Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust's first quarter 2023 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, Ms. Angela Kleinman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleinman. You may begin.

Good morning. Thank you for joining Essex First Quarter Earnings Call. Barb Pack and Jessica Anderson will follow me with prepared remarks, and Adam Berry is here for Q&A. We are pleased to report a solid first quarter that exceeded our initial expectations and that we are raising the midpoint of our FFO brochure guidance for the full year. Barb and Jessica will provide more details on the quarter, while my comments will focus on our economic outlook, the opportunities within our platform, and some perspectives on the apartment transaction markets. Beginning with our outlook for the remainder of the year, we continue to anticipate modest economic growth in 2023, resulting from a more restrictive monetary policy tempering job growth nationally. Our assumptions are detailed on page S17 of our supplemental package. As we all know, the West Coast is home to some of the largest companies to announce layoffs over the past six months. Even so, the West Coast economies have proven resilient, producing a solid job growth of 2.7% on a trailing three-month basis through March. We believe there are two key factors contributing to the durability of the underlying West Coast fundamentals. First, many of the layoff workers have quickly found new jobs. And second, the vast majority of the layoffs affected people who do not reside on the West Coast. We continue to monitor war notices, and of the largest companies to announce layoffs, only 16% of their reductions have occurred in our markets. With the exception of a few specific submarkets, the overall labor market and demand for housing in the West Coast had a healthy start to the year. On the supply side, the outlook remains favorable, with only about 60 basis points of total housing stock forecasted to deliver in 2023, The supply risk in our markets remain low. We expect that continued housing production challenges, such as diminished labor force and high construction costs, should lead to relatively light apartment deliveries for the next several years in our markets. Thus, we do not need meaningful job growth to generate modest rent growth in 2023. Since none of us have control over the Fed or the economy, our team will remain focused on what we can control, which is the continued enhancement of our operating platform. We have been thoughtfully transforming our operating model for several years, which has resulted in one of the most efficient operating platforms in the industry. Relative to our peers, Essex has the highest controllable operating margins and one of the lowest average controllable expense per unit. While the rollout of our property collections model has contributed to this efficiency, We are only midway through implementation. Our next phase of expanding this operating model to the maintenance function will maximize the workflow of our associates, including reducing task time and vendor costs. These advancements will enable incremental revenue growth to flow more efficiently to the bottom line, ultimately generating additional FFO per share and dividend growth throughout all economic cycles. Lastly, turning to investment activities. We're still seeing institutional quality transactions occur from the mid to high 4% market cap rate with a deeper buyer pool toward the high end of this range. Keep in mind that the transaction market is still digesting higher interest rates as evidenced by a significant reduction in volume of approximately 70% nationally and 60% in the West Coast in the first quarter compared to last year. In addition to the anemic volume, our cost of capital remains unattractive from an acquisitions perspective. Keep in mind that Essex has a long track record of creating value for our shareholders by arbitraging discrepancies between the stock price and the underlying asset value. Once again, we demonstrated this strategy in the first quarter, locking in significant FFO and NAV per share accretion for shareholders, which is the primary driver of raising our FFO guidance mentioned earlier. We continue to actively evaluate potential deals and are ready to act swiftly and thoughtfully when opportunities emerge. With that, I'll turn the call over to Barbara Pack. Thanks, Angela.

I'll begin with a few comments on our first quarter results and full year guidance, followed by an update on investment activity and the balance sheet. I'm pleased to report our first quarter core FFO per share grew 8.3% on a year-over-year basis, exceeding the midpoint of our guidance range by 8 cents. The better than expected results are largely attributable to two factors that drove an outperformance in same property revenue growth. First, occupancy trended higher than we expected for the quarter. And second, net delinquencies were better than forecasted as we received 1.3 million in emergency rental assistance. As you may recall, we did not assume any rental assistance funds in our 2023 forecast. Overall gross delinquency was 2.5% of scheduled rents for the quarter in line with our expectations. Given the favorable first quarter results, we are currently running 30 basis points ahead of our full year midpoint for same property revenue growth. However, given the macroeconomic uncertainty and the timing of recapturing delinquent units, which remains uncertain, we are holding off on changing our same property guidance range until we get further into the peak leasing season. As for core FFO, we are raising our full year midpoint by 3 cents per share, primarily related to accretion from stock repurchases completed in the first quarter and higher other income. Turning to our stock repurchases and investments. During the quarter, we sold a 61-year-old student housing community located in a non-core market. The proceeds were used to buy back the stock on a leverage neutral basis in order to arbitrage a significant disconnect between public and private market pricing. This is another example of how ethics seeks to create value in all environments while at the same time improving our portfolio. As it relates to our preferred equity book, we had little activity to report this quarter. However, for the full year, we still expect about 100 million of early redemption. Our sponsors are able to take advantage of the available financing via Fannie Mae and HUD to redeem us early. We believe the additional sources of financing is one of the many benefits to being in the multifamily sector, which has over time helped keep cap rates low. Overall, we remain comfortable with our preferred equity portfolio, especially given how diversified it is both geographically on the West Coast and in terms of the average deal size. Finally, on to the balance sheet. We plan to pay off our upcoming 2023 unsecured bonds that mature May 1st with the proceeds from the 300 million delayed draw term loan which closed last year. As such, we have no funding needs over the next 12 months. With 1.5 billion in liquidity, limited variable rate debt exposure, and access to a variety of capital sources, our balance sheet remains in a strong position. I will now turn the call to Jessica Anderson.

