The Essex Property Trust Second Quarter 2023 Earnings Conference Call has begun, with Angela Kleiman, President and Chief Executive Officer, providing an update on the company's performance and outlook for the year. The West Coast economy and labor markets have been stronger than expected, leading to a healthy demand for rental housing in the company's markets. As a result, the company has increased its 2023 guidance for same property revenues, NOI, and core FFO per share growth.

The West Coast is expected to experience above-average rent growth in the coming years due to three key factors: a muted supply outlook, increased rental affordability, and the high cost of homeownership. Job growth has been steady in the first half of the year, but there is a potential for more interest rate increases which could moderate the economy. Average market rent growth expectations have been raised by 50 basis points to 2.5%.

Angela reported that the West Coast's transaction activities have remained muted in the second quarter, with cap rates in the mid-4% to low 5% range. Barbara then discussed the company's second quarter results, with core FFO per share of $3.77, which exceeded the midpoint of their guidance range. She then gave an update on capital markets and the balance sheet.

The company has seen strong year-to-date results, enabling them to increase their midpoint of same-property revenue growth by 40 basis points and reduce their same-property operating expenses by 100 basis points. As a result, they have raised their full year midpoint of core FFO by $0.22. Additionally, they have refinanced a $298 million 10-year secured loan at 5.08%, which will be used to repay unsecured bonds maturing in May 2024 and will result in a positive impact to FFO of approximately $0.03 per share. Their balance sheet metrics remain strong.

Barb reported that the company is in a strong financial position with minimum near-term financing needs and over $1.6 billion in liquidity. Jessica then discussed the second quarter operating results, noting that same-property revenue increased 4% year-over-year and that the new lease trade-out accelerated from 0.5% in May to 1.7% in June and 2.1% in July. Renewal trade-out was stable and averaged 3.4%, resulting in blended net effective rent growth of 2.2%. In Seattle, blended net effective rent growth averaged negative 0.2%, due to a year-over-year comp and the market's seasonal sensitivity.

The Seattle market experienced an increase in supply and softening demand in the back half of 2022, but demand strengthened in the second quarter of 2023 due to Amazon's return-to-office policy. Blended net effective rent growth averaged 1.5% in Northern California, 4.1% in Southern California, and 97% quarter-end occupancy in both regions. The current operating environment is encouraging and occupancy is currently at 96.7%.

The company shifted their strategy from an occupancy-focused approach to a rent growth focus in mid-May, which was driven by comfort in their ability to maximize revenue in a variety of market conditions. They expect delinquency to continue to trend lower and be below 2% by the end of the year.

The company took a proactive approach to the layoffs earlier in the year and saw strengthening in the market. Evictions have been coming back at a steady, manageable pace, so the company shifted to a rate growth focus. In April and May, concession usage was high, averaging a week free, but as of today, concession usage is minimal. Delinquencies are expected to be roughly 2% for the full year, and the blended rate expectations for new leases and renewals are yet to be determined.

The company has achieved 1.1% year-to-date for new leases, and has revised its outlook from 2% full year rent growth to 2.5%. This leads to 2.8% for new lease growth expected for the back half of the year. Renewals are reaccelerating and expected to be around 4% for the back half of the year. Despite the strength in the first half of the year, the company is leaving its back half same-store revenue growth guidance of 3% unchanged.

Jessica Anderson commented that they expect rents to accelerate in Q4, and that the seasonality of this year will be typical. She also noted that rents are still accelerating in San Jose and Southern California, and that they are seeing strong leasing on the ground. EQR also commented that they were seeing an improving return-to-office, especially in the Bay Area.

Angela Kleiman discussed the differences in the portfolio of Essex and EQR, and the implications of suburban versus urban type of assets. She noted that most large tech companies in California are suburban-based, which has been beneficial for Essex pre-COVID. She also discussed the return-to-office activity, expecting it to be more pronounced in September with Meta and other larger companies. Essex is mandating a 3-day working from office until September after Labor Day.

