Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust fourth quarter 2021 earnings conference call. As a reminder, today's conference 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.

Good day and welcome to our fourth quarter earnings conference call. Angela Kleiman and Barb Pack will follow me with comments and Adam Berry is here for Q&A. Today, I will provide an overview of fourth quarter and full year results, our expectations for 2022, and an overview of the apartment investment market. Essex experienced a strong recovery in 2021 following the unprecedented and extraordinary challenges of 2020. The fourth quarter was our second consecutive quarter of positive same-store results, and core FFO exceeded our original guidance midpoint by 5 cents per share. Overall, net effective rents remain above pre-COVID levels despite a modest seasonal slowdown that occurs every fourth quarter. In California, the pandemic and related regulation has led to an unprecedented divergence in apartment performance across our portfolio. The suburban areas that underperformed for most of the past 30 years are now our top performers, and our historical top performers are now our . To demonstrate, net effective rents in San Diego, Orange, and Ventura counties are up at least 25% from pre-COVID levels, pushing rent to income ratios in these counties to all-time highs. Conversely, rents in the tech markets remain well below pre-COVID levels, especially San Francisco and San Mateo counties, which remain down at least 15% and now screen affordable relative to their much higher median household incomes. There is a similar divergence in performance in the large metros that contain both urban and suburban areas. For example, in Los Angeles County, downtown LA net effective rents are flat from pre-COVID levels while suburban areas such as Long Beach and Santa Clarita are up 15 to 20%. We attribute the underperformance of the urban core to the damaging lockdowns in 2020, which resulted in severe job losses in restaurants and the service sectors. More broadly, recoveries in the urban core and major tech companies have been slowed by ongoing government restrictions, worker shortages, and delayed return to office plans. While the large tech companies generally did not experience job losses, their hiring slowed during the pandemic, and many employees relocated in the initial phase of the pandemic due to citywide shutdowns. As of December 2021, the U.S. has recovered about 96% of jobs lost in the pandemic, compared to only 78% for the Essex markets. Obviously, we are disappointed that many tech employers pushed back their office reopenings during the surge of the Omicron variant over the holidays. However, the data indicates that most large tech employers will adopt a hybrid office environment, and therefore, the return to office should be a significant catalyst for housing demand in our poorest performing markets. With job growth now exceeding the U.S. average, we believe that our recovery is well underway and several observations support our positive outlook. As highlighted on previous earnings calls, there has been many large investments in office space by the large tech companies this past year, contributing to positive net office absorption in seven of our eight major markets representing 4.8 million square feet of space. Available office sublease space has begun to decline in San Francisco, San Jose, Los Angeles, and Seattle, which supports our belief that many companies are moving forward with their return to office plans. As expected, there is a resurgence in service and hospitality related hiring as our cities recover. with year-over-year increases in leisure hospitality employment ranging from about 29% in Ventura to about 56% in San Francisco. Recent immigration policy changes from the White House announced last week should also support the positive momentum that we're seeing in job growth at the higher income levels. For many years, Santa Clara and San Mateo counties disproportionately benefited from foreign immigration. However, during the COVID pandemic, stricter immigration policies during the previous administration drove net foreign immigration to a 30-year low. We suspect that the recently announced immigration policy changes will contribute to job growth, particularly in the Bay Area. Venture capital investment in the Essex markets continues unabated. In the fourth quarter, approximately $37.5 billion of capital was invested in West Coast-based companies, or approximately 40% of the total venture capital deployed in the United States, and representing 124% year-over-year increase. The West Coast remains a leader in venture capital, which is a driver of global innovation and, in turn, local economies, and job growth. The top 10 tech employers in our markets continue to seek talent, and with open positions listed in California or Washington reaching 47,000 in the fourth quarter, far exceeding the pre-COVID peak by 62%. Turning to our expectations for 2022, page S17 of our supplemental package summarizes our key operating expectations and assumptions. We continue to expect full year rent growth of 7.7% for Essex's West Coast markets. Our rent estimates are derived from a top down and bottoms up approach that we continue to refine with each passing year. We are expecting 4.1% job growth in our