Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust second quarter 2022 earnings 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 Shull, President and Chief Executive Officer for Essex Property Trust. Thank you, Mr. Shull. You may begin.

Thank you for joining us today and welcome to our second quarter earnings conference call. Angela Kleiman and Barb Pack will follow me with prepared remarks, and Adam Barry is here for Q&A. I will start with a summary of our second quarter results and then highlight the strong underlying momentum in the Essex portfolio, especially in the markets benefiting from the return to office programs of large tech companies, and finish with a brief overview of the apartment transaction market. We are pleased to announce our fourth consecutive quarter of improving results with core FFO up 21.1% from the same quarter last year, exceeding the high end of our guidance range and achieving the second best quarterly growth since the company's IPO in 1994. Given our strong year-to-date results, we increased our guidance ranges for same property revenues NOI, and core FFO for a third time in 2022, which Barb will discuss further in her commentary. Beginning with operating fundamentals, net effective rents for new leases are now 16% above pre-COVID levels and 20.6% higher year over year compared to the second quarter of 2021. Job growth remains robust at 5.6% for June year over year, substantially outperforming the U.S. and reflecting the ongoing recovery from the massive COVID-related job losses in 2020. Page S17.1 of our earnings supplement demonstrates the surge in rents in the tech markets of Northern California and Seattle, the largest and last markets in our portfolio to fully recover from the pandemic. Net effective rents have increased between 18 and 20% year to date, reflecting momentum from return to office programs and very strong job growth. Fundamental research from our data analytics team indicates job openings at the largest technology companies have moderated recently off the very high levels throughout the pandemic, with job openings now about 15% above pre-COVID levels compared to about 77% last quarter. Unlike other industries within our markets, the tech sector was better positioned to pivot to hybrid work in response to the pandemic and accelerated hiring. As a result, labor demand for the most highly skilled workers at the large technology companies remain solid, implying job formation in excess of the number of recently announced layoffs in our markets, which we highlight on page S17.2 of our earnings supplement. Given the focus on tech layoffs recently, it's relevant to note the definition of what constitutes a tech company has broadened to include businesses that have digitized a variety of analog processes and thereby represent a much broader umbrella of organizations not necessarily located in the Bay Area, including Peloton's fitness offerings, Carvana's auto sales process, and mortgage companies like Better.com. Likewise, the venture capital slowdown is now impacting companies across many industries and geographies consistent with this broader scope. Conversely, it's the largest tech companies that drive employment in our NorCal and Seattle markets, and they are more insulated from capital market fluctuations given their growth opportunities and extraordinary financial strength. Rounding out the overall employment picture in Northern California, we continue to see a recovery of jobs that were eliminated during the pandemic. COVID-related regulations were so stringent that much of the local service economy workforce had to be fundamentally rebuilt. For example, the Essex markets added 420,000 relatively low-paying jobs on a trailing three-month basis, including a 20 to 25% increase in the leisure and hospitality sector which supports returning tech workers and their demand for services. Our commentary usually focuses on high paying jobs, but the service jobs are also important because most of their employees need to report to a physical location each day, and they support the ecosystem that creates livable and desirable communities. The strong demand for housing is supported by apartment affordability in our Northern California markets, which has improved sharply relative to long-term averages, reflecting a higher growth rate for median incomes relative to median rents. From a historical perspective, these markets screen affordable for the first time in the last decade, and rental housing is significantly more affordable versus home ownership. The value of the median price home in California is up about 13% year over year, and with higher mortgage interest rates, apartments are clearly the more affordable option. We estimate that it is now over two times more expensive to buy than rent in the Essex markets. Affordability trends will be impacted by the apartment supply picture of moderating deliveries in the second half of 2022 and a further decline expected in 2023. Sharply lower rents in Northern California during the pandemic resulted in fewer apartment starts in 2020 and 2021, and therefore a significant drop in new Bay Area apartment deliveries into 2023. Production levels of for sale housing is also muted on the West Coast, with only about 0.4% of existing stock being built annually, and production is difficult to increase given zoning restrictions and land availability. Looking ahead, we recognize that the Federal Reserve is working to fight inflation, which often leads to a recession. Our experience indicates that no two recessions are alike, and clearly the current situation is unique given West Coast remains in a recovery mode from the pandemic. Given this backdrop, we believe that the following factors will help moderate the impact to the West Coast rental markets in the event that economic conditions deteriorate later this year. First, large technology companies significantly accelerated hiring during the pandemic, largely because there were beneficiaries of the pandemic-driven preference for touchless interaction. Many newly hired employees were asked to work remotely until offices reopened, which is now occurring and is a key component of our recent market rent growth in Seattle and the Bay Area. Second, we have extremely tight labor markets and strong job growth on the West Coast, a significant portion of which relates to the recovery of jobs lost in the early part of the pandemic. Recovery of jobs, especially in leisure, hospitality, and service sectors, has been resilient and should continue for the foreseeable future. Third, the normal migration pattern from the West Coast includes workers approaching retirement who plan to lower their cost of living and use the equity in their homes as part of their retirement plan. We believe that most of these workers left during the pandemic, given California's extraordinary lockdowns, and therefore, it's likely that retirement-related migration will be muted for at least a few more years. Finally, foreign immigration was significantly slowed throughout the pandemic. In recent months, new visas for foreign workers are increasing, with the large tech companies being a primary beneficiary, restoring an important source of apartment demand. Before I turn the call over to Angela, let me quickly touch on apartment investment activity. The extraordinary uncertainty and volatility in the financial markets and higher interest rates have disrupted the apartment transaction markets, resulting in fewer closings given diverging buyer and seller expectations. We are in a period of price discovery for apartment transactions, and the absence of financial distress means that buyers and sellers are not forced to transact. Therefore, we expect fewer apartment transactions for the foreseeable future. It's difficult to pinpoint cap rates in this environment, although limited recent activity indicates cap rates in the high 3% range to low 4% range. We have seen an increase in apartment development activity that was decimated in the pandemic, driven by the strong rent recovery in suburban areas which should lead to more preferred equity investments going forward. With that, I will turn the call over to Angela Kleinman.