Thanks, Barb. I'll begin my comments today by providing color on our recent operating results and strategy, followed by regional commentary. I was pleased with our operating results from the first quarter, including a same property revenue increase of 7.6% year over year. As Barb mentioned, one core factor driving these results was the successful execution of our occupancy strategy that resulted in a solid 96.7% for the first quarter of 70 basis points from the fourth quarter. This focus began in Q4 and was done proactively in anticipation of elevated turnover from evictions. During the first quarter, we made progress recapturing units from nonpaying tenants, and we experienced the highest volume of eviction-related move-outs to date. The number of long-term delinquent residents has declined by 65% from our peak over a year ago, excluding Los Angeles and Alameda counties. Additionally, a notable milestone in the first quarter was the ending of the eviction moratoriums in the city and county of Los Angeles, where approximately half of our delinquency resides. Given backlogged eviction courts, it will take many months to recapture these units, but steady progress throughout 2023 is expected. I am very proud of the team and appreciate the tremendous amount of work that has gone into recapturing, turning, and releasing units. Thank you, team. Great job. Throughout the first quarter, we saw positive demand indicators for the portfolio. Lead volume, which reflects the number of initial inquiries into leasing an apartment and is a leading indicator of demand, was consistent with and up in some cases over the same quarter last year. Additionally, concession usage has declined from approximately two weeks free in the fourth quarter to a half a week free in the first quarter. We are experiencing a relatively normal ramp up to the peak leasing season. Net effective blended rates accelerated through Q1, averaging 2.9% for the quarter, and ended with March at 3.8%, although they moderated in April. This was due to a temporary increase in leasing incentives to offset a period of heavy eviction volume. While April averaged 96.4% occupied, we are at 96.9% today and well positioned to absorb additional turnover while still increasing rents as demand allows. Moving on to regional specific commentary. In the Pacific Northwest, our most seasonal market, blended net effective rents were up 30 basis points in the first quarter compared to one year ago. The elevated supply in the downtown submarket is weighing on our regional performance. The supply outlook for Seattle is comparable to 2022, and similarly, a more challenging second half of the year is expected. In Northern California, blended net effective rents improved to 2.6% in the first quarter year over year. We're seeing strength in the San Jose submarket offset by supply driven weakness in Oakland. The supply outlook for Northern California remains relatively muted, which will benefit our ability to push rents presuming job growth continues to outpace the recently announced layoff. Finally, in Southern California, Blended net effective rents were up 5% in the first quarter as demand remained solid. All regions have fared well to start the year, including Los Angeles. As I mentioned earlier, we're expecting elevated turnover in this region driven by evictions. In general, supply outlook in Southern California is very manageable, and outside of pockets of supply in submarkets such as West LA, this market is expected to fare well. In summary, 2023 has started off slightly better than expected. Demand for apartments has been solid. We continue to make progress with evictions and our occupancy-focused strategy positions as well. We are cautiously optimistic as we head into the peak leasing season, but also acknowledge the macroeconomic uncertainty that could influence apartment demand through the balance of this year. I will now turn the call back to the operator for questions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask your question, you may press star one 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please limit yourself to one question and one follow-up. Our first question comes from the line of Nick Ulico with Scotiabank. Please proceed with your question.

Great, thanks. Appreciate some of the commentary on the markets and the tech job exposure. I guess if you were to quantify some of the impact to markets, whether it's parts of Oakland, downtown Seattle, any other more difficult markets right now within the portfolio, how would you come up with that as a percentage of the total company?

Yeah. Hey, Nick. It's Angela here.

Good question. On the, you know, on our portfolio composition, big picture, we have about 20% of exposure in Seattle and 40% in Northern California and 40% in Southern California. And so when we look at the overall portfolio composition, we're actually pretty comfortable at where everything is sitting and our results have delivered especially in Q1, the way we had anticipated. Now, there are pockets of softness. For example, I think you heard about downtown Seattle and certain pockets in downtown LA. And so, you know, downtown LA, for example, is about 2% of our portfolio. And so, in aggregate, it's not so meaningful that it gives us pause. And as you can see by our Q1 results, that it's, we're generally, trending well here.

Great. That's helpful. And then just a second question is, I know you talked a little bit about the tracking ahead of same-store revenue growth guidance right now. I guess in terms of what some of the – you could talk a little bit more about some of the offsets that could prevent the guidance raise in the second quarter. I don't know if it's the delinquent units coming back to market and how they get leased. And then separately on the economic forecast, it sounds like, you know, the job losses are playing out better than expected year to date. And, you know, in many cases, large tech has already come out with their announcements. So, you know, maybe talk a little bit more about the decision to not change some of the economic forecasts as well. Thanks.

