Essex Property Trust, Inc.

Good day and welcome to Essex Property Trust second 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 risk 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 Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.

Good morning and thank you for joining Essex second quarter earnings call. Our pack will follow with prepared remarks and Rylan Burns is here for Q&A. We are pleased to report a strong second quarter with core FFL per share exceeding the high end of our guidance range by five cents. As a result, we have our second notable increase to our full year guidance. Today, my comments will focus on underlying drivers to our outperformance and operational highlights, followed by an update on the investment market. Starting with operating fundamentals. Year-to-date, demand for West Coast multifamily housing has exceeded our expectations, particularly in Northern California and Seattle regions. While we've traditionally relied on the BLS to assess housing demand, the reported data have not correlated to the strength we're experiencing on the ground. As such, we've analyzed alternative demand indicators from third-party sources for better insights into the key drivers supporting housing demand. The first of these is job openings at the top 20 technology companies. In June, openings in the Essex markets total over 17,000 jobs, which represent a 150% increase from the 2023 trough. While we have yet to return to the historical average of 25,000 jobs, The steady improvement so far has generated incremental demand in our markets and is a good precursor of the recovery, particularly in Northern California and Seattle. Another factor contributing to West Coast housing demand is migration. Real-time data using Placer AI shows a gradual improvement in domestic migration patterns on the West Coast. This is illustrated on page S16.1 of our supplemental. This data suggests that workers are relocating back to the coastal headquarters, generating a shadow demand similar to a new job being added. Additionally, this year, Northern California has positive net domestic migration for the first time since pre-COVID. As for supply dynamics, limited new housing combined with favorable rental affordability continue to underpin our market fundamentals. For example, the rate of income growth has outpaced rent growth, which has improved affordability metrics in our markets. Additionally, it is 2.8 times more expensive to own than to rent in our markets today, compared to 1.7 times back in 2019 when interest rates were near the historical low. Even if mortgage rates were to revert back to the 2019 level, home ownership in our markets will still remain significantly less affordable than renting. Turning to property operations, we experienced a solid peak leasing season with blended rent growth for same property portfolio of 3.4% for the quarter. Blended rent growth would have been 4.5%, so 110 basis points higher if we exclude LA and Alameda, the two counties with elevated delinquency-related turnover. As for regional highlights, Seattle has been our best-performing market today. achieving a 4.9% blended rent growth while maintaining strong occupancy level of 97% in the second quarter. The east side, which has been less impacted by supply than the CBD, led this region with 5% blended rent growth. There are two key factors that contributed to this strong performance. First, relative to our other regions, Seattle has the strongest job growth. Second, The new supply has been less impactful as timing delays resulted in fewer deliveries in the first half of the year. These two factors have led to a prolonged seasonal peak in that this market typically peaks around late June, but this year the peak occurred a month later, around the end of July. Northern California was our second best performing region, achieving a 3.3% blended rent growth in the second quarter, an occupancy of 96.3%. San Mateo and San Jose were the notable outperformers at around 4% growth, with Alameda County pulling down the regional average by 80 basis points due to delinquency turnover and the continued elevated supply in Oakland. Generally, rents in this region peaked around early July, consistent with historical patterns. Lastly, Southern California continues to be a steady performer. We achieved 2.8% blended rent growth for the quarter, which would have been 200 basis points higher if we were to exclude L.A. In similar fashion, Southern California's average occupancy of 95.7% for the quarter was tempered by Los Angeles, with all other markets at or above 96% occupancy. Excluding LA, Southern California's rents peaked in late July, consistent with historical patterns. As we begin the third quarter, our portfolio is well positioned with average concession of less than two days and occupancy is healthy at 96.2%. We are prepared to shift to an occupancy strategy as appropriate while maintaining the optionality to maximize rental growth. Finally, on the transaction market, In the second quarter, there was a significant increase in investor demand for well-located, newer multifamily properties on the West Coast. In contrast, the number of marketed properties for sale remained low. This combination has resulted in a highly competitive bidding process and a compression in cap rates in some markets. Over the past few months, Essex has selectively procured three high-quality communities in the Bay Area. All three of these investments have significant upside potential based on the favorable fundamental backdrop and efficiencies from our operating platform. We are pleased with the progress to date with over $500 million in acquisitions closed and are optimistic more opportunities will arise in the near future. As always, we remain disciplined and focus on maximizing shareholder value and enhancing the growth profile of the company. With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with comments on our second quarter results, followed by the key components of our full year guidance raise, and conclude with an update on the balance sheet. Beginning with our second quarter results, we are pleased to report core FFO per share of $3.94, which exceeded the midpoint of our guidance range by 11 cents. The outperformance was primarily driven by 5 cents of higher same property revenues which was largely the result of stronger net effective rent growth. In addition, this quarter benefited from $0.04 of one-time revenues and lower operating expenses, which are timing-related. Turning to our full-year guidance revision, our strong second quarter results and healthy peak leasing season have enabled us to increase the midpoint of our same property revenue growth by 75 basis points to 3%. Our improved outlook is largely driven by blended rent growth outpacing our initial forecast, resulting in a 50 basis points increase to revenue growth. We now forecast blended rent growth to be 120 basis points higher than our initial forecast, driven by outperformance in Northern California and Seattle. As for same property operating expenses, higher utility costs and legal fees are the primary drivers of the 50 basis points increase in our midpoint to 4.75%. As it relates to controllable expenses, we have been effective in managing this aspect of the business despite the elevated cost environment. For the year, we expect controllable expenses to increase less than 3%. In total, we now expect same property NOI to grow by 2.3% at the midpoint, representing a 90 basis points improvement to our prior guidance and 170 basis points improvement from our initial outlook. Based on our strong second quarter results and the revision sustained property growth, we are raising full-year core FFO by 27 cents to $15.50 per share, which represents 3.1% year-over-year growth. In total, we've raised core FFO a notable 47 cents per share so far this year. As it relates to our third quarter guidance, we are forecasting $3.87 at the midpoint. The sequential decline from the second quarter relates to two factors. First, same property NOI is expected to be $0.05 lower, which is driven by elevated operating expenses given the typical seasonality in spending for repairs and maintenance, taxes, and utilities. And second, we had $0.02 of one-time items in the second quarter. Turning to the preferred equity portfolio. For the year, we expect between 125 million to 175 million in redemptions, of which we received 50 million to date. Our intention is to redeploy the proceeds into acquisitions depending on market opportunities. In terms of the watch list, we started the year with five properties on the list, of which three have been removed so far to date. Two of the properties were acquired and consolidated on our financials, and one of the investments had a significant equity infusion, which puts us in a better position in the capital stack. In total, the reduction in the watch list added approximately $0.04 to our full-year core FFO. The rest of the portfolio is performing as planned. Finally, our balance sheet metrics remain a key source of strength. We have no remaining consolidated maturities in 2024. Our leverage levels remain healthy with net debt to EBITDA at 5.4 times. and we have over one billion in available liquidity. As such, we are well positioned to capitalize on opportunities as they arise. I will now turn the call back to the operator for questions.