Q2 2020 Essex Property Trust Inc Earnings Call
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Good day and welcome to the Essex Property Trust second quarter 2020 earnings Conference call.
As a reminder, today's conference calls 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 in the company's filings with the FCC.
It is now my pleasure to introduce your host Mr., Michael Schall, President and Chief Executive Officer for Ics, Essex property Trust. Thank you you may begin.
Thank you for joining our call today, the unprecedented reactions from the Cobot 19 pandemic have presented many challenges that have affected every part of our business and indeed our lives.
We'd like to offer our best wishes to all those impacted by Cobot 19, and thank you for participating on the call today.
On today's call John Burkart, Angela Kleiman will follow me with comments and Adam Barry is here procure day.
Our reported results for Q2 reflect these unprecedented challenges as reported 5.1% decline in core FFO from a year ago, representing an abrupt turnaround from very favorable conditions throughout this economic cycle.
Our first priority upon receiving Kobin 19 related shut down orders was to ensure the safety of our employees had residence, while reactive thoughtfully to shelter in place restrictions and regulatory hurdles that had been especially pervasive across our markets.
Unprecedented job losses from mandatory shutdown orders in March suddenly and significantly reduced rental demand leading to lower occupancy in April followed by a steady recovery throughout the quarter ultimately occupancy fully recovered and was 96.2% in July.
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[noise] delinquencies also spiked due to job losses, and anti addiction ordinances, which often contain collection forbearance provisions proposed regulations that could further impede collection of cobot 19 related red receivables, let us to adopt a conservative approach to bad debts.
During the second quarter, the direct cost of the pandemic in the form of greater residential and commercial delinquency lost occupancy and Kobin 19 related maintenance totaled $27 million.
We view these costs is mostly temporary and have seen improvement in each category in second quarter.
John and Angela will provide additional detail is part of their remarks.
Fortunately the economy improved quickly from its April trough as measured by resumed job growth lower continuing unemployment claims and fewer war notices. In addition, many businesses had found ways to adapt to the virus by creating new safety protocols and procedures.
After declining nearly 14% in the Essex markets during April by June you're over your job declines had moderated by almost 400 basis points to 10.1%.
We expect gradual improvements to continue in the second half of the year.
Turning to the West Coast markets technology companies, our primary driver of wealth creation and growth in the Bay area in Seattle.
Most of the leading tech companies remain in a growth mode with minimal damage to their business models and many of them.
Such as Amazon, Netflix and zoom had benefited from the shelter in place restrictions, resulting in greater market share.
Generally it appears that many large tech companies have slowed their pace of growth, while allowing greater flexibility for employees to work from home.
We track the open positions at the 10 largest public technology companies all of which are headquartered in Essex market. Recently. These companies had approximately 17000 job openings in California in Washington.
These large cup large company tech jobs are down by about a third on a year over year basis and are now at about the same levels as we saw in 2017.
Many of the top tech companies, including Apple alphabet, Microsoft Amazon Salesforce, our planning for employees to return to the office and have established related dates which range from October 2022 July 2021.
This is consistent with our comments during our June knavery meetings, whereby we expect employees in the post cobot era to have a greater work from home flexibility. While also needing to report to the office at various times to maintain came dynamics acclimate, new hires and pursue career.
Opportunities all of which require periodic face to face contact.
Venture capital has continued to flow at a healthy pace. According to the most recent data.
However, we understand that the mix of investments is more focused on companies that had business models that are not directly impacted by cobot 19, and have lower cash burn rates.
Southern California has a more diversified economy that has outperformed during previous recessionary periods, while San Diego Orange and Ventura counties have generally continued this trend Los Angeles County has notably underperformed.
L.A.'s preliminary unemployment rate was 19.5% in June well above the level implied by recent job losses of 12.3% on a trailing three month basis and partially explained by the unusually large number of gig and freelance workers in L.A. that are not captured by the.
Ill ask payroll survey.
Filming and content production is a key contributor to jobs and wealth creation in Los Angeles, and the industry came to a temporary standstill.
Film L.A. reported that the number of shoot days during the second quarter declined 98% from the prior year across television film and commercials.
Despite these challenges the demand for content is unabated amid the pandemic and there are reasons to be optimistic in a joint report called a safe way forward various organizations, including the screen actors Guild have outlined in the process for content production amid the pandemic.