Yeah, it's Angela here again. Good question. And it's something we debated because you mentioned As you know, in Q1, jobs did track better than what we expected. Having said that, I do think that visibility this year is just more limited than past years because of Fed's position, right? And the next Fed meeting isn't until May 1. And so we are anticipating a mild recession, and that is a factor, and that's nationwide. Of course, it's not Essex. And you're right, with the tech layoffs, especially looking at the war notices, we saw that peak in January and appears to be trending down, but it's just too early to really have clear visibility on where the economy is headed. And Barb will talk about guidance.

Hi, Nick. Yeah, I would say on the guidance piece, delinquency obviously is a is something that's still a little bit uncertain to predict in terms of getting units back. As Jessica mentioned, L.A., Alameda just are coming out of their eviction moratorias. And so the timing on when we're going to get those units back is uncertain. And so that's a factor. And we also want to get a little further into the peak leasing season, given the uncertainty that Angela just mentioned. And then we'll do a full re-forecast for the second quarter. But, you know, the first quarter was very strong for us, and we feel pretty good going into the second quarter.

Our next question comes from the line of Eric Wolf with Citi. Please proceed with your question.

Thanks. I guess with respect to the stock repurchases, is there an internal limit sort of in the short term or long term or just as long as you're able to sell assets and then buy back your stock at a reasonable discount, you'll just keep going?

Hi, this is Barb.

We're going to match fund asset sales with stock repurchases so we know what we're locking in in terms of value. We do have an internal NAV and we know where the value of our assets are. And so we're going to be cognizant of it. We're going to be mindful of the balance sheet liquidity and maintain our strong balance sheet structure. And so it's not we're just going to do it to do it. We want to make sure that we're thoughtful about doing it. And what we did in the First quarters, we sold an asset that's non-core. It actually doesn't fit with our new operating model. We got a very attractive price for it. And then we're able to take it and redeploy it and buy back the stock and create a lot of value that way. So we're going to be very thoughtful going forward.

Right, right. And I guess what I was trying to understand is just, you know, if you're able to sell 200 million, you're able to sell 300 million successfully, you'd be willing to repurchase 300 million or, is there just sort of a certain point where, you know, from a GNA perspective and sticking other sort of considerations into account, that it's just not as efficient for you to keep selling assets and buy back stock. And then I guess to sort of add onto that question, you know, for your internal NAV, you know, are you using the cap rates that you see transacting your markets or sort of making adjustments about where it should be based on debt costs? Because I think the, The fear is that, you know, it's a pretty thin transaction market right now, so the cap rates we're seeing may not be sort of reflective of where things would transact if they had to.

Yeah, our NAV is based off of, you know, Adam and I sit down and we talk about where transactions are happening and where, you know, where we think we could sell our assets today and based off of what is happening and negotiations that are going on behind the scenes. And so we feel like we have a good pulse on the market we have sold assets over the last several years and proven out the value for the portfolio. And so that is the process on the NAV side. And, you know, we're very comfortable transacting and selling and then buying back the stock.

Okay. Thank you. Our next question comes from the line of Steve Stackwell with Evercore.

Please proceed with your question.

Thanks. Good morning. I guess maybe for Jessica, I was hoping you could speak a little bit to the blended rates that you talked about. I think in April, you said maybe there was some impact from the eviction. So I'm just hoping to see if you could quantify that, because I think amongst all your peers, you might be the only one that showed a decline in April. So just trying to get a sense of the magnitude of that and maybe what your expectations are for May and June.

Hi, Steve. Yeah, the overall, those numbers, those blended numbers that we're looking at, those are net effective trade out numbers. And so I think it's important to point out, as I mentioned in my prepared remarks, that through March, so they grew sequentially throughout the quarter. So April really reflected a point in time pricing strategy rather than underlying market fundamentals. And we've expected, you know, with the evictions, we're working through quite a few. And they do come to us in a steady stream, but we do anticipate that there might be some concentrations from time to time. And so that's what's really driven our occupancy-focused strategy. And you really saw that play out with our April occupancy number. We had floated down after seeing a concentration in March to 96.4%. But ultimately, when we think about as far as the markets and how they're progressing through the seasonal ramp up and the strength there, we really look at our market rent, which is essentially our gross recently achieved leases. And since the beginning of the year, we have seen our market rates grow sequentially through April. in all of our markets. And so those net effective trade outs, of course, incorporate concessions, and again, really reflects the point in time. So we saw really great activity in April, and we were roughly one week free as far as concessions go. And we've since pulled back to only a couple of days today on average. And, you know, breakdown by market, we're actually sitting at 97% in Seattle, 97% in Northern California, and then 96.8% today. So ultimately, we're pulling back on the concessions. There might be a little bit of a spillover into May, and we expect the trade-out rates to reaccelerate from here, and then also market rents to continue to grow.

Thanks. And then I guess maybe as a follow-up, just to get a little more color on Seattle, I mean, some of your peers had maybe a bit more weakness and spoke to the weakness specifically in downtown Seattle. I know that you have probably more east side exposure, but just any thoughts around Seattle in particular? And, you know, does Amazon's kind of May 1st return to office policy have any influence or have you seen any influence from that? Or do you think people were sort of already back in the Seattle market? Or do you think there's a wave of people to come back to the market in the near term?