Thanks, Mike. First, I would like to express my appreciation for our operations and support teams for delivering some of our highest level of quarterly same-store revenue growth. All this while we continue to roll out our property collections operating model throughout the portfolio. Great job, team, and thank you. Today, I'll start with key operational highlights in our major regions, discuss rent growth expectations for the remainder of 2022, and conclude with an update on the rollout of our transformational initiatives for the operating business. We are very pleased with our second quarter performance. With strong demand fundamentals and modest supply described by Mike earlier, we maximize revenues by favoring rent growth rather than occupancy. This resulted in same property revenue growth of 12.7% on a year-over-year basis and a 4.8% on a sequential basis, which are some of the highest growth rates achieved in the company's history. As we head into August, so far we are experiencing a normal leasing season with June and July loss to lease for the same store portfolio at 9.7% and 10.3% respectively. Turning to regional highlights, starting with our Washington portfolio. This region generated a 20.7% year-over-year net effective rent growth on new leases for the second quarter, which was led by Eastside Seattle, where the majority of our portfolio is located. Seattle continues to benefit from strong job growth, which is driving leasing momentum. Our Seattle portfolio is well positioned, and 9.7% lost the lease as of July. On to Northern California. This region generated 17.5% year-over-year net effective rent growth on new leases for the second quarter, which was led by Santa Clara County at 24%, primarily driven by the robust demand from large tech employers in Silicon Valley. Northern California has demonstrated some of the strongest job growth this year, and despite the negative headlines on tech startups, we are not experiencing any softness in rent growth in July or in our third quarter renewals. We expect positive momentum to continue for Northern California with demand from return to office, which may be further accelerated by incremental job growth throughout the second half of the year. Loss to lease in this region continues to pick up and is 8.7% in July. Moving on to Southern California, which has been a strong performer with 22.4% year over year net effective rent growth and new leases for the second quarter. Healthy job growth has continued to drive incremental demand in Southern California, which has built upon the significant rent growth achieved last year and resulted in our highest level of loss to lease at 12.1% in July. Turning to our expectations for the remainder of 2022. As you may recall, we had anticipated a deceleration in market rent growth in the second half of the year because of tougher year-over-year comps. As expected, we are seeing this deceleration show up on our new lease spreads on page S16. However, as demonstrated by our current performance and the increase to same property growth expectations for the year, our fundamentals remain strong. It is with this backdrop that we continue to advance our company-wide implementation of our property collections operating model. By way of background, we have been transitioning from a dedicated team for each property to teams that cover a collection of around 9 to 12 properties, thereby transforming our business from a property-centric to a customer-centric operating model. As we have rolled out this model to our other regions, we've been able to replicate the improvements in cross-selling from 15% to 23% achieved at the first asset collection that was rolled out last year in San Diego. This demonstrates our sales team's ability to sell effectively across multiple properties, reducing customer acquisition costs, and improving overall sales efficiency. Lastly, we have been making good progress co-developing proprietary applications with partners from the RET ventures, such as Funnel, to enhance our technology platform. We execute approximately 60,000 transactions a year, including move-in, move-out, and renewals, and we are focused on automating all manual tasks. Following full deployment of the funnel suite in late 2023, we anticipate this investment will be an important factor in the 200 to 300 basis points of margin improvements we expect to achieve over the next few years. With that, I'll turn the call over to Barb Hacks.