Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust's first quarter 2024 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, Ms. Angela Klyman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Klyman. You may begin.

Good morning and thank you for joining Essex first quarter earnings call. Our pack will follow with prepared remarks and Rylan Burns is here for Q&A. We are pleased to kick off our 2024 earnings with a notable increase in our four year guidance. This is primarily driven by solid first quarter results with core SFO per share of 4.9% exceeding the high end of our original guidance. Barb will provide more details on our financial performance in a moment. Today, my comments will focus on market fundamentals and operational highlights, followed by an update on the investment market. Heading into 2024, consensus forecast was a slowdown for the U.S., and so far, U.S. job growth has trended better than initial forecast. Job quality, on the other hand, has been concentrated in government and low-wage service sectors. In the West Coast, The tech industry is a primary source of high-paying jobs, and job growth in this industry has lagged because of evolving business strategies as companies reallocate resources to artificial intelligence opportunities. However, we have seen encouraging signs, including a steady increase in job openings in our markets by the top 20 tech companies. As for our near-term outlook, recent inflation data and Fed commentary have resulted in elevated uncertainty regarding the path of interest rate cuts. With this in mind, we do not anticipate an imminent improvement in job growth in the high-paying sectors, which is typically the key catalyst to accelerate demand for housing and rent growth. While job growth on the West Coast has remained soft, our steady performance here today is attributed to two factors. First, limited housing supply. This is a significant structural benefit and a pillar of our California investment thesis. Lengthy and costly entitlement process effectively deters housing supply. To this point, total housing permits as a percentage of stock continues to remain well below 1% in Essex, California markets. Our performance today demonstrates this supply advantage. It is a key stabilizer during soft demand periods and a driver of rent growth outperformance over the long term. The second positive factor is rental affordability, which is driven by wages growing faster than rent in Essex markets. Additionally, the cost of home ownership continues to rise. The median cost of owning a home is two and a half times more expensive than renting in our markets. Likewise, the percentage of turnover attributed to purchasing a home has fallen from around 12% historically to 5% today. Accordingly, Rental affordability supports a long runway for rent growth in the ethics markets. Turning to first quarter operations, we achieved a 2.2% growth in blended lease rates, which consists of 10 basis points on new leases and 3.9% on renewals. Our new lease rates are tempered by delinquency related turnover in LA and Alameda, which comprise of approximately 25% of our total same store portfolio. If we excluded these two regions, new lease rates would have been 150 basis points higher at 1.6%. Moving on to regional highlights. Seattle was our best performing region, achieving blended rates of 3.6% with new lease rate growth of 1.3%. New lease rates turned positive in February, led by the east side, and the positive trend has continued. Northern California was our second best performing region with 2.1% lender rate growth and flat new lease rates. San Mateo was our strongest market, offset by the East Bay, which remained challenged primarily from delinquency impact in Alameda County. Excluding Alameda County, new lease rates in Northern California would have been 70 basis points. As for Southern California, This region continues to be a steady performer, generating blended rate growth of 1.7% with negative 30 basis points in new lease rates caused by delinquency in Los Angeles. Excluding Los Angeles, average new lease rates would have been positive 3.1% in Southern California. Along with the improvement in eviction processing time, our operations and support teams have done an excellent job recovering long-term delinquent units at a faster pace, which has led to lower delinquency. We welcome this trend and continue to proactively build occupancy in anticipation of recapturing more units in this region. We view this temporary tradeoff as net beneficial to long-term revenue growth. As for current operating conditions, At the end of April, we are in a solid position with 96% occupancy heading into peak leasing season. Concessions for the portfolio average only three and a half days, and aside from areas with delinquency had been discussed earlier, we see opportunities to increase rental rates throughout our portfolio. Lastly, on the transaction market. Deal volume remains thin compared to recent years, and we continue to see strong investor demand for multifamily properties in our markets, with cap rates ranging from mid-4% per core to mid-5% for value-add communities. Against this backdrop of limited transaction volume, we have created external growth opportunities generating FFO and NAV per share accretion through our joint venture platform. In the first quarter, we purchased our current interest in a $505 million joint venture portfolio that will produce almost $2 million of SFO accretion for us in 2024. In fact, since inception, our private equity platform has delivered a 20% IRR and over $160 million to promote income for our shareholders and remains an attractive alternative source of capital. In conclusion, We intend to pursue growth through acquisitions while maintaining our disciplined capital allocation strategy and our core principle of generating accretion to create significant value for our shareholders. With that, I'll turn the call over to Barb. Thanks, Angela.

I'll begin with comments on our first quarter results, provide an update on key changes to our full year guidance, followed by comments on investment activities, capital markets, and the balance sheet. I'm pleased to report core FFO per share exceeded the midpoint of our guidance range by $0.09 in the first quarter. The outperformance was primarily driven by higher same property revenue growth, which accounted for $0.06 of the $0.09 beat. The first quarter also benefited from one-time lease termination fees within our commercial portfolio, totaling $0.02, which are not expected to reoccur for the remainder of the year. Turning to our full year guidance revisions. As a result of the strong start to the year, we are increasing the midpoint of same property revenue growth by 55 basis points to 2.25%. The increase is driven by two factors. First, delinquency has improved faster than our original expectations, which accounts for 40 basis points of the revision. We now project delinquency to be 1.1% of scheduled rent for the year. The second factor relates to higher other income as we have been successful at optimizing our portfolio through various initiatives, which has led to 15 basis points of better growth. While we are trending slightly ahead of our expectations on blended lease growth so far this year, especially on renewals, we have not factored any revision into our guidance as we want to get further into peak leasing season when we sign the bulk of our leases. The other key driver of our full-year guidance revision relates to the consolidation of our partnership in the BEX-AEW joint venture, which accounts for $0.03 of FFO accretion. As Angela highlighted, this acquisition reinforces the value Essex has created for shareholders through our joint venture platform, as well as our ability to grow externally in an otherwise challenging market. In total, we are raising core FFO by 20 cents per share, a 1.3% increase at the midpoint. Turning to our preferred equity investments, subsequent to quarter end, we assumed a sponsor's common equity interest affiliated with a preferred equity investment. This investment was previously on our watch list and was placed on non-accrual status in the fourth quarter of 2023. As such, this transaction is beneficial to our 2024 core FFO forecast. The property is located adjacent to an existing ethics community, which will allow us to operate it efficiently within our collections model. Overall, we view the outcome favorably given that quality of the asset, our initial yield, and our long-term view on the growth in the Sunnyvale submarket. Turning to capital markets. In March, we issued $350 million in 10-year unsecured bonds to refinance the last remaining portion of the company's 2024 debt maturities and to partially fund the BEX-AEW transaction. We are pleased to have locked in 5.5% fixed rate debt in today's volatile interest rate environment. As it relates to equity, the company did not issue common stock to fund our year-to-date investments, nor do we plan to issue equity at our current stock price. We have alternative sources of equity capital, such as retained cash flow and preferred equity redemption proceeds from last year and expected this year that can fund up to $400 million in investments, including transactions completed to date, without the need for new equity. We will continue to look at all our sources of equity capital, including disposition proceeds or joint ventures, in order to maximize growth in core FFO and NAB per share while preserving our balance sheet strength. We have been prudent stewards of shareholder capital over our 30-year history, which has served our shareholders well. In conclusion, ethics is in a strong financial position. Our leverage levels remain healthy with net debt to EBITDA at 5.4 times, and we have over $1 billion in available liquidity. As such, we are well equipped to act as opportunities arise. I will now turn the call back to the operator for questions.