Essex Property Trust's second quarter earnings call featured remarks from President and CEO Angela Kleiman, CFO and EVP Barb Pak, and EVP and Chief Investment Officer Rylan Burns. The company reported a strong second quarter, with core FFO per share exceeding expectations and resulting in an increase to full-year guidance. Demand for West Coast multifamily housing has been strong, particularly in Northern California and Seattle regions, and the company has analyzed alternative demand indicators to better understand the key drivers behind this trend.

The first factor contributing to housing demand on the West Coast is job openings at top technology companies, with a 150% increase from 2023. There is also evidence of migration back to coastal headquarters, generating a "shadow demand." Limited new housing and favorable rental affordability are also driving market fundamentals, with income growth outpacing rent growth. Property operations saw a solid peak leasing season with 3.4% blended rent growth, which would have been higher if not for elevated delinquency-related turnover in two counties.

Seattle has been the best-performing market for the company, with strong rent growth and high occupancy levels. This is due to strong job growth and delayed supply deliveries. Northern California also performed well, with San Mateo and San Jose leading the way. Southern California had steady performance, but was weighed down by Los Angeles. The company's portfolio is in good shape with low concessions and high occupancy, and they are prepared to adjust their strategy as needed.

The fourth paragraph of the article discusses the increase in demand for multifamily properties on the West Coast and the resulting competitive bidding process and compression in cap rates. The company, Essex, has recently acquired three high-quality properties in the Bay area and has closed over $500 million in acquisitions. The paragraph also includes comments on the company's second quarter results, which exceeded expectations, and an update on their full year guidance, which has been revised due to strong performance and higher projected revenue growth.

The company has revised its forecast for rent growth to be 120 basis points higher due to outperformance in certain regions. Operating expenses are expected to increase by 50 basis points, primarily due to higher utility costs and legal fees. Despite this, the company has effectively managed controllable expenses and expects them to increase by less than 3%. As a result, same property NOI is expected to grow by 2.3%, a significant improvement from previous guidance. Full-year core FFO has been raised by $0.27 per share, representing 3.1% year-over-year growth. Third quarter guidance is forecasted at $3.87 per share, with a decline from the second quarter due to elevated operating expenses and one-time items. The company plans to redeploy proceeds from preferred equity redemptions into acquisitions. Three out of five properties on the watch list have been removed, with two being acquired and one receiving a significant equity infusion.

The reduction in the watch list has added $0.04 to the full-year core FFO and the rest of the portfolio is performing as planned. The balance sheet metrics remain strong with no remaining consolidated maturities in 2024, healthy leverage levels, and over $1 billion in available liquidity. The company is well-positioned to capitalize on opportunities. The recent pullback in renewal rate growth is part of the company's seasonal strategy to maximize revenues. New lease growth has trended differently across the three regions, but the company is not seeing any red flags in the fundamentals.

Angela Kleiman discusses the new lease rates in Southern California, which have remained steady with a slight deceleration. Northern California has seen a more significant deceleration of 200 basis points, while Seattle has seen a smaller deceleration of 50-60 basis points. This is in line with their normal business patterns, with Northern California usually peaking earlier than Southern California. When asked about their pricing strategy for LA and Alameda, Kleiman states that they are not yet at a point where they can push pricing, as they are still focused on increasing occupancy. However, they have made progress in reducing delinquency. The company's gross bad debt has improved to 80 basis points in July and they expect it to remain around 1% for the rest of the year.

The speaker discusses the progress made in reducing bad debt and the expected trend for the second half of the year. They also mention the average concession length across different markets and how it varies by region, with Southern California having a heavier concession in L.A. and Northern California being driven by Oakland due to higher supply.

The Southern California DQ with L.A. and Northern California with Oakland are the main drivers of higher concession levels in the region, compared to Seattle and other areas. The average concession level for July is two days. The company was asked about the same-store revenue guidance and why the low end was not raised more, since year-to-date it has been trending at 3.5%. The company explained that factors such as the decline in the peak leasing season and potential delinquency issues could impact the low end of the guidance. They feel comfortable with the midpoint of the guidance. The company is currently sending out renewals for August and September, with a portfolio-wide average of low 4%. Negotiations are expected to result in renewal rates between mid-3% to high 3%.

The unidentified analyst asks a question about pricing expectations for the back half of the year and if there is any conservatism in the company's new guide. The company's representative, Angela Kleiman, explains that they expect a slight deceleration in blended rents due to tougher year-over-year comps and renewals converging towards market rate. The company has been active in the transaction market and with JV partners, indicating confidence in their markets, but they are also considering on-balance sheet development due to lower hard costs.