I think, yeah, overall for Seattle, we have a pretty conservative outlook for Seattle this year. And as I mentioned, you know, I think it'll be more challenging in the back half as we experience more supply. And we've been experiencing that really for the last six months. But interestingly, yeah, in April, we did see quite a bit of movement from a leasing velocity perspective. So I do feel like that May 1st mandatory return to office three days a week for Amazon potentially had an impact for us. And as far as strength goes, I mean, anytime you introduce leasing incentives or adjust your rates, how the market responds and the leasing velocity you're able to get is really telling. And so we weren't necessarily targeting 97% in Seattle. So that really goes just to show that there is some underlying strength there. And so I think Amazon did play out. But again, we have a pretty conservative outlook and we're certainly seeing the impacts of demand, you know, with the diminishing of the hiring, you know, with Amazon and Microsoft last year having, you know, July, August, 30,000 open positions that essentially disappeared in a matter of a month or two. And then obviously we have the supply factors. We have both things working against us. But, you know, encouraged and, you know, I think Seattle's on track with our expectations for the year.

Our next question comes from the line of Austin Worshmuth with KeyBank. Please proceed with your question.

Great, thank you. Sort of going back to the stock buyback conversation, I guess, in sort of the sources and uses or match funding, any future repurchases, are you guys currently marketing any additional non-core assets today?

Hey, Austin, this is Adam.

Apologies. So at the moment, we are not actively marketing anything. We're always opportunistically looking at potential for disposing of assets that are either non-core or in non-core markets. And this is how CBC sweeps, which is the deal we sold last quarter. That's how that came about. But currently, no, not not marketing anything right now.

Got it. And then just going back to guidance a little bit, I mean, you mentioned a couple of components of driving the same store revenue outperformance in the first quarter first, you know, which is obviously a non-recurring item in the ERAP payments. Have you received any additional ERAP payments in the second quarter? And then second, you know, with the dip in April, I guess, how is April trending relative to plan? Is it, you know, offsetting some of the benefit you had in 1Q or is, you know, April occupancy and rents also trending ahead of plan? Thank you.

This is Barb. On the emergency rental assistance payments, in April, we had 100,000 in our same store portfolio, so nothing material. And that is disclosed in our supplemental. And then in terms of, you know, factors in the April guidance, the one thing I would say is that for delinquency, we did assume the first half of the year would be in the mid 2% range, two and a half. And then the back half, we expect it to continue to trend down to close to one and a half and 2% for the full year. So, you know, we're on plan with delinquency in April and then occupancy at 96.4 is generally in line with the plan as well.

Our next question comes from the line of Jamie Feldman with Wells Fargo.

Please proceed with your question.

Great. Thank you. I was hoping to shift gears to the expense side. Can you talk about just the key lineups and expenses? You know, there's been a lot of volatility for insurance for people and taxes. Just kind of what gives you conviction on your current outlook for the different expense lines? And where do you think maybe there might be some risk, either the upside or downside on the growth rates?

Yeah, this is Barb again. So on the expense side, I think the biggest variability we're seeing is really maintenance and repairs because we have more turnover. We had some more flood damage this quarter. So that's kind of one time. We don't expect that to reoccur, but we do expect the turnover to be a reoccurring item given evictions. I would say on the insurance, we've already done our insurance renewal for the year. So that line is pretty baked and we don't expect any surprises from From here on out, it is up 20%, but that's going to be the number for the year. And then on the tax side, you know, we do have the benefit of Prop 13, which is 80% of our tax base. And so that is pretty well known. We'll know Seattle taxes here in the second quarter and then really have that drilled in. And so for us, the variability on our expenses is mostly just tied to R&Ms. And then utilities, the one thing on utilities is it can be variable. We did, you know, we've put in place some gas hedges, which has helped us on the utility expense side.

And so, it's kept it to a more moderate level, all of being equal.

Okay. Thanks, Barb. Orange County seems to have come through this quarter pretty well across most portfolios, including yours. Can you just talk more about what's going on in that submarket specifically?

Yeah, as far as Orange County goes, it has performed well for the last couple of years. We were seeing good trade-out numbers, good leasing velocity. It's really stable as far as the supply outlook goes. There's nothing noteworthy there as well. So overall, Orange County is pretty stable as a lot of our Southern California markets. San Diego is similar as well.

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thank you. Barb, can you just elaborate a little bit more on the real estate taxes? You had the rare decline. And I think you mentioned last quarter you were budgeting a four and a quarter increase. And given real estate taxes are the largest components of OPEX and insurance came in pretty much where you expected, is there the likelihood of your expense guidance going down during the year?

Yeah, John.

So on the tax line, it really deals with a comp issue from the first quarter of last year. So in Seattle, if you recall, we did have a favorable surprise last year where our real estate taxes went down 4%. We didn't know that until the second quarter. The first quarter of last year was our budget and what we assumed taxes would be. And so it was way too high. And so we're comping off of a really easy comp. And that's why you see the negative 1.6 on the tax line. Like I said a few minutes ago, we'll know where Seattle taxes come in in the second quarter when we pay the bills. And so that's still TBD. We're still assuming four and a quarter overall for the tax line for this year. It's really just a comp issue in the first quarter.