Barbara Pak believes that expenses related to eviction costs and turnover will moderate in the second half of the year due to easier comps. She does not expect significant changes in other major line items for the year, but predicts that insurance costs will increase by 20% or more in 2024. She also notes that insurance costs are only 4% of total operating expenses. Lastly, she believes that the insurance market will remain difficult when their renewal comes up in December.

Angela Kleiman answered a question from Alexander Goldfarb about tech hiring from overseas. She reported that there has not been active hiring from an international basis yet, but the net outflow of migration for California as a whole has improved since the start of the COVID-19 pandemic. She also mentioned that move-ins to their portfolio had seen an acceleration since California began reopening, and that move-ins have remained positive and stable since then. Goldfarb then asked a question about capital markets, and Kleiman mentioned that the company had done a secured loan that wasn't for a joint venture asset, which is not typically seen in REIT land for investment-grade companies.

Barbara Pak explains that the company prefers to use unsecured debt, but due to the significant pricing differential between secured and unsecured debt, they decided to move forward with the secured side of the equation. She also explains that the R&M same-store expenses were affected by storm and flood damage in the first and second quarters, but the company expects those costs to normalize out in the third quarter.

In mid-May, R&M began a strategy shift from occupancy to rate growth, which has resulted in a 1.7% loss-to-lease. July new lease rates have accelerated nicely from 2Q, and it is expected that the loss-to-lease will increase slightly as rents continue to grow in some markets.

Jessica Anderson discussed the sequential improvement in the company's performance, citing Seattle, Northern California, and San Jose as key drivers of growth. She attributed the success in San Jose to strong occupancy and leasing demand, as well as corporate housing activity. She also noted that Seattle has seen a boost due to the return to office announcements from Amazon and other tech companies, and that the company is still seeing strong demand today. However, she noted that Seattle is the company's most volatile market and expects rental prices to decrease in the back half of the year.

Angela Kleiman reported that the key drivers of demand in the San Diego market have been in health services, education, leisure, and hospitality. Barbara Pak then discussed the 1% year-over-year reduction in property taxes in Washington, which was due to a decrease in millage rates. However, it is difficult to know if this rate will be a good run rate going forward, as it depends on the millage and assess values in the coming year.

Barbara Pak and Angela Kleiman discussed the 1.7% loss-to-lease rate and how it may change in the future. They noted that the demand in the Bay Area and the return to office could affect the typical seasonal curve of August and September. Last year, the loss-to-lease rate was around 7%. Haendel St. Juste asked about transactions, which have been stalled, but the company is underwriting deals.

Adam Berry and Jessica Anderson discussed the bid-ask spread in the market and the concessions they are providing in their NorCal, SoCal, and Seattle regions. Adam mentioned that many of the deals on the market today will make, and they will continue to monitor the market and act when it makes sense. Jessica provided a breakdown of the average concession they are providing in each region, with Southern California being a little less than half a week, Northern California being one week, and Seattle being a little bit over half a week.

Haendel St. Juste and Unidentified Analyst asked about the loss-to-lease by market and the embedded assumption for bad debt impact the revenue in the back half of the year. Barbara Pak replied that the assumption is roughly 2%, a little bit under 2%, which is the same for the full year forecast. Adam Berry said that their intention is to not acquire anything in the back half of the year, as it does not make sense strategically with their existing portfolio given their cost of capital. Therefore, there will be no development starts penciled.

Barbara Pak discusses the use of stock buybacks as a capital allocation priority in the midterm. She explains that they would need to find a source of capital to do this, as well as look for opportunities to add value to the bottom line. When asked about the percentage of $100 million in outstanding delinquencies that they expect to collect, Pak is unable to provide a number, but suggests that it could be closer to 10%, 20%, or 50%.

Jessica Anderson discussed how the writers and actor strikes have not had a significant impact on their portfolio due to their low exposure to major studios. She also noted that there is not much difference in performance between A and B quality properties, but that suburban properties are performing better than urban properties due to supply.

Jessica Anderson discussed the strength of the San Diego market, which has benefited from people relocating there due to its low rents and good quality of life. She also noted that the Bay Area and Seattle markets are showing signs of strength, though Seattle will face some supply headwinds in the coming year. The conference then concluded.

This summary was generated with AI and may contain some inaccuracies.