The operator introduces the Essex Property Trust Third Quarter 2023 Earnings Conference Call and reminds listeners that statements made in the call are forward-looking and subject to risks and uncertainties. The host, Angela Kleiman, discusses the company's performance in 2023, including an increase in same-property revenue and NOI growth despite challenges such as a high level of rent delinquency. Kleiman also provides an initial outlook for 2024 and mentions the impact of COVID on the investment markets.

The company has made progress in reducing delinquency and plans to provide a more comprehensive outlook for the West Coast in 2024. The market is expected to have low housing supply and minimal risk to job growth. The tech industry is showing signs of recovery and the artificial intelligence industry could drive demand for housing in major employment centers. Affordability, especially in Northern California, is also a factor to consider.

The Bay Area is currently experiencing affordable rent prices and a potential for long-term growth. The apartment investment market has slowed due to increasing interest rates. Essex's finance team has prepared the company for any economic environment. In the third quarter, core FFO per share exceeded expectations due to higher revenues and lower G&A expenses. Operating expenses only increased by 1% due to a favorable outcome in Seattle, but are expected to remain elevated in 2024 due to non-controllable factors.

In 2024, the tax benefit received in Washington is not expected to repeat, but the company has been able to improve its operating efficiency and keep controllable expenses low. They anticipate preferred equity redemptions of $70 million for the year and $100 million in 2024. The company remains disciplined in finding new investments and has recently closed a $298 million secured loan at a fixed rate of 5.08% to repay upcoming maturities.

The company has minimal financing needs for the next 18 months and has a strong balance sheet with over $1.6 billion in liquidity. Jessica Anderson will discuss the company's recent operating results and strategy, including solid same-property revenue growth and a shift to an occupancy-focused strategy to recapture non-paying units. Delinquency levels have improved in several markets, but remain elevated in Los Angeles and Alameda County.

The company has seen improvement in delinquency, but it has resulted in a temporary tradeoff with new lease growth and occupancy. However, the company remains adaptable and is focused on maximizing revenue. The Seattle market has performed as expected, with solid demand and a normal seasonal moderation in pricing. Northern California has also seen consistent growth, with Santa Clara being the top-performing market. Southern California remains the top-performing region, led by San Diego.

The market rents in Southern California peaked in mid-September, but blended net effective rates remained strong. Delinquency in Los Angeles has improved since the start of the year and is expected to continue to improve. The company's focus is now on preserving occupancy and positioning the portfolio for 2024. The company's strategy has shifted from pushing new lease rate growth to growing occupancy due to elevated move outs of non-paying tenants. The guidance assumes an improvement in cash delinquency and re-acceleration in new lease rate growth in the back-half of the year.

The company is pleased with the recent decline in delinquencies in October, which they attribute to several factors. These include the expiration of tenant protections in certain areas, which has led to a higher number of evictions and move-outs. In other areas, tenants are feeling a greater sense of urgency due to the lack of protections and emergency rental assistance. Overall, the company believes this trend is sustainable and reflects a change in tenant sentiment.

The speaker addresses concerns about recent trends in delinquency rates and explains that they will be monitoring the situation closely. They also discuss the impact of non-paying tenants on new lease rates and renewals, stating that new lease rates will remain muted for the short-term but will set them up for a positive outlook in 2024. They also mention that renewals will likely follow the trend of new lease rates.

The company has increased incentives for renewals and expects consistent rent growth in the fourth quarter. They have decided not to publish their macro outlook and will provide it early next year. Market fundamentals will be impacted by factors such as third-party macroeconomic forecasts, but it is too early to predict.

The speaker discusses the current state of the real estate market in Essex, mentioning low supply and potential for future demand. They also mention the performance of different regions, with Northern California being a steady market and Southern California having potential for recovery. They provide some figures for loss to lease and earning, but note that it is still early and more information will be provided in the fourth quarter.

The company is expecting to see growth in revenue next year due to various income initiatives. They also anticipate opportunities in the market for stabilized properties seeking recaps. Demand in San Francisco and Seattle is currently soft, but the company is optimistic that it will improve in the future.

The speaker discusses the current state of the market, noting that September was strong due to the tech sector before their retrenchment. They mention stable unemployment claims and WARN notices as positive indicators. Looking ahead, they anticipate a return of hiring in the tech sector and a decline in remote job hiring and international migration, which could have a positive impact on the market. The speaker also mentions that there is not a specific rent growth number needed to hit fourth quarter guidance, as there are other factors at play.

