Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust's first quarter 2022 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.

Thank you for joining us today, and welcome to our first quarter earnings conference call. Angela Kleinman and Barb Pack will follow me with prepared remarks, and Adam Berry is here for Q&A. Today, I will comment on our first quarter results, recent housing demand and supply trends, and a brief overview of the apartment transaction market. We are pleased to announce our fourth consecutive quarter of improving core FFO per share and same-store revenue growth, with this quarter's core FFO exceeding our guidance midpoint by $0.07 per share. As mentioned in our earnings release, our results and rent growth trajectory support an increase in core FFO and same property revenue guidance for the year, which Barb will review shortly. Overall, rents have continued to improve, and as of April 2022, net effective rents in the Essex markets are now 11.4% above pre-COVID rent levels and up 22% compared to one year ago. All of our markets have positive sequential rank growth, with Northern California leading the portfolio, improving sequentially by approximately 3% in each month of the first quarter. We expect further improvement in Northern California as progress is made on return to office programs for the large technology companies, following several COVID-related delays. The top Tech companies also continue to hire rapidly in the Essex markets, with over 50,000 job openings posted for California and Washington, a 79% increase compared to March of 2020. Other indicators, including job growth, venture capital deployment, and office investment continue to support our thesis that Northern California will remain the epicenter of the technology industries. A significant recent example came from Google, which announced a plan to invest more than $3.5 billion on additional office and data centers in Mountain View, downtown San Jose, and elsewhere across the Bay Area. The easing of COVID-related regulation has been pivotal for return to office in our markets. Mask mandates have been significantly relaxed versus prior quarters, making it easier to bring employees back to the office. business travel, in-person meetings, property tours, and conferences have resumed, and we look forward to in-person investor meetings once again. As COVID-related regulations continue to subside on the West Coast, the deadline to apply for rental relief in California has now passed as of April 1st. Government-sponsored rental relief has been a double-edged sword for California apartment owners as tenants were often encouraged to seek government rental relief programs rather than paying rent. Delays in government reimbursements led to the highest delinquency since the onset of the pandemic. With the rental relief program now closed to new applications in California, we are now cautiously optimistic that underlying delinquency trends will improve. California's rental assistance program remains far behind with respect to payments, providing potential upside as we continue pursuing the approximately 76 million of rent owed to the company. Given the extraordinary government restrictions during the pandemic, it became clear that our portfolio would need to achieve two inflection points before we could be confident that a full recovery was underway. The first was the reopening of our markets, which occurred in July of 2021, and the second was a return to office for the largest technology companies. Over the past two months, we've seen Google, Microsoft, Meta, and Apple all begin to reopen and restaff their offices. Our leasing specialists are reporting more applicants returning from out of state as hybrid and similar arrangements require regular office attendance for employees. Return to office mandates are generating economic activities, which is apparent in the job growth reports, with San Francisco leading our portfolio with 8.9% trailing three-month job growth. On average, the Essex markets reported job growth of 6.7% on a trailing three-month basis versus the broader U.S. average of 4.7%, marking the second consecutive quarter that Essex markets have outpaced the nation in job growth. We expect this outperformance will continue as Essex has still only recovered 83% of the jobs compared to pre-COVID levels versus the U.S. recovery of 95%. We expect service and hospitality related jobs to continue a strong growth trajectory supported by increased travel generally and demand for services from the well-paid workforce on the West Coast. The confluence of increasing job growth, a lower unemployment rate of 3.6% in the Essex markets, and expensive for sale housing all contribute to favorable rental housing tailwinds. Turning to housing supply, the ability to ramp up housing production is more challenging along the West Coast as a result of long entitlement processes, burdensome regulations, labor shortages, and inflating construction costs. As a result, housing permits in Essex markets remain at levels roughly consistent with our long-term averages. Our bottoms up supply analysis indicates that new deliveries will moderate for the rest of 2022, and we are also expecting a 15% decline in apartment supply in 2023, which includes a 54% reduction in new supply expected in Northern California. All of our markets remain on the lower end of the supply growth spectrum versus other U.S. metros. Turning to the apartment investment markets, Geopolitical events, turbulent financial market conditions, and high levels of inflation create uncertainty, which may become a headwind for transactions. However, cap rates generally don't move quickly and are mostly a function of investor demand for property. As to the West Coast specifically, strong evidence of recovering apartment market conditions, higher inflationary growth expectations, and significant capital pursuing apartments appear to have mostly offset the impact of higher interest costs, keeping cap rates unchanged at this point. Our review of cap rates for recent apartment transactions across the Essex markets indicate most institutional quality assets trading in the mid-3% range for stabilized properties with little deviation across markets, building class, and locations. We will continue to be selective with our capital allocation strategy, focusing on deals that have the best growth potential and generate accretion to our financial benchmarks. In closing, I'd like to briefly highlight the importance of ESG and its impact on the company. As a leading provider of housing along the West Coast, we know that our company has a responsibility to operate in an environmentally conscious way. Consistent with that thesis, We recently released our TCFD report, which is the first step toward alignment with proposed SEC reporting requirements. Last week, we announced that Essex will co-anchor an ESG Housing Impact Fund managed by RET Ventures. Finally, we are also pleased to announce the upcoming publication of our fourth CSR report, which should be available in early May. With that, I'll turn the call over to Angela Kleiman.