Which is building production momentum.
A key factor impacting all of our markets is the loss of leisure and hospitality and other services jobs, which represented from 12% to 17% of total jobs at June 2019 in the Essex Metro's.
Compared to the total jobs lost in the Essex pockets. This past year. These service jobs declined an average of about 30% year over year with the greatest declines in Seattle and San Francisco.
These job losses are throughout each metro area, although the downtown locations have the greatest concentrations of affected businesses.
We see the recovery path ahead as reversing the pandemic related declines we experienced this last quarter.
In the near term progress will be will depend on the direction of cobot infection rates and the associated governmental limitations on business activity.
Given the covert related shutdown, a film and digital content industries and its potential for value creation. Its recovery is essential in Los Angeles, Fortunately that recovery is under way with the recent restart in the production of daily TV shows such as jeopardy, and wielded wheel of fortune in Culver City.
And several soap operas produced by CBS at a B C.
Necessarily crowded motion picture sets and safety mandates will probably make this a slow process.
Well the areas create demand for restaurants bars, and other services and the related jobs contribute to housing demand, particularly in the cities that make service jobs systematically important to housing and we believe that they will recover finally, most of the technology industries our income.
Great condition and should be expected to resume greater hiring and growth.
Along with unspent wealth accumulated during the pandemic, we expect the recovery of jobs to be strong as the outlook for managing the pandemic improves.
In light of the unpredictable nature of the pandemic and with the recent surge in Cobot 19 cases in hospital hospitalizations. The course, the pandemic and governmental responses had become intertwined with job growth and other economic outcomes. Thus, we made the decision would drop to withdraw our forecast on pay.
Page 16 of the supplemental until we had better clarity on the direction of the pandemic.
Finally, turning to the apartment transaction market, we sold two properties during the quarter.
Both of which were placed under contracted may pricing for both represented a small discount compared to the pre coded period.
Both properties were in downtown San Jose continuing the theme of the past few years of selling downtown locations that are more susceptible to added supply at a diminishing quality of life.
Going forward, we expect to grow the portfolio near major employment centers that offer a better living experience.
Generally.
The transaction markets had been slow to recover with very few closed apartment sales and even fewer properties being marketed the industry is working through key issues in the selling processes, such as travel restrictions and due diligence challenges given a dearth of transactions, it's too early to conclude.
On how buyers will value apartment properties going forward. The few close transactions since the onset of the pandemic traded at prices at or near pre covered levels, suggesting that highly motivated buyers have taken a longer view when valuing property by treating the cobot 19 specific impacts.
Such as delinquency as a purchase price adjustment rather than long term reductions in at Hawaii or higher cap rate.
At quarter end, we had two additional properties under contract for sale. Both are smaller properties at one of them closed in July going forward. Our intent is to mostly fund our growth with disposition proceeds.
We announced one new development deal in suburban San Diego, and we have a robust preferred equity pipeline.
As before plenty of money is searching for distressed real estate, which will be scarce with institutional grade apartments, given extraordinarily low financing cost.
As with prior recessions, the existence of Fannie Mae and Freddie Mac virtually assures a source of liquidity for apartments.
Yields or cap rates for apartments, generally substantially exceed long term interest rates on related debt and the resulting positive leverage remains a powerful force in the market.
Unlike REIT stocks private market values in terms of cap rates are generally sticky, meaning that they don't change immediately in reaction to events, but rather seek to reflect the longer term financial performance of a property.
At the end of the day, we believed that the transaction markets will likely recover because lower interest rates will provide sufficient incentive to offset greater perceived risk.
Historically, we found opportunities to add value as markets transition and in periods of disruption.
I'm confident that we have the team resources and strategy to Thoughtfully Act on these opportunities consistent with our long term track record about performance.
And now I'll turn the call over to John Burkart.
Thank you Mike our priority. During this period was our people the safety of our residents and our employees I'm incredibly proud of what our team accomplished and how they work together to serve and support our residents this challenging time.
Thank you eating.
Looking at the second quarter of 2020, the occupancy challenges that we faced early on related to a reduction in demand when the initial stay at home orders were implemented as opposed to an exodus of existing residents during may traffic increased substantially and we took advantage of the relative strength in our markets by lowering our rental rates.
