Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust fourth 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 Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.

Good morning, and thank you for joining Essex's fourth quarter earnings call. Bar Pack will follow with preparing remarks. Rylan Burns and Jessica Anderson are here for Q&A. I will start with the key highlights of our 2023 performance, then discuss our expectations for 2024, followed by comments on the transaction market and our investment strategy. Overall, 2023 was a solid year for Essex. We achieved a 4.4% same property revenue growth for the full year, which is in line with our revised guidance and 40 basis points higher than the original midpoint. Furthermore, we made substantial progress in reducing delinquency as percentage of rent, from over 2% in the first quarter down to 1.4% by year-end. These are the results of the well-coordinated efforts of our hard-working operations and support teams across the company. Great job, team, and thank you. Lastly, we continued to drive results to the bottom line, delivering a 3.6% year-over-year increase in core FFO per share, exceeding the high end of our original guidance range by six cents. Turning to the fourth quarter, we deployed an occupancy-focused strategy as market grants moderated generally consistent with typical seasonal pattern. In addition, we recovered a significant number of delinquent units starting in October. As expected, the subsequent backfilling of non-paying units during a seasonally slow period created a temporary headwind to net effective new lease rates, which averaged negative 1.7% for the quarter. On the renewal front, the positive trend continues with strong retention among our residents, generating an increase in renewal rates of 4.9% for the quarter, resulting in blender rates of positive 2.6%. As we start 2024, leasing activities in our markets is steady. In January, new lease net effect rates improved by 150 basis points and concession usage decreased by half since the fourth quarter. And our financial occupancy sits in a solid position of 96.2%. Moving on to our outlook for the West Coast in 2024, as outlined in our earnings package, we expect the U.S. economy and job growth to normalize in 2024, consistent with economists' outlook of a soft landing. We forecast job growth on the West Coast to perform in line with the national average on the ethics markets to produce market rent growth of 1.25% on average. The consensus macroeconomic US assumptions and the quality of jobs are key considerations to our modest outlook. In 2023, the employment growth was largely concentrated in the service sectors, which did not yield meaningful rent growth. We expect this dynamic to continue, and we currently assume hiring of highly skilled workers to remain muted as companies continue to evaluate their labor needs and priorities. While our base case scenario for 2024 reflects tempered growth, there are several factors that could support a more positive outcome. First, inflation could continue to move in the right direction, increasing the likelihood that the Fed will pivot from tightening to easing. Accordingly, the economy could gain momentum and the hiring of highly skilled workers reaccelerate as cost of capital becomes more attractive. Second, the large technology companies implemented significant business and labor retrenchments at the end of 2022 through the early part of last year. Therefore, these companies are better equipped today to lead advancements and stimulate growth. To this point, Recent layoff announcements have been much smaller in scale, with companies citing larger strategic plans to redirect talent and investments toward artificial intelligence projects, which we view as a long-term benefit for the West Coast. With low levels of housing supply in our markets, a modest increase in demand could accelerate rent growth. Despite uncertainties in the overall economy, we are confident in our market's ability to navigate near-term volatility and to outperform in the long term. Our conviction is based on two fundamental factors, low housing supply and favorable affordability. Over the next two years, we expect less than 1% of total supply growth per annum, which enables us to generate positive rent growth in most environments. Also, renting in the Essex markets is considerably more affordable than owning a home, and favorable rent-to-income ratios support a long runway for rent growth, especially in our northern regions. As such, we expect the economic incentive to rent to persist and drive demand for multifamily housing. Lastly, on the investment market and our strategy, 2023 was a year of historically low transaction volume, primarily due to significant volatility in the capital markets. Although we've seen interest rates decline throughout the fourth quarter, yield spread between buyers and sellers remain wide, ranging from approximately 25 to 50 basis points in our markets. And thus, we are not anticipating a significant increase in deal volume in the near term. Lenders have generally been accommodating to sponsors, extending debt maturities when feasible, and there are very few forced sellers in our markets currently. Given the dearth of data points, there is less certainty in the transaction market. It is during periods of uncertainty that Essex has historically created significant value for our shareholders through external growth. As such, our investment team is proactively looking for acquisition opportunities to generate the best risk-adjusted returns. We expect Essex's disciplined approach to capital allocation, strong balance sheet, and deep market expertise will be key differentiators in creating long-term value. With that, I'll turn the call over to Barb.

Thanks, Angela. Today, I will discuss the key assumptions to our 2024 guidance and provide an update on the balance sheet. Beginning with our outlook for 2024. A key factor to our revenue forecast is our market rent growth assumption. As Angela mentioned, the economic backdrop is expected to be muted this year, which is leading to below average rent growth for our markets. As a result, same property revenue growth is tempered at 1.7% at the midpoint on a cash basis. The key drivers of our revenue growth are outlined on page S17.1 of the supplemental. Our guidance assumes delinquency of 1.5% of schedule rents for the full year, which represents a 40 basis points improvement to year-over-year revenue growth. We expect delinquency will gradually improve as we move through the year. In terms of regional performance, we expect Southern California will produce our highest revenue growth at 3%, led by Orange County and San Diego. Northern California will be around 1%, and Seattle will be our weakest performing region, which is forecasted to be flat on a year-over-year basis. Moving to operating expenses, we are projecting 4.25% growth for the full year, which is largely driven by higher insurance costs. Although insurance costs accounts for a small portion of our total operating expenses, we are forecasting a 30% increase in our premiums, which adds 1.4% to our total same property expense growth. The company remains focused on managing controllable expenses, which we are forecasting to increase 3% in 2024, primarily driven by higher wages. In total, we expect same property NOI growth of 60 basis points and core FFO per share growth to be flat at the midpoint compared to 2023. Core FFO growth would be over 1% higher if not for the impact from two items related to our preferred equity platform. First, in December, we received $40 million in redemption proceeds, and we are forecasting an additional $100 million in redemption proceeds this year. We anticipate redeploying the funds into new acquisitions, which tempers our near-term FFO growth, but is the best long-term capital allocation decision for Essex. Second, while our sponsors remain current on all financial obligations with the senior lenders, we changed the accrual status on two investments in the fourth quarter based on current market conditions. Further, we've taken a prudent approach as to how we projected income for the remainder of the portfolio as part of our 2024 guidance. We will continue to evaluate their accrual status on each of our preferred equity investments every quarter as appropriate. Turning to the balance sheet, Ethics is in a strong financial position with minimal financing needs over the next 12 months and ample sources of capital. Our leverage levels are solid with net debt to EBITDA at 5.4 times, and we have over $1.6 billion of liquidity available to us. We manage our balance sheet and capital needs conservatively to be well positioned to create value throughout the cycle, and we remain optimistic we will see opportunities to invest this year. With that, I will now turn the call back to the operator for questions.