Thanks, Mike. First, I would like to express my appreciation for our operations and support team. As we have implemented new systems and structures to optimize our operations, our team has taken on these challenges in stride and continues to demonstrate exceptional work ethic and dedication to our company's success. In today's comments, I'll begin with key operational highlights on our major regions, including our outlook for 2022 rent growth, and conclude with an update on the rollout of our property collections operating model. We are pleased with our first quarter operating results, especially in delivering a 6.5% same property revenue growth on a year-over-year basis. This is primarily driven by increases in schedule rents and improvements in concessions, detailed on page 2 of our press release. The first quarter performance exceeded our expectations and included some of our strongest leasing spreads reported in the company's history, with net effective new leases up 20% and renewals up 11.7% compared to the same period last year. Average concessions for the portfolio continues to remain minimal, with April loss to lease for the same store portfolio at 9.5%. We are well positioned heading into the summer leasing season. Here are the key operational highlights from north to south. Beginning with our Washington portfolio, rents in the Pacific Northwest had a strong start to the year, improving sequentially each month since December. In addition, we successfully decreased concession in downtown Seattle throughout the quarter. Our supply forecast reflects a modest in deliveries throughout 2022, and the Seattle job market remained strong with March average trailing three-month growth rate of 6.1%. Moving forward, we anticipate steady performance from our Seattle region, with loss to lease in April of 7.7%. On to Northern California. As Mike mentioned earlier, rents in this region are being lifted by the return to office of large tech companies and a solid rebound in job growth. After a typical season of slowdown in the fourth quarter, concession usage in San Francisco and San Jose declined throughout the first quarter, leading to a steady improvement in net effective rents. Looking ahead, we expect the supply picture to remain steady for the rest of the year. And on the demand side, job growth is accelerating, with March average streaming three-month growth rate of 6.7%. As Northern California is in its early stages of recovery, We are seeing a steady increase to loss to lease, which stands at 5.1% in April, and we continue to expect this region to lead our market rent growth in 2022. Turning to Southern California, which has been our best performing market throughout the pandemic. We continue to be confident about Southern California as rent did not experience the typical seasonal decline in the fourth quarter and have continued to improve each month in the first quarter. Concessions have been below one week for almost a year. Turnover in Southern California remains at the lowest level relative to the rest of our markets, demonstrating continued strength and stability of this region. For 2022, we have forecasted a modest increase in supply delivery and anticipate concessions may temporarily elevate in areas near those development lease-ups. On the demand side, Southern California was our top performing region with March average trailing three months job growth of 7.9%. Furthermore, our April loss to lease of 14% will provide a tailwind to revenues into 2023. It is with this strong fundamental backdrop that Essex continues to make progress in advancing our property collections operating model. We discussed on previous earnings calls on how we successfully improved efficiency last year in San Diego and Orange County by operating closely located properties as a single unified business. The benefits of this operating model include enhancing our customer service through virtual on-demand experience, creating more career advance opportunities for associates through specialization, and ultimately generating a 10 to 15% reduction in administrative staffing needs through natural attrition, which is also mitigating the inflationary pressures we are experiencing today. Historically, Essex has operated with an employee-to-unit ratio of 40 to 1. Today, we are at 43 to 1, and our target by the end of 2022 is 45 to 1. At this point, we have completed the ROLA of Southern California and expect company-wide implementation by year end. In addition, We have ongoing digital platform improvements rolling out over the next few years. As such, we have yet to fully optimize our business, and we anticipate further benefits in 2023 and thereafter. With that, I'll turn the call over to Barb Pack.