Offering significant leasing incentives in certain markets.
Two to eight weeks on stabilized properties, leading to an increase in our same store occupancy of 110 basis points in June.
The relative strength in the market continued into July enabling us to increase our asking rents decreased or leasing incentives and add another 80 basis points in occupancy.
Our availability 30 days out as of the end of July was 10 basis points lower than where where it was last year at this time.
As our customers adapt to the new covert 19 environment, we're seeing some consumer behavioral changes that make intuitive sense. For example, with the current work from home practices the value proposition of living in downtown San Francisco has temporarily changed since the restaurants entertainment.
Sports venues have shut down.
Additionally, the value of having more private indoor space presumed called.
High speed Internet and access to open space for outdoor activities have increased demand for suburban assets, despite being a greater distance from corporate offices.
We have also noted.
That work from home has turned into work from anywhere as we've seen several consultants moving back to their original home and continuing to work for their west coast employer.
Regarding the work from anywhere theme, we believe this trend will reverse when conditions permit we were all positively surprised by the ease in which we all adapted to zoom and believe that this experience level lasting impact on future same day business travel.
However, the loss of a personal connection frozen screens in barking dogs in the background. So that zoom cannot replace the value that comes from in person interactions.
As I heard someone say recently.
I am done with living at work.
We see the changes in consumer behavior within our portfolio, our same store portfolio, when contra Costa Ventura Orange and San Diego have higher occupancy is today than in pre co that March.
Turning to our Q2 20 results as presented on page two of our press release year over year revenues declined by 3.8%.
On delinquencies various governmental bodies have enacted and continually extend resident protections along with prohibitions against late fees any fiction.
These regulations have been a strong headwind for the industry and our markets compared to other metros.
Thanks, Lee they are temporary in nature.
Referring to the us at 15 delinquency for a total portfolio on a cash spaces was 4.3% in the second quarter of 2020 compared to 34 basis points in the second quarter of 2019.
In the month of July on a cash spaces delinquency was 2.7% which is down from the prior month.
In July 18% of our same store assets had positive delinquency.
Meaning the delinquency line item contributed positively to the revenues due to residents pain past due amounts.
We appreciate that are residents continue to prioritize the rental obligations.
Moving onto our operating strategy in this new environment.
Our operations objective continues to be focused on maximizing revenue.
Given current conditions, our strategies will evolve as the market changes and will vary across our markets.
For example, we will likely run lower occupancy is uncertain urban markets, such as downtown San Francisco, well targeting higher occupancy in highly desirable suburban markets such as San Ramon.
Overall, we believe that market occupant has fallen about 150 basis points and our same store portfolio is expected to run at a lower occupancy for the remainder of the year.
As noted on F 15, our supplemental and consistent with our expectations, our new leased rate excluding leasing incentives were down 5.8% in July compared to the prior years period.
We expect that market rental rates will remain depressed in the fall due to the seasonal decline in demand.
That said some of the historical factors such as contract is moving home in the fourth quarter are not an issue since they've already moved out do the work from home policies in place.
Onto tech initiatives.
We continue to make considerable progress on the technology front as their employees learn how to optimize our new tools. For example, we currently have several leasing agents that are leveraging these tools that enable them to be two to three times more productive than the average leasing agent.
We are seeing similar progress with their maintenance systems as well our emphasis we will continue to be on people first as we try to bring every went up to speed. However, we expect that through the increased productivity and that's really a true attrition, we will both lower headcount and increased our compensation to our top performers.
Another advancement in our Technology Road map include the development of our mobile leasing up it is on target for pilot at the end of this year.
Yeah, this fully integrated with or other sales tools will fundamentally change, how we interact with our prospects providing them with a simple seamless 24, seven mobile experience.
Finally, we are now offering ultra fast internet.
Offered by market, leading fiber providers at 10% of our assets and we expect to complete installation at another 50% of our assets by year end.
The ultra fast service is in great demand in our current work from home environment and is expected to be a great value add asset for our residents.
Turning to our markets and the Seattle market year over year revenues in Q2.
It was down 20 basis points and occupancy was down 1% the greatest decline during this period within the Seattle CVD, we're at where revenues declined to 70 basis points, followed by the east side with a 20 basis point decline while revenues in the south saw an increase of 10 basis points in the same period.
