the 5.8% revenue decline continues to be primarily driven by LACBD and West LA, which were down by an average of 13%, while our suburban Southern California submarkets of Ventura, Orange County, and San Diego averaged a 2.1% decline. As you can see, our suburban portfolio continues to significantly outperform the urban markets. On the other hand, there are signs of improvement in our tech-centric urban markets. For example, first quarter sequential financial occupancies in San Francisco and Seattle CBD increased by 2.7% and 4.2%, respectively. In addition, the sequential quarterly turnover rates declined at an average of 5.4% in these markets. We continue to anticipate that the urban CBD markets, particularly in downtown Seattle, Oakland, and LA, will remain impacted by greater concentration of supply deliveries, resulting in elevated level of concessions, which will moderate the recovery. Although we typically do not place significant focus on sequential performance because of the seasonality embedded in our business under normal market conditions, as we emerge from the pandemic, we view the sequential trend as a better indicator of our recovery progress. From this perspective, we have delivered two consecutive quarters of modest total same property revenue growth supported by comparable periods of job growth in our markets, which began in the fourth quarter of last year and has continued through the first quarter of this year. More notable is the 110 basis points in sequential improvement of our average net effective market rent per unit, with Southern California continue to lead our portfolio growth. On average, new lease concessions improved from a little over two weeks in the fourth quarter to about one and a half weeks in the first quarter. While the magnitude may vary, this trend is in line with our forecast, where we had expected that market rents in our portfolio on average which frothed between the fourth quarter and the first quarter. Lastly, although office rental market has softened, major tech employers are continuing to expand in our markets. Google recently procured the rights to build an additional 1.3 million square feet of space in Mountain View, and Amazon in Bellevue began construction on a brand new office tower, as well as signing a new lease and a development for an additional 600,000 square feet. With our economy approaching 50% reopening, we remain mindful of the market and legislative uncertainties as we continue on the path to recovery. In conclusion, our portfolio is stable with current same-store portfolio occupancy at 96.7%. Our availability 30-day out is at 4.4%. Thank you, and I will now turn the call over to Bar Pack.

Thanks, Angela. I'll start with a few comments on our first quarter results, followed by an update on our recent capital markets activities and the balance sheet. I'm pleased to report Core FFO for the first quarter exceeded the midpoint of our guidance range by $0.04 per share, of which $0.02 from consolidated operations and the other two pennies relate to the joint venture portfolio and lower interest expense. Of the two cent beat on operations, one penny relates to higher same property revenues and the other penny is from lower operating expenses, which is timing related. For the second quarter, we expect core FFO to be $2.92 at the midpoint, a 15 cent per share decline sequentially. Half of the decline is attributable to the loss of income on the early redemption of 110 million preferred equity investment, which occurred at the end of March. and the $276 million of dispositions that closed at the end of February. There is a temporary mismatch on the timing of the use of a portion of the proceeds, and as such, this is causing a $0.07 decline sequentially. In addition, we expect commercial income to be $0.02 lower as we had one-time benefits related to better delinquency collections in the first quarter that we do not expect to repeat in the second quarter. The remaining decline relates to lower same property NOI due to higher expected operating expenses and delinquency and higher G&A. For the full year, we are reaffirming our guidance ranges for same property revenue, expense, and NOI growth and core FFO per share. Turning to investments. During the quarter, we received $120 million for the redemption of two preferred equity investments. One of the investments, totaling $110 million, was redeemed early as a developer was able to sell the property for a price that exceeded our pre-COVID valuation. We estimate the cap rate at 3.6% on pre-COVID rents and 3.25% on current net effective rents. As a result of the early redemption, the company received $3.5 million in prepayment penalties, or 5 cents per share. which compensates us for the lost income on the portion of the investment that was made in the fourth quarter of 2020. However, for FFO purposes, we booked this income as a non-core item. Given the strong demand to invest in apartments and cheap financing alternatives currently available, we may experience additional early redemptions of preferred equity investments in 2021. Moving to the balance sheet. During the quarter, we issued $450 million of unsecured bonds with a seven-year term and an effective yield of 1.8%. The proceeds were used to refinance most of our unsecured term loans that matured over the next two years, allowing us to extend our maturity profile with no impact to interest expense. We now have less than $200 million of debt maturing between now and the end of 2022. Since the beginning of... 2020, we have refinanced nearly 30% of our debt, taking advantage of the low interest rate environment and reducing our weighted average interest rate by 60 basis points to 3.2%. This is leading to a significant reduction in interest expense in 2021 and can be seen in the first quarter results via the $4 million reduction to interest expense compared to the prior year. During the quarter, we raised our common dividend by 60 basis points to $8.36 per share on an annual basis, our 27th consecutive dividend increase. This is a sign of our strong balance sheet and cash flow coverage despite the effects of the pandemic. With approximately $1.4 billion of liquidity and minimal near-term funding needs, our balance sheet remains strong and we will remain disciplined as we look for ways to invest accretively to create shareholder value. With that, I'll turn the call back to the operator for questions.