The speaker is responding to a question about the company's occupancy first initiative and its potential impact on year-over-year comps. They mention that year-to-date occupancy is at 96.5% and may decrease in the short term due to seasonal factors, but there are other factors, such as delinquency rates, that could positively impact revenue. They also mention that Orange County, San Diego, Ventura, and Seattle have strong occupancies, while Los Angeles and the Bay Area may see a decrease.

The company has been closely monitoring the return to office mandates, with some tech employers announcing a return to two days in the office and a halt to remote hiring. However, it is difficult to determine the exact impact on leasing activity due to ongoing issues with evictions and delinquency.

Adam Kramer asked a question about two demand drivers for the company, in-migration to their markets and the end of the writer and actor strikes. Angela Kleiman responded that data on in-migration is not readily available, but they have been tracking move-ins. Jessica Anderson added that they are offering an average of one week free and adjusting concessions as needed. Concessions are concentrated in pockets, with Southern California and the Bay Area having larger concessions, while Seattle has been stable.

The speaker mentions a good uptick in the previous year, which is attributed to a steady recovery. However, international migration has not yet returned. The main drivers of job growth in the third quarter were education, healthcare, and other services, with hospitality and leisure being muted due to a strike. The speaker believes the strike could potentially serve as a demand catalyst. The company expects to be repaid $100 million in structured finance mid-year and their portfolio is geographically distributed with 40% in Northern California, 40% in Southern California, and 20% in Seattle.

John Kim from Green Street asks Jessica Anderson and Barb Pak about the 5.3% renewal rate growth achieved in October and how much of that was due to rate growth versus concession burn-off from a year ago. Jessica responds that it was roughly 50-50, with 2.5% to 2.8% in rate growth and the rest from concession burn-off. When asked about the gross delinquency outlook for the second half of the year, Barb says there have been no changes to their guidance of 1.9%. John Pawlowski asks Barb about potential deferred repair and maintenance and CapEx costs associated with delinquent tenants in the portfolio, and Barb says they are in line with their full year guidance and there may be some trade-offs with occupancy. John asks for an estimate of the total amount of dollars that will need to be spent on these units, but Barb does not provide a specific number.

John Pawlowski asked about the impact of evictions on early innings and the cost flow, and Rylan Burns commented on the market clearing cap rates in urban areas of San Francisco and San Jose. Angela Kleiman noted that the turnover from delinquent tenants is not significantly affecting CapEx, and Barb mentioned that the eviction volume is higher but not causing greater damage. Rylan declined to give a specific number for market clearing cap rates due to a lack of transactions and the different buyer profile currently seen.

The speaker discusses how family office buyers are still investing in challenged markets, but as things improve, more investors may come back. They also mention that their company prioritizes investing in suburban markets and will only invest in urban markets if the price is right. They are optimistic about finding more opportunities in the future.

Angela Kleiman and Barb Pak discuss the impact of international migration on California's growth, noting that historically, the state has had a negative net in-migration. They cannot give an exact percentage of the impact, as it is influenced by various factors such as supply, demand, and affordability. They also mention that the unsecured bond market has improved slightly since the issuance of secured debt earlier this year, but there have not been many transactions in the unsecured market.

The speaker, Angela Kleiman, discusses the housing shortage in California and the efforts made by Governor Newsom to increase housing production. However, despite these efforts, the barriers to building, such as cost and legislation, continue to hinder progress. The original goal of building 3.5 million homes by 2025 seems unlikely to be achieved, with only 450,000 permits issued so far. This indicates that the housing supply will remain favorable in the future.

The speaker, Angela Kleiman, discusses the expected rent growth in various markets over the next 12 months. She mentions that the Northern region, specifically Northern California and Seattle, are expected to outpace the Southern region due to factors such as lower supply and strong job growth. She also notes that Northern California has a better affordability metric, which will contribute to its outperformance.

Linda Tsai asks about expenses, and Barb Pak responds that there is pressure on insurance costs nationwide, and utility costs are also expected to be above inflationary levels despite ESG efforts. This will lead to elevated expense growth in 2024. The conference call then concludes.

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