In July unemployment in Washington remained 90 basis points below the U.S. average of 10.7%.
And the same period Amazons job openings remained at just over 8000, a year over year decrease of about 25%.
Moving to northern California in the Bay area market year over year revenues in Q2 were down 3.4%.
Revenues in San Francisco, Oakland, CBD declined by 6.3% and 7.8%, respectively, well, our San Jose revenues declined only 1.5% in the same period.
Then as a job growth declined the least of our markets in Q2 and was 100 basis points below the U.S. decline of 11.3.
Down in southern California year over year revenues in the second quarter declined 5.7%, while occupancy declined 2.1%.
Hello was our hardest hit market with the year over year revenue decline of 8.6% in Q2.
Our La County, Submarkets decline between 8.4% and 9.7% in the same period with the greatest decline in L.A. CBD.
The L.A. economy has been the most impacted out of all our markets within unemployment rate of 19.5% leading to a higher delinquency rates that are other markets.
In Orange County, the South Orange, Submarket outperformed north Orange Submarket with year over year revenue declines of 2.6% and 5.1% respectively in the second quarter.
Finally in San Diego European revenue declined 2% in Q2 with the exception of the Oceanside Submarket, which grew revenues by 2% in the same period likely benefiting from the military stay in place order through the end of June.
Currently our same store portfolio is physical occupancy is 96% our availability 30 days out is that 5.5% and a third quarter renewals are being sent out with an average reduction in rate of 1.4%.
Thank you and I will now turn the call over to our CFO Angela Kleiman.
Thank you John I'll start with a few comments about the quarter followed by an update on our funding plan for investment and the balance sheet.
As noted in our earnings release and earlier comments, that's what they challenging quarter with declines in both same property revenue growth in core AFFO per share.
The 3.8% decline in same property revenue growth is primarily driven by two key factors first we took a conservative approach and reserved again approximately 75% if I do infancies.
Which negatively impacted our same property revenue growth by 2.9%.
This information is available in a new table at the bottom of page two of our press release, along with other additional detail.
Second we we report concessions on a cash basis in our same property results, which reduced our growth rate by approximately 1% compared to using the straight line method.
The combined negative impact to same property revenue growth from both of these accounting treatment is 3.9%.
As for our core AFFO per share growth the total negative impact of delinquencies in the second quarter is 22 cents.
Without this a core f. all per share growth would have been positive 1.5%.
More details are available in a new reconciliation table on page 15 of the supplemental along with additional disclosures on operations.
Onto operating expenses.
Same store expenses increased by 6%, primarily driven by Washington property taxes, which have increased approximately 15% compared to the prior year.
As you may recall taxes in Seattle decreased by 5% in 2019, resulting in a difficult year over year comparison.
Our controllable expenses have remain generally in line with plan for the rest of the here.
Turning to funding plan for investments and the stock buyback, we are expecting to spend approximately 205 million in 2020 between our development pipeline and structure finance commitment.
In addition, we have bought back 223 million a stock here today, bringing total funding needs to 428 million.
As for finding research funding sources.
We expect 150 million of structure finance redemption, and we closed on the sale of three assets for 284 million.
In total we have 434 million of funds available, which covers all known funding obligations. This year on a leveraged neutral basis.
Moving onto capital markets.
The finance team was very productive in the second quarter. The trailing a 200 million dollar term loan which was used to pay down all remaining 2020 debt maturity.
In June we Opportunistically issued 150 million in bonds, achieving a 2.09% effective rate for 12 year paper and used the proceeds to pay down our line of credit.
Lastly on the balance sheet, our reported net to EBITDA was 6.4 times, an increase from prior quarter, primarily related to how we account for delinquency reserve.
Adjusting for the impact from delinquencies I met to eat our net debt to EBITDA would have been six times.
With nothing drawn on our line of credit and approximately 1.4 billion in total liquidity a balance sheet remains strong as we continue to maintain our disciplined approach to capital allocation.
Thank you and I will now turn the call back to the operator for questions.
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We ask that you please limit to one question and one follow up.
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My first question comes from Jeff Spector with Bank of America. Please proceed with your question.
Great. Thank you good afternoon, but just looking at some of my notes from from the remarks.