The majority of development projects do not meet return expectations, but there are some promising opportunities in the pipeline. The company is looking for a significant premium compared to current market rates for these projects. In terms of L.A. and Alameda markets, the level of growth will depend on demand and job growth. The new guidance for the fourth quarter shows a slight decrease in core FFO, which is unusual as the fourth quarter is typically the highest FFO quarter. There may be some factors offsetting this trend.

Barb Pak and Brad Heffern discuss the impact of preferred redemptions on the fourth quarter, while Haendel St. Juste asks about the positive migration and return to office mandates in Northern California. Angela Kleiman explains that the company is seeing pricing power and outperformance due to high demand, but it's difficult to predict the exact impact on rent. She also shares that about 400,000 people migrated out of the company's markets during COVID, but about 1.25 of them have returned, with the majority going to tertiary markets within Washington and California.

The company is seeing strong transaction activity in the second quarter, with cap rates in the mid- to high 4 range. They are looking for unique opportunities to add to their operating platform and generate additional accretion. They are also focused on finding ways to increase yield on the top line. The recent investment in the Elan building was at a high 4 cap rate, with potential for further benefits from putting it on their operating platform. The building was purchased at a 20% discount to replacement cost and has rents 15% below pre-COVID levels.

The speaker discusses the company's pursuit of new opportunities in certain submarkets and their disciplined approach to pursuing them. They decline to provide specific details on the potential IRRs but suggest they are above 8%. The speaker also mentions a 50 basis point improvement in July loss compared to last year. In response to a question about competition from new supply, the speaker states that the concessionary environment has improved in the past six months and they are not seeing competition from the single-family side.

Jamie Feldman is asking about the potential risks of rent control regulations and Prop 13 on the company's acquisition plans. Rylan responds that they are becoming more active in acquisitions and are aware of the headlines surrounding their markets. They are taking these risks into consideration when underwriting potential long-term rent growth and expenses.

Rylan Burns, a representative from a real estate company, was asked about their plans for acquiring new assets in light of the upcoming election and potential changes in regulations. He stated that historically, rent control regulations have been defeated and they do not anticipate any changes in the near future. However, they will consider specific submarkets with rent control when making their rent growth assumptions. They typically aim for long-term average rent growth, but may be more aggressive in certain markets with favorable supply and demand. They also mentioned that urban markets are becoming healthier and they may consider acquiring assets in those areas at a better value.

Rylan Burns of the company is discussing their strategy for acquiring properties in the current market. While they typically focus on acquiring fee simple ownership properties, they are also open to preferred and mezzanine investments and are currently pursuing some. However, the slowdown in development opportunities has limited their ability to deploy in the preferred space.

The speaker discusses their company's reputation as a great partner for a particular product and mentions that there have been fewer opportunities due to a decrease in supply and new developments. They also discuss the Seattle market, which is expected to perform well in the second half of the year but may be offset by an increase in supply. Another speaker mentions that cap rates are in the mid- to high 4% range and that rent growth is currently about 15% below pre-COVID levels, but they anticipate a recovery in rent growth within a few years due to strong income growth and a potential rebound in the tech market.

The speaker discusses the factors that influence their decision-making in the market, including the actions of their competitors and the demand for Northern California. They also mention that while there has been a lot of discussion on pricing power and favorable trends, renewal rates are actually trending downward. The speaker also addresses the question of supply growth and mentions that some deliveries may be pushed into next year, but does not provide specific numbers for 2025 supply growth.

The company's 2024 forecast for supply has been affected by delays in Southern California and an increase in supply in Seattle. Overall, there will be a small reduction in supply for multifamily properties this year, but it is expected to increase slightly next year. The company has little visibility on delinquency issues in the broader market, but has seen improvements in their own portfolio. The backlog in the court system has decreased, allowing for a quicker recovery of delinquent units. It is not expected for delinquency to suddenly increase, but it could be lumpy over time.

The company is aware of a developer who has decided to pull out of the West Coast due to the challenging environment. However, this may create opportunities for Essex as there will be less competition. The company is targeting a 100 basis point spread versus acquisitions and is currently close to achieving this goal. They have been disciplined in their development approach and are cautiously optimistic about rebuilding their pipeline in the near future.

During the conference call, Ami Probandt from UBS asked about the increase in bad debt in Southern California, to which Barb Pak responded that it was just monthly fluctuations and nothing to worry about. Ami also asked about changes in reasons for move-outs, to which Angela Kleiman replied that it has remained consistent with job changes and household changes being the main reasons. No further questions were asked and the call was concluded by Angela thanking everyone for participating.

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