Okay. I mean, I saw last year's first quarter wasn't that high either. It was like 3%. But anyway, my second question is on your MES opportunities. It seems like with regional banks having issues, that could be a part of the capital stack where you could see more opportunities at higher yields. And I'm wondering if that's the case and how you would stack that up versus banks.

Hi, John. This is Adam.

So over the last couple of months, we've seen, I would say, a slight uptick in possible opportunities come in the MES and PREF world. As you said, some of the Some of the lending sources out there have either tightened or disappeared entirely. It remains to be seen if this new wave that we're seeing will actually translate into deals. These, there are legacy development deals that have been out there a while. There are some new actually existing deals that we're seeing as well. But again, this process takes a long time and, you know, several months. And so, we're assessing a number of new opportunities. very too early to tell how many of them translate into actual deals. But we'll always, we'll continue to look at potential options of when we have liquidity, whether that's through dispositions or redemptions, what the best use of that capital is.

Our next question comes from the line of Brad Hefford with RBC. Please proceed with your question.

Yeah. Hi, everybody. Thanks. So the big tech layoffs have already been touched on, but I'm wondering what effect, if any, do you think the SVB failure and the associated impact on tech company funding may have on your residents? I know you typically talk about a relatively small exposure to big tech in the resident base, but I'm curious if you think that applies to startups as well.

Hey, Brad. It's Angela here. You know, with the SVB failure that occurred recently, We did not see any impact to our portfolio. And so, but, you know, looking forward, obviously, we don't know what can happen. But we do know that the parent has filed for bankruptcy, but a subsidiary, which is FCBB, has, you know, the Fed stepped in, and then it's been sold. And so, we certainly don't expect, you know, further disruption from that. And just looking at, you know, some anecdotal information, looking at the 30-plus companies in our real estate technology ventures, there's no impact there either. So, you know, as it relates to kind of that broad banking sector, it may play into more a broad economy conversation. And, you know, that's one of those reasons that we are forecasting a mild recession in our current expectations.

Okay, got it. Thanks for that. And then maybe for Barb, another one on the guide. You know, the increase of the guy was smaller than the beat versus the first quarter midpoint guide. I know you mentioned that most things are outperforming and then you had the repurchase as well, but it seems like there was some sort of offset for, you know, the rest of the year, second quarter, fourth quarter. So can you talk about what that is?

Yeah, so the vast majority of the beat in the first quarter was really tied to same-store revenue growth, and we didn't change our revenue outlook. And so that is not carried forward through in the guidance. So that was $0.07 of the $0.08 beat. The reason we changed our guidance was the stock repurchase, which we'll carry forward. That's three pennies. And then we also have higher other income, mostly tied to better rates on our cash management platform and how we're managing our cash. and our marketable securities. And then a partially offset by lower co-investment tied to preferred equity redemptions and the timing of those redemptions. So that's what was updated in the guidance.

Same will be revisited here in the second quarter.

Okay. Thank you. Our next question comes from the line of Adam Craver with Morgan Stanley. Please proceed with your question.

Hey, guys. Thanks for the question. Just wanted to ask about it. Look, I know we touched on kind of tech and SBB. Maybe asking that same question a little bit differently, which is just on kind of severance packages. I know some of the early layoffs last year, maybe some even later in the year, had longer severance packages, right? And so maybe you wouldn't kind of see that change in resident behavior right away. wondering if maybe some time has passed since then, any difference in resident behavior, kind of given these severance packages that may be expiring now?

Yeah, it's Angela here. The severance packages can, you know, range up to three months. Having said that, you know, given bulk of the layoff announcements that occurred back in January, Tenants' behavior, they tend to make decisions say 45 days to 60 days in advance of a major event. We, you know, what our expectation is that we've seen that play through our portfolio. We've digested that already. And once again, you know, I kind of want to point to the job growth numbers as a good indicator. But the other good indicator is the initial unemployment claims in California and Washington. And to date, they still remain below the 15-year average.

So that's another, you know, good data point there.

That's good. That's all super helpful. Maybe a follow-up. I think you guys have done a really good job of kind of bringing us into your minds when it comes to kind of managing occupancy versus pushing rents. I think both from this call and prior calls, maybe just kind of on a go-forward basis, walk us through kind of, you know, kind of that trade-off, right? I know you mentioned concessions now lower than they were. earlier in April. Walk us through maybe just kind of how you're thinking about that trade-off now, giving kind of the, you know, the demand screen today, right? How are you thinking about kind of managing occupancy versus pushing rents?

Hi, Adam. This is Jessica. Yeah, so, you know, we're progressing through the peak leasing season, and, of course, we're always going to be opportunistic with a focus on maximizing revenue. I think overall with our outlook for the year, I think we'll probably spend the bulk of the year focused on occupancy based on, you know, we know we're going to continue to have to work through evictions, but also rent growth is moderating. And when you think about as far as rate growth, you know, anytime you're turning an apartment, you know, you're experiencing the turn costs and the cost of vacancies. And so you really have to be getting some really strong trade-out numbers to make it make sense to be focused on rate over occupancy. But certainly, you know, we'll monitor the markets closely. And just like we pulled back concessions at the end of April and leaving us well-positioned for the peak growth period that typically occurs in Q2, we certainly have opportunities, again, to maximize revenue overall. Okay.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Please proceed with your question.