Between Mike in John on.
Your your thoughts on periodic contact at the office first work from home and some of the initiatives that John laid out I guess just big picture.
Can you clarify you know at least today, how you think your portfolio is positioned for what you think may be because I'm sorry, it was a little confused between the different comments.
Yes, why don't I go ahead and start with that this is John I think we're actually positioned very well and what we're seeing is people wanting to different value proposition. So they're looking for our assets, which we have many that have a little bit lower price point or dollars per square foot little bit more space.
They are they are in great.
Locations as it relates to outdoor recreational opportunities.
Then of course access to high speed and going forward gig speed.
Internet. So I think we're positioned very well for that what we're seeing is you know at this point in time, many the tech companies have.
Decided that they're going to defer occupying the buildings a range of dates really starting from October through one of them throughout July of 2021, but had no cases do we see that becoming permanent and then again it gets back to this reality as people are now realizing that as much as we all kind of started up and were impressed with zoom then.
Really worked hard to make things work, which is fantastic something's being lost and with the competitive juices flowing we strongly believe the companies will want to bring people back together they see the value like they've always saw the value in having that and there is also another piece to it which is I can speak anecdotally.
I was talking somewhat over the weekend. They mentioned the idea of moving in the extended commute zone and their employer said, that's fine, but you're going to get a 20% to 25% pay cuts.
Obviously completely negating there a perceived value of a lower real estate prices. So no doubt there not moving and.
We think we're positioned very well for the for the long run with our portfolio that answer Mike.
Yeah, Jeff Let me just add a little bit more kind of in America.
Turning to you because I totally agree with what John says and and I think that things are in ultimately pretty good order considering the fact that we've had.
10% loss of jobs in June so thats an extraordinary.
Number of jobs being lost and more than the financial crisis and as a result.
Tourism is there's a pretty big deal a lot of people like to go to San Francisco and to the various L.A. places rest, but was restaurants and bars shut down.
Those services are not available and you probably can't get there it's difficult to get there given all the various shutdown orders et cetera, and the other kind of key parts to our economy are.
Certainly the film and content production in L.A., which would realize exactly how big a problem that was with respect to covert 19, and prevention cover 19 and producing content.
And then finally, the tech slow down that I commented on and in my script. So.
All these things are actually.
Things are demanded in the marketplace.
And they will recover and ill, yes, it will take time and we're certainly disappointed about.
The second second wave and the renewed shutdown orders you know and in many cases restaurants and bars. We're open for a couple of days and then shut down again in California, and so this has been incredibly disruptive.
In California has made it difficult to get traction on things that really matter generally speaking, we have areas with pretty substantial amounts of wealth wealthy people like to consume services and including restaurants and bars.
We'll also people that have a choice between living in the hinterlands, where you can make $15 an hour versus working in the city.
In a restaurant job restaurant type job, making $50 an hour that's why there that's what people go to the to the to the cities so basically.
The most of these relationships and activities had been shut down again on a temporary basis and I think California has been.
Incredibly lets say vigilant with respect to the shutdown order say if they had been very extensive throughout the marketplaces and continue to have an impact so with the easy enough that and with better coded news I think youre going to see things open up relatively quickly.
Thank you very healthy.
Yes. Thank you.
Our next question comes from Nick Joseph with Citi. Please proceed with your question.
It's Michael Bilerman here with Nick.
Mike in the press release, you talked about a care Sean that ethic started with donations from executive officers and it says you intend to distribute up to 3 million.
Of that 3 million had was it all donations and do you expect to use corporate cash as part of it or is it all.
Led by executives.
No Michael it's it's a combination of both and.
We set up at the beginning of the crisis, we set up a.
Resident response team and they found extraordinary needs out there and including people for example that.
Couldn't.
Have didnt have money for for food and other central needs and so we actually the executive group in that case essentially donated some money to provide meals for people and then we realize that even more broadly we have we have other needs because there are people that have lost.
Our jobs and don't have great prospects for getting another job and so we wanted to have an entity that would provide relocation money and similar types of services and so we decided to set up the Essex care entity in order to do that so.
In situations, where if it's not doing that many good they need to move on and their life and find something better. If we can provide those relocation benefits. It's good for them. It gets them into a better place and you know in our case, we have we have the and I eviction ordinances are.
