Essex Property Trust, Inc.

Good day and welcome to Essex Property Trust's fourth quarter 2024 earnings call. As a reminder, today's conference 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. Thank you for joining Essex fourth quarter earnings call. Bar pack will follow with prepared remarks and Rylan Burns is here for Q&A. Before we begin, on behalf of the entire company, I want to express our condolences to those affected by the tragic wildfires in Los Angeles. While our properties did not incur any loss, my gratitude goes to the Essex team for proactively helping those displaced as we adopted several policies to ease the transition into new housing within our Los Angeles portfolio. As for our earnings call today, I will cover our full year and fourth quarter 2024 results, followed by our outlook for 2025, and an update on the investment market. We are pleased to achieve same property revenue growth of 3.3% and core SFO growth of 3.8%, both exceeding the high end of our original guidance. Our strong performance was the result of improving demand, including return to office and migration patterns, combined with attractive affordability and delinquency resolution by our hardworking associates. With this backdrop, we experienced a typical seasonal rent curve for the first time in several years. Additionally, we successfully shifted the company into growth mode. acquiring and consolidating 13 properties at above market yields. As for operation highlights, fourth quarter results were generally consistent with expectations. We achieved 1.6% blended lease rate growth and concessions averaged one week for the same store portfolio in the fourth quarter. On a more granular perspective, Orange County and Santa Clara County led the portfolio with 2.7% blended rate growth while LA and Alameda counties land with 20 basis points of blended rate growth. In January, demand picked up in line with our operating plan, listing occupancy by 40 basis points to 96.3%, and concessions improved to less than half a week on average. Turning to our 2025 outlook, detailed on page S16, consensus GDP and job growth is forecasted to moderate for the U.S. overall, but remain at a healthy level. The West Coast is well positioned with improving economic fundamentals as job growth is forecasted to outperform the U.S. after lagging in 2024. Job growth in the technology sector is the key driver of this outlook as we anticipate job postings to convert into new hires in 2025, resulting in better overall growth. Steady demand combined with low level of supply deliveries at only 50 basis points of total housing stock, and attractive affordability relative to home ownership leads to our base case forecast of 3% market rent growth. Seattle and San Jose are projected to lead the portfolio at approximately 4%. As far as the range of outcomes, the low end of our guidance is mainly attributed to policy uncertainty and timing of delinquency recovery. Our optimism for the high end of our guidance is supported by solid fundamentals and based on past precedent that tech job postings still have a runway to grow for this phase of the innovation cycle. It is notable that recent office expansion announcements demonstrate the intention that the majority of new hirings will be focused in headquarter locations, which favors the West Coast economy, particularly the northern regions. Over the long term, we see a path for the West Coast apartment markets to continue to outperform the U.S. average with better job growth and wealth creation driven by centers of innovation combined with limited level of supply growth. Lastly, on the investment market. In 2024, the West Coast experienced a meaningful uptick in volume, reaching a level close to the pre-COVID average. Although interest rates increased in the fourth quarter, there remains a deep pool of capital eager to acquire properties on the West Coast, and cap rates in the fourth quarter for high-quality properties remain consistent at around mid to high 4% range. In 2024, Essex was opportunistic in its acquisition efforts, successfully generating significant accretion by consolidating joint ventures and acquiring several communities in close proximity to our property collections where we can enhance the yield on day one by operating these communities more efficiently. In 2025, we expect to be net acquirers again, while optimizing our cost of capital. Our focus remains on being creative and opportunistic to drive SFO and NAD per share growth for our shareholders. With that, I'll turn the call over to Barb. Thanks, Angela.

Today, I will discuss our fourth quarter results, key assumptions to our 2025 guidance, followed by comments on the balance sheet. We are pleased with our fourth quarter results, which were slightly ahead of our expectations, primarily driven by higher income from our joint venture entities. As it relates to same property operations, we saw a continued reduction in delinquency during the quarter, which improved to 60 basis points of scheduled rent on a cash basis. For the year, we've made substantial progress on the delinquency front, reducing our VAD debt by over 50% from one year ago. As such, we are pleased to be in a position to fully eliminate the remaining accounts receivable balance during the quarter, which resulted in same property revenue growth of 2.6% on a year-over-year basis. Without this non-cash adjustment, revenue growth would have been 3.2% for the quarter. Turning to our 2025 outlook. same property revenues are forecasted to grow by 3% at the midpoint. The key drivers of this growth are outlined on page S16-1 of the supplemental. Continuing on with Angela's comments, stable economic conditions, low supply, and expectations for increased hiring among key West Coast industries leads to our forecast for blended rent growth of 3%. In terms of the cadence, we expect blended rent growth in the first half to be below the full-year midpoint, and improve in the second half of the year as hiring accelerates and translates into increased demand for housing. Our guidance assumes a 50 basis points improvement in delinquency as we continue to make progress returning to that long-term run rate. Rounding out the remaining components, we anticipate 30 basis points combined contribution from higher occupancy and other income. Moving to operating expenses. We forecast 3.75% same property expense growth at the midpoint, a significant improvement from what we've experienced the past two years. The biggest factor driving this outcome is lower insurance expense. We renewed our property insurance in December and saw a small reduction in our premium as compared to the prior year. Regarding controllable expenses, we are forecasting growth of less than 3% as we continue to seek ways to enhance our operating efficiencies to offset wage pressures. Putting it all together, same property NOI growth is expected to increase 2.7% at the midpoint. As for core FFO, our midpoint of $15.81 equates to 1.3% year-over-year growth. The modest increase is driven by two factors, which combined represent around 2% headwind to growth. The first relates to higher interest expense, primarily driven by the refinance of $500 million in unsecured bonds. Our guidance assumes we refinance this debt in the first half of the year, and given the current interest rate environment, the all-in rate is expected to be meaningfully higher than the 3.5% rate on the maturing bonds. The second factor is lower structured finance income, as a result of redemptions in 2024 and those expected in 2025. Our guidance assumes 150 million in redemptions at the midpoint, of which approximately 50% is expected to occur by midyear. As previously communicated, we expect to reinvest the proceeds into new acquisitions, which will offset a portion of this income and result in better NAV and core FFO growth for our shareholders over the long term. In total, the structure finance book is expected to represent around 4% of our core FFO in 2025, consistent with our target range of 3% to 5%. Turning to investments, the midpoint of our guidance assumes we acquire $1 billion in new apartment communities. As for funding, it will be dependent on market conditions and our cost of capital, utilizing the most attractive equity capital source, available at the time and executed on a leveraged neutral basis consistent with our track record of disciplined capital allocation, including with the balance sheet. The balance sheet and credit metrics remain strong, and with over $1 billion in liquidity and ample sources of available capital, the company is well positioned. I will now turn the call back to the operator for questions.