Hey, uh, good morning, morning out there. Uh, so two questions first, uh, just going back to Silicon Valley, uh, let me ask the question this way. Uh, you guys mentioned that you anticipate the a hundred billion of, uh, you know, of debt and preferred equity being taken out this year and that the, uh, the owners of those properties have capital options in Fannie and Freddie. So are you saying that what's going on in banking and where we see people, lenders pulling back from real estate loans, that's having no impact on your debt and preferred equity portfolio? Or is it just this $100 million that you're slated for being taken out as fine? But broader speaking, there are bank fallouts to the debt and preferred equity business.

Hi, Alex. It's Barb.

You know, what I was speaking to is that, you know, there is still capital available in the multifamily space. I know in other sectors, it has definitely pulled back. And I definitely think the banks have pulled back. But the government financing is still available. Life insurance companies are stepping in. And I think you're seeing other lenders step in. And in our preferred book, keep in mind, the deals that we're getting taken out of And they were underwritten 2019, 2020, a long time ago when, you know, cap rates weren't in the mid three and a half. And so we can get fully taken out. And so I think they're good situations for us. And, you know, we haven't seen any real issues within our own portfolio. It doesn't mean that it's not happening elsewhere. But in terms of distressing the whole market, we haven't seen that in a significant way on the West Coast.

Okay. The second question is going back to supply. It sounded like the only market that was an issue is Seattle. And I'm assuming that's Seattle downtown, not the suburbs. But in general, as you look at your portfolio into next year and the year after, do you see supply coming down everywhere? Like Northern Cal is clearly that's been a pullback. But do you see any area where there's going to be a deluge of supply that's going to deliver next year? Or as you look across your portfolio, whatever this sort of is the peak and, you know, next year should be less supply across your markets?

Hey, Alex, it's Angela here. It's a good question, trying to figure out, you know, looking ahead, what's happening here. In terms of our portfolio, just big picture, starting today, This year compared to last year, overall supply is slightly down. But the vast majority, as you pointed out, is Northern California, down over 20%. And Southern California is up slightly, about 14%. And the bulk of it is in the downtown, you know, downtown L.A. and in some of these other, West L.A., you know, certain other markets. But overall, of course, that supply number is quite muted. If we look forward, what we're seeing preliminarily is a similar landscape. And so not a huge drop off, but similar level. But keep in mind, we're already operating at a pretty darn low level, right? I mean, you know, total supply as percent of total stock is only 60 basis points. And so we do foresee that to continue, especially, you know, given the environment of a much more challenging labor force available and higher construction costs. And lastly, rents in the northern region haven't moved significantly past pre-COVID. So northern California is still, you know, slightly below pre-COVID level. And so it didn't surprise us that southern California, you know, picked up slightly this year. I think you kind of see that, you know, throughout the country where you have significant rent growth, that's where supply will occur. So that's the big picture for overall, you know, this year and next year, similar levels, and it's going to be in our markets.

Okay, so just to clarify, Seattle, it is just downtown Seattle that's the issue, right?

Seattle overall is slightly down, but downtown is up.

Okay, thank you.

Thank you. Our next question comes from the line of Anthony Powell of Barclays.

Please proceed with your question.

Hi, good morning. Going back to the sheer buybacks, do you have a number of assets or a dollar number in terms of non-core that you would sell? And if you were to get offers on core assets at those four to high four cap rates, would you opportunistically sell those to buy back creatively?

So on the first, hi, I think it is Adam. The first part of your question, do we have lists of non-core assets? The answer is yes. And we're constantly having discussions and going through those to see where they could potentially sell and what we could do with the proceeds. As to the amount with which we can buy stock back, there are challenges always with dispositions There's always the different ramifications of tax gains, Prop 13. So all of those are taken into account when we assess what we can do with those proceeds. There's also another tool in the shed is to use 1031 exchanges to exchange out of non-core assets into markets that we think will overall affect the portfolio in a positive way.

Okay, thanks. And maybe more broadly, it sounds like you're a bit more – optimistic on kind of the West Coast markets recovering this year despite the layoff activity. Does this make you, does this reinforce your view on the West Coast as the best use of capital, the best place to invest, or would you still consider maybe diversifying into the East Coast or Sunbelt as we've talked before about in prior calls?