We can have a victim anyway, so it's probably better for everybody. So I think that this is a good example, a fine in sort of the common good.
As it relates to the current situation.
And you're providing an opportunity to let people move to pursue to pursue their life and the better their life.
Right to in then so how much of that 3 million was corporate cash how much was.
Donations and how much capital.
Do you foresee ethnic contributing going forward to these initiatives.
Well I don't think we decided exactly I think the b. The portion that came from the employee pool is somewhere around $500000 and the rest came from ethics, but thats not us not a perfect number but does rough number that's what that's what we did.
And then the two and half is prospective or was there an expense in the quarter for the corporate cash then.
Training that like you know I know yes.
There is no [laughter].
Yeah, Michael Let me, let me address as so.
There were expenses during the quarter, but we sense set the entity up toward the ended the quarter. So what happened during the quarter was already expanse and essentially we created the entity in response to the needs that were out there and what we're seeing on the ground we're dealing with.
The people you know we are resident response team consists of some 50 to 60, Essex employees and they're talking to our residents.
A couple of times, a month typically and again, they're trying to yeah. We came up with a a basket of needs and and people that were real we're really in difficult situations and so this is intended to respond to those needs on more of a perspective basis.
Okay, and just last one on this topic is the two and half million, that's going to Essex corporate cash, how you're going to treat that you're going to treat that's a contra revenue are you going it's included in same store or are you going to treat it completely separate.
From your financials.
Well I'll, let my financial Guru Tuck.
Angela.
Hey, Michael <unk>. That's a good question I think it depends on what it's being used more. So for example, if it's for groceries or to relocate our tenants it'll be a DNA item, but if it's for something that's revenue related you know.
[noise] impacting say delinquency it would be a contra revenue item and so at this point, it's too early to.
Now to see where that geography lands, but the intention is really more of a DNA item and we'll see what that means anything.
Okay, and I still think of living that work. Thank you.
[laughter].
Thank you.
Our next question comes from Rich Hill with Morgan Stanley. Please proceed with your question.
Hey.
Good morning, guys I apologize if the.
My phone dies in the middle of this call where when Mr. Getting up pretty bad storm I think a lot of my people out in the phone might be as well so I want to come back and talk about a topic that.
You've spent some time on the past, which is valuing occupancy versus rent growth and if I'm looking at.
One of your your metrics I think you're at 90 94.9 into Q and you've got up to 95.8.
As of July, but new and renewal spreads are obviously negative and maybe even a little bit.
Lower than where they were.
In the quarter. So I'm just wondering if you can give us an update about how you're thinking about occupancy versus versus rank gross at this point and when you think that you might be in a position to push occupancy.
And renewal and new leases be less bad than they are right now.
So that is John Thats, a great question well you know again as Mike had mentioned we started in a hole in the April really related to the shelter in place and just the demand stopped for a period of time. So as we moved in his as traffic increased pretty dramatically in May and then we took advantage of that decided to fill up the Paul.
Folio and you know big picture, there is a saying that we like which is let's not be proud and vacant and vacant units really obviously are nothing so we made the decision to get aggressive and.
Offer some leasing discounts or leasing incentives to enable us to gain occupancy and we ultimately gain about 200 basis points you locked into between.
June and July.
And Thats positioned us well, we subsequently pulled back on on concessions and we're still offering them and certainly market by market it depends but taking some of our markets a suburban markets like the San Diego Orange County venture a contra Costa in many of those cases, we've pulled back quite a bit on concessions.
And those occupancy is are writing higher.
There is in actuality, they're actually higher as I mentioned on onto my remarks than they were in March.
So we we look at it and say the best thing is to position ourselves.
So that we're meeting the market and not allow ourselves to be sitting vacant and so that's why we took that actually right now we're at a pretty good spot and we're just watching the market on a literally a daily daily basis understanding what's going on there are some areas that are more under stress.
Certainly San Francisco, we only have less than 1000 units there, but that's cisco's definitely under stress then.
I also know San Francisco about 30% of our units are so our studios and studios are clearly a challenged.
A unit type in this market.
Moved out and so that's also putting a little bit of excessive pressure on the San Francisco market in our numbers.
Does that answer your question.
Yes, yes, it does.
