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.