Yeah, hi, it's Angela here. On the diversification question, you know, or expanding outside of West Coast, it is something that We have been disciplined about evaluating. And so that, just that basic, you know, discipline has not changed. We're going to continue to monitor those markets and look for opportunities. But back to your original point, I think you hit the nail on the head, especially as it relates to Northern California. You know, a couple of things going for it. for our markets, right? We have the lowest supply deliveries and especially Northern California supply is down 22%. We're just starting to rebound in terms of job growth, getting jobs, numbers getting back to pre-COVID levels and market rents still below with gradual improvements. We're in the best affordability position from a rent to income perspective in the Northern region. you know, below a long-term average. And so that would point to, you know, all the best growth prospects. And on the just broad picture on the migration front, and we all experience, you know, meaningful net all migration during COVID. Well, the migration landscape has been improving gradually as well. And so, you know, you put together all those pieces to point to that where we want to deploy Our dollar, where we see the most upside ahead of us, it's in the West Coast.

All right. Thank you.

Our next question comes from the line of Wes Galladay with Robert W. Baird. Please proceed with your question.

Hey, everyone. I just want to get your view on the maybe starting developments, you know, with the hopes of delivering into a better part of the cycle.

Hi, Wes. This is Adam.

It's the development landscape today is challenging for a number of reasons. Angela's pointed to a few of them. With a challenging labor market, construction costs have remained elevated. And so when solving for a call it 20% premium over where market cap rates are, it just basically will lead to a lower land price than land owners are willing to go. Sure, we would love to be delivering into a lesser supply market, but right now, it's just the development deals just don't cancel.

Got it. And can you remind us, don't you have a few covered land places, or did you get rid of those?

We do, yes, and those are still generating active revenue, and with some, we're pursuing entitlements in the meantime, so parallel processing, and others have just longer-term lease commitments.

Okay. And then could you talk about, you know, maybe the demand from people that are currently have an H1B visa? Do you view it as maybe a potential positive with more people getting visas or with tech layoffs, maybe you might lose a few people?

We actually see the international part to be a tailwind for us because it's just starting. And so I think it's no surprise that, you know, historically, California has a net out migration if you only look at domestic numbers. In fact, 17 out of the last 20 years, it's met out migration domestically. And even during those periods, we had, you know, meaningful rent growth acceleration. So the international component is what drives migration to become positive for California. And that virtually disappeared. I mean, it was zero during COVID. And so that is just starting to come back. And so we are hopeful that will, you know, be additive to the demographics piece.

Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks a lot for taking my question. My question is about migration. How has demand been from customers currently living outside Essex's market, and how does that compare with normal and then also the other side? Have you seen increased or decreased move outs to non-Essex markets?

Yeah, that's a good question. You know, compared to the migration from outside of Essex markets, we are generally, just domestically speaking, of course, We're generally back to pre-COVID levels, and so that's a good thing. And, you know, with, of course, with the international, we do see that's where the tailwind is. As far as the out-migration piece, when we look at the migration numbers, we look at it on a net basis, and so we're continuing to see gradual improvements.

Got it. And my follow-up, you know, we've talked a lot about tech layoffs, but, you know, have you seen any specific changes in the reasons for move out?

Yeah, we really haven't. I mean, we've tracked, of course, the usual, you know, move out to purchase a home that's below the long-term average, move out for jobs, new jobs or transfers or loss, you know, on that one bucket and in totality. It's generally in line with historical norms. And so what I think is happening is, you know, what we're seeing, which is that the job losses are being quickly absorbed and benefited by that gradual emigration on a net basis.

Our next question comes from the line of Chani Luthra with Goldman Sachs. Please proceed with your question. Sandy Luthor, your line is live.

Sorry, I was on mute. Sorry about that. Could you give us any thoughts around the real page issue? Any changes you're making to your operating platform considering this dynamic situation? And then how are you thinking about the roll-out class action suit?

Hey, Shandi, it's Angela here. You know, we actually have been reducing our usage of RealPage as we develop our new revenue management system over the past several years. And so we started as well before the RealPage lawsuit, you know, for the reasons that Jessica mentioned earlier. So we believe that their claim is without any merit, and we're very confident about our defense prospects.

Great. And as a follow-up, and sorry if I missed this, but what was gross delinquency in the first quarter? I believe net was 2.1. And then, you know, as we sort of think about delinquencies improving faster than expected with eviction, moratorium, going away and the process becoming easier, could there be upside to that 2% gross delinquency number that you laid out earlier?

Hi, Shandi, it's Barb. So in the first quarter, gross delinquencies were 2.5% versus the reported number of 2.1, so 40 basis point improvement tied to emergency rental assistance. And then for the outlook for the year, the 2%, we're still holding to it. I think You know, I think L.A. and Alameda have just come off. It's really going to depend on how quickly the courts move on these evictions. It's taking, you know, six-plus months right now. And so, you know, that really is going to depend how quickly either people go through the whole eviction process or whether they just skip. And that's a little unknown at this point.

I think in the next few months we'll have a better visibility on that. Great. Thank you for the detail.

Our next question comes from the line of John Pulaski with Green Street. Please proceed with your question.

Thanks. Maybe just a follow-up question to that bad debt topic. Barb, just one question on the longer-term bad debt profile of your markets. Based off the current trajectory of gross delinquencies and just the payment behaviors you're seeing among tenants, do you think when the dust settles, bad debt actually settles out at a structurally higher level versus pre-pandemic behavior? And if not, when's your best guess on when bad debt does get back to pre-pandemic levels?

Yeah, John, it's a great question, something we talk about internally a lot. You know, we historically have been at 35 basis points pre-COVID. We believe we'll ultimately get back there because there won't be any loss to protect tenants like there was during COVID, which allow tenants to have this behavior. And so now that we're coming out of all the moratoriums, I think the city of Oakland is the only one that really remains. We think we will get back there, but it's going to take until into 2024 to get there. And it won't be for the full year of 2024. It's going to take into that year because of the eviction process and how long it's taking. But structurally, we don't believe that there will be a fundamental shift in delinquency in our long-term

trends will go up because of COVID. Okay. In your unregulated submarkets within the portfolio, has bad debt reverted fully back to pre-COVID levels?

You know, I don't think we've, no, I don't think we've gone back fully to pre-COVID levels in our other markets. As Jessica said in the call or in her prepared comments that, You know, we've gotten over 60% of our long-term delinquent residents out over the past or since the start of 2022, so we're making good progress, but we're not fully back to where we should be at this point.

Okay. And then last question for me is more of a regional question for Angela or Jessica. If you start the clock today, which region do you think will generate the highest and lowest revenue growth in the next two or three years, Seattle, Northern California, or Southern California?

Well, it's Angela here. I'll start, and Jessica is welcome to add. You know, in terms of the upside or the most revenue growth, we definitely see Northern California being at the top of that list, followed by Seattle and then Southern California. And both for, with Northern California because of, you know, as I said earlier, the job growth is just getting back to pre-COVID level. Market rents are still below pre-COVID, but it has been gradually improving. It has the lowest level of supply deliveries relative to our other portfolio and the best affordability position. And so that, for those reasons, it's ranked number one. And Seattle, for similar reasons, but it does have a higher supply, you know, and it's more volatile or more seasonal. And so, which means, so with Southern California coming in, you know, last, not because we don't like it, it's just because it's just done so well. I mean, it's, you know, it's 15, in some cases, 20, 30% rent growth above pre-COVID. And we're starting to see some supply pressure, which, you know, it's still in check relative to the rest of the U.S., but relative to our markets, it's starting to creep up. And so that's the order of the ranking. Jessica? I have nothing to add. Agreed.

Okay, good. Glad you agreed. Our next question comes from the line of Handel St. Just with Mizuho. Please proceed with your question.

Hey, it's Barry Liu on the line for Handel St. Just.

I just want to have a quick follow up on the regulatory question. So I was wondering if you could provide a color on the eight and a half million in legal settlements added back to your core FFO. Wondering if that's from one big settlement and if there's any piece of that that will trickle into future quarters. Thank you.

Yeah, this is Barb. It was primarily related to a legal settlement for construction defect at one of our properties, and there's no carry forward on that. That was just a one-time item that occurred in the first quarter. It was paid in cash, so that's done.

Got it. Thanks.

Our next question comes from the line of Joshua Dennerle with Bank of America.

Please proceed with your question.

Yeah, thanks for the time, everyone. Just wanted to touch base on the new revenue management software you rolled out at the start of the year. Just curious to kind of hear your experiences as you're using that now and how it's trending versus your expectations and just maybe just the capabilities versus your old software.

Hi, this is Jessica. Yeah, things are going very well. We're very pleased with the platform thus far, and we have a long development pipeline for that revenue management system. So all is going well. I mean, a couple of benefits to point out that we're looking at is it's in alignment and allows us to price at a portfolio level with our property collections model. versus the commercially available systems you're often pricing at the property level. And then second, we also see, as far as long-term development, the ability to optimize our amenities. So when you look at like our average rent is $2,600, and a good $200 of that is actually fixed amenity values. And again, with your commercially available systems, that portion of the rent is not optimized. And so if you look at that on an annual basis, what that is for us, it's over $100 million that's not optimized. So that's one opportunity we also see moving forward with the system. So there's a few value-add opportunities to give you a couple of examples.

Okay. Thanks, Jessica. Maybe just One follow up on that. What exactly do you mean by like price of the portfolio level and like what's the benefit to having it done that way?

Well, when you're looking at, we have a high geographic concentration. And so when you're pricing properties individually, sometimes you can be kind of cannibalizing yourself based on the occupancy position at a property. And so when you're looking at an entire portfolio collectively, one bedrooms, two bedrooms, ultimately you can maximize revenue through more stable approach to rents and the balance with occupancy.

Appreciate that. Thanks, Jessica.

Our next question comes from the line of Linda Sy with Jefferies.

Please proceed with your question.

Hi. Thanks for taking my question. Just one on the job market. You know, to the extent that job growth has fully recovered to pre-COVID, more notices are below average and that laid off people are finding jobs quickly again. Do you have a sense of what industries people are getting hired to?

Yeah.

You know, in our markets, well, in the northern regions is, of course, you know, more tech But in Southern California, it's more service-driven. These are in hospitality. You know, it's much more diversified. It mirrors that of the U.S. broad economy with more professional services and, of course, you know, higher income levels.

Is the tech hiring from the ones that are also laying off, or is it more diversified?

It's more diversified. Got it. Thank you.

There are no further questions in the queue. This does conclude today's teleconference.

Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.