markets next year suggesting moderation from the 5.5% trailing three-month average Essex markets achieved as of December. Even at 4.1%, West Coast job growth should significantly outpace the nation. Our research team conducts its own fundamental analysis of apartment supply, and they expect around 37,000 apartment deliveries in 2022. This is slightly higher compared to 2021 and should lead to a limited disruption at stabilized communities. Similar to 2020, there are pockets of apartment supply deliveries in some urban submarkets, notably CBDLA. Similar to 2021, for sale housing deliveries will remain very muted at about 0.6% of total stock of for sale homes. Continued improvement in apartment trends in 2022 may be bolstered by inflationary pressures in the United States currently at the highest level since the early 1980s. While inflation and its countermeasures have the potential to slow the economy, it's worth noting that apartments are resilient with short lease durations and high operating margins. In addition, it is incredibly difficult to ramp up rental and for sale housing production on the West Coast given long entitlement processes, government restrictions, and construction labor shortages. Finally, we have a conservative debt structure characterized by minimal levels of variable rate debt, staggered debt maturities, and low leverage. Estimating future supply a few years from now is another important part of Essex's capital allocation process, and page F17.1 of the supplemental highlights recent increases in housing permit activity in various prominent residential REIT markets. While supply, while future supply in the Essex markets is expected to drop in 2023 and remain at manageable levels thereafter, supply appears to be increasing in several other markets. It is also important to note that we have limited exposure to the institutional single-family rental market compared to other metros. We continue to believe that housing supply and demand is the fundamental driver of our business and our capital allocation priorities. I have a few brief comments on the apartment investment markets where the deal volume in our markets has now surpassed pre-COVID levels as institutional capital targets West Coast apartments. Cap rates are consistently in the low to mid-3% range, and we've seen yields converge across markets, construction types, location, and age. We sold four properties last year valued at $330 million, using the proceeds to fund stock repurchases early on and then acquisitions as the year progressed and our cost of capital improved. For the year, we acquired $432 million, with the majority of acquisitions completed in a co-investment format to conserve capital. Generally, we see greater deal volumes during uncertain conditions, so we are optimistic about more opportunities to create value in the transaction market in 2022, and Barb will detail our 22 guidance assumptions in a moment. With that, I'll turn the call over to Angela Kleinman.

Thanks, Mike. First, I'd like to express my gratitude for the exceptional operations and support teams we have here at Essex. As the challenge to our business continues to evolve, our team has also continued to step up, which speaks to the dedication, work ethic, and the can-do attitude across the organization. On to today's comments. I'll begin with key operation highlights of our major regions, then focus on our outlook for the year. followed by an update on the progress we are making by leveraging technology, data analytics, and transforming our operating platform. We are pleased with our fourth quarter results of 4% year-over-year and 1.6% sequential growth in same property revenues. We have detailed on S16 of our supplement, which shows the fourth quarter year-over-year new and renewal rent spreads up by 17.1%, and 10.7% respectively. The significant recovery in rents over the last year was bolstered by the occupancy and concession strategies we implemented throughout the pandemic. To review our markets by region, I'll begin in Southern California, which represents almost 45% of our NOI and was our best performing region in 2021. Through many economic cycles, we have consistently relied on Southern California for steady performance, and during the pandemic, it has exceeded our expectations. The one caveat is the Los Angeles submarket. While it is also showing strong rent growth, this market faces offsetting challenges from the ongoing eviction moratorium and disproportionate bad debt. Notwithstanding these challenges, we remain optimistic with a broader Los Angeles submarket because of the continued strategic commercial investments by companies like Warner Brothers, which is planning to develop a 1.3 million square feet of studio and office space in Burbank. This will be the largest studio development in the country and is expected to bring about 1,400 new jobs to the market. Film LA recently reported the production activity hit an all-time high in the fourth quarter And Apple recently proposed a half million square foot office development in Culver City, which should create approximately 2,500 new jobs. The continued job growth and high cost of home ownership amidst a slight increase in supply deliveries in Orange County and San Diego are factors considered in our expectation for demand for rental housing and the basis for a 2022 outlook