It does and I once maybe just come back to that a little bit more and think about the impact of concessions and you might have talked about this a little bit earlier on but if I'm thinking about this correctly, new leases or an average.
New leases on average of one or two months of concessions. So I'm just trying to think about how we're supposed to think about net effective rents.
Hey can you just walk us through walk us through the effective portion of it because it seems like.
It could be down a lot more then.
What the headline suggest so I want to make sure I'm thinking about that correctly.
Yes, so concessions I mean, I'd think of it in this particular market I think of it very similar to a development lease up where you offer concessions to.
Two incense someone to move them. There is obviously a certain real cost of moving and then there's just a pure motivation of moving and so when we desire to fill up our portfolio. We offered concessions is that really reflective on necessarily market rents are lower doing offering the concessions enabled us to gain a significant amount of occupancy. So I would look at it that way.
Yeah.
I don't want to dance around though there are clearly concessions in the marketplace. We were more aggressive because we wanted to fill up our portfolio and we've now backed away quite a bit from that our average concessions you know I know in the supplemental you're looking at same four to eight weeks and that was pretty common but the average concession during June was closer to 4%.
A four weeks or little bit less than that.
That we used two of which enable us to fill out but we did right. There was a range. We clearly had assets that have zero concessions and some that red eight weeks and sort of hence the a footnote in the financials got it got it and so just to be clear and I'm sorry for belaboring. This point, but it's hard to compare across names and that's what I'm trying to understand at this point yes.
The new and renewals our headline without the concession right.
That is that is correct and I'll, let you throw in one more comment on the renewals to give a little clarity. The renewals go out typically 60 days plus into the marketplace. Both were trying to give our customers no time to make a decision and then there's certain laws that prevent us from sending them out say less than 30 days and so what can happen is the market can move.
Uhhuh.
Between the time you send the renewable out which is what happened in the second quarter and when it actually becomes effective. So we would have had renewals that were effective in June that may have been signed in March if that makes sense. So you're always the renewals always get a leg.
Market rents, which are happening at at that point in time, yeah that makes sense. Thank you very much guys.
Surfer harping on a nuance question.
Oh, no problem great questions rich.
Our next question comes from Austin Wurschmidt with Keybanc. Please proceed with your question.
Yes, Thanks, guys and just building a little bit maybe even more you know John It sounds like you said that into July incentives have been broke even more.
So I mean.
Relative to that four weeks or less in June.
Have you virtually eliminated concessions at this point across most of your markets, given where occupancy is today or or.
Is it is it two weeks can you can you give us help us quantify that and then what the impact is on on from an effective perspective.
Sure sure so so.
It moves around daily literally but I can tell you that for a period of time, we completely eliminated them out of a San Diego Orange Ventura and parts of a contra Costa subsequently, we've moved back end with weak the two weeks here and there other markets and it's certainly Seattle falls in that bucket as well.
While other other markets like San Francisco, we continue to offer concessions somewhere in the range of four to eight weeks it depends and San Mateo pretty high end with concessions in similar a similar number of cuts number of weeks and a silicon valley is a mixed bag, but there are concessions.
In Silicon Valley, especially near the lease ups. There there is a both downtown Oakland and Silicon Valley and then some in San Francisco, where there is lease ups that obviously is the concessionary market, but we are pulling them back and we're going back and forth and part of it is.
We run the company as a portfolio or not.
Asset by asset, so where we see opportunity where the markets are stronger like Orange County in San Diego Ventura, we're going to allow that to increase the occupancy increase a little bit more than offset some of the areas that are little bit weaker like San Francisco.
No. That's helpful. And then how frequent are you using concessions on renewal leases to retain tenants and could you quantify what that net effective spread is in July versus last year.
Yes, so with renewals much less it's probably about 10% of.
10% of what we're doing with the new leases and renewals go out without any concessions. They can get negotiated in you know it depended upon the situation, but our renewals.
Yeah were.
Really.
I I expect the renewals going forward that'll really dried out because the market is changing right now and so we know where we were in June and what we negotiated in June.
You know we negotiated less in July and probably less again in August.
So.
Yeah, maybe it's.
A week or something or less than not I mean, because again most of them don't even have concessions.
For the renewals.