for Southern California market rent growth of 7.1%. Moving north to the Bay Area and Northern California. It is no secret that Northern California's rents have lacked the nation and the Essex portfolio average. We view the region as in early stages of its recovery. Unlike most markets across the country, which are effectively back to normal economic levels, the Bay Area has yet to fully recover due to ongoing COVID regulations, such as mask mandates and delayed return to office. tempering the momentum of normal economic activities. We have seen communications by Bay Area companies informing employees of plans to return to office after Omicron case subsides and we remain encouraged by the large tech companies expansion plans and commercial investments in our markets as highlighted by Mike. Furthermore, our supply delivery forecast a decline in 2022. Thus, we anticipate rapid recovery in rent growth without requiring a comparable level of increase in housing demand. Keep in mind that our Northern California portfolio is mostly suburban and should benefit from those employees having fewer commuting days in a hybrid environment. These factors contribute to our expectations for Northern California to be one of our strongest rental markets in 2022, with market rent forecasted to increase by 8.7%. Turning to our Seattle portfolio, which continues to perform well, we anticipate similar level of supply deliveries this year as last year, with the majority concentrated in downtown Seattle. Because our portfolio skews to the east side in Bellevue and surrounding suburbs, the demand for our communities remains strong from the continued investments by several companies, most notably Amazon. which has committed to developing a second tower in Bellevue with constructions to start this year and is expected to create an additional 3,500 jobs. Therefore, we forecast Seattle's market rent growth at 7.2% for 2022. Moving on to the advancements in our operating model. By way of background, our discipline and focus of investing in high quality submarkets has resulted in 70% of our properties being located within five miles of each other. With this competitive advantage in geographic concentration and innovation in technology and data analytics, we have re-envisioned Essex operating model with property collections. Essentially, we are transitioning from a dedicated team at an individual property to teams that will cover a collection of properties, allowing each associate to specialize in specific function and improving our ability to cross-sell among nearby properties. By organizing properties into collections and centralizing certain administrative duties, we expect to generate more efficiencies across the portfolio. We have already implemented this collections model in Orange County and San Diego and have achieved a reduction in personnel by approximately 10 to 15 percent through natural attrition. In addition, Our data analytics has determined that our ability to cross-sell neighboring communities has increased by over 800 basis points following the adoption of the collections model. We plan to complete the rollout of the collections operating model to the remaining regions by the end of this year. While Essex has been efficient historically with each associate covering 40 units prior to 2019, with recent enhancements, We currently have each associate covering 43 units across the entire portfolio. Further benefits are expected in 2022 and thereafter as we complete our technology and other implementation plans. We are currently co-developing proprietary applications with partners from RET Ventures Fund and other software developers that will enhance the associate and customer experience. One example of advancements in our operating model over the past months has enabled 100% contactless tours, which currently consists of 92% self-guided tours and 8% virtual tours. As part of our technology initiative, we are starting the rollout of Alloy Access, a smart rent common area access solution, which will elevate the resident experience while also further the productivity of our operations team by enhancing security, usability, and monitoring, along with improving the effectiveness of the self-guided tours for prospective customers. In addition, we are working with Funnel to co-develop a tailored solution to further automate our platform, which we plan to roll out later this year. We believe this will directly benefit both the associates and customers through streamlined systems, on-demand features, and link communications across properties which will meaningfully accelerate the timetable to turn prospects into renters. We integrate these advancements with our data analytics platform to provide new operational insights. For example, leveraging newly available data on our leasing patterns from Funnel has improved the quality and effectiveness of our customer interactions. We have also applied advanced analytics with data from SitePlan to streamline our maintenance workflow which reduced our unit turn times by 10% in the fourth quarter on a year-over-year basis, despite COVID-related labor challenges. We expect that these initiatives will continue to provide us with additional levers and insights to improve our revenue growth and operating margins in the coming years. With that, I'll turn the call over to Barb Pak.