We're not trying to instead of some of the move it's the where we're trying to incentive someone to move that's where they come into play because it really is a matter of have moving cost and so this kind of this exchange that goes on.
Yep Yep understood now that's very helpful. Appreciate the time.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey.
Morning warning out there and rich was right on the power outages. We've now had a few of them since so a few questions here hi, John and in hearing your responses to everyone's questions. It sounds like you know things improved in July and then since then they have improved so we.
I think it was Mike you talked about are you talked about rent pressure in the back half it sounds like that's more like you're not.
You're not pushing rents positively, but you're seeing good demand. Most your markets are seeing up occupancy and that you're really not concerned about the back half for repeat.
The softening that occurred in early in Twoq was at a fair assessment.
Hey, I'll start Im sure Mike might have some comments, but you know there's a lot of risk factors out there Alex So certainly factually today the market is better today than it was yesterday the day before et cetera, and this is all the good thing and we feel good about that our portfolio is positioned very well.
All things considered but there's obviously things that are happening.
Related to co that that throw risk factors. There's some unusual there's some positives as I mentioned, we had consultants they usually move out in the fourth quarter, well, that's not going to happen because they already moved out.
We didn't have interns come in and therefore, they won't move out. So those are positives that may enable us to have a longer leasing period and then there's some interesting things going around some of the colleges. For example in many of them are doing partially online and that requires you to be very tethered to the university because you maybe.
Online for class and then it half an hour lately you have a lab on site are you still need to live right at that University and they've cut down the.
Occupancy my family just went through this and my daughter got bumped out in for spot. So she is now in an apartment and so there's things like that that are positive, but there is obviously risk factors out there and I'll flip it over to Mike. If you have more to add there, yes, Alex let me I try to tie this thing pretty specifically back.
What's going on on the job front and you know John So John mentioned that things have gotten better and.
Probably didnt draw enough attention to this but in my script I said year over year job growth declines have moderated almost 400 basis points to 10.1%. So from my perspective things are really horrible in April.
We fell off a cliff in terms of occupancy and a variety of other things we had an additional challenges that we had all of these anti eviction ordinances and if someone wanted out of their lease given the backdrop of having an anti eviction ordinance, we were actually I would say motivated.
To let them out of their lease probably to a greater extent than than many other places would be and and so we did so that accounted for you know sort of the occupancy drop and then if things got better and again job declines moderated 400 basis points and the results got better and so I would.
And that's kind of the point of my.
My script is to say, we need things to continue to get better and.
Thats going to be intertwined with Fig covert 19 experience going forward and we remain hopeful that it's certainly we certainly believe it's going the right direction, we certainly believe that.
Mankind and.
Potentially a vaccine or therapeutics or whatever is going to continue to moderate the picture but.
We did positive.
Positive developments certainly as it relates to the shutdown orders and once again it looks like we're hitting a new peak on this a second surge and so maybe we can open the restaurants again and we can do some other things I'd I was talking to some people recently about.
Restaurants in Palo Alto and they are shutting down partially shutting down the street. So they can move more of the tables out on the street.
And then have a traditional restaurant experience outdoors that will work in the winter, but in the summer that'll be great. So there is incremental improvement for sure and weak and just good thoughtful people can overcome a lot of these challenges. So I would expect certainly the progress to be on.
Going but whether we can take a big step forward or when we take a big step forward, we're still unclear as to when that might be hopefully that makes sense, we're making progress we wanted to be faster, it's little too slow, but it seems to be go into right direction.
Right, but it gets to the point, Mike you guys, obviously, none of us can predict the future, but from what your properties and your regions are telling you today you felt comfortable as you guys said pulling back concessions you've seen an uptick in occupancy and I think with the exception like the downtown L.A. or downtown San Francisco It sounds like most of your markets.
Have been responded well to the to the actions that you guys are taken you didn't identify maybe I missed but it didn't sound like it you identified markets, they're still you know weakening and getting worse and getting softer yet correct.
Yes, I mean like that that's a fair statement now let me San Francisco still challenged you know that trying to figure that one out there, but it's very small part of our portfolio but.
The yeah, though the other markets clearly responded to pricing I mean, we said this back at any rate we saw traffic increased pretty dramatically and that's when we made the decision to get aggressive and leased up the portfolio. So.
Yeah, our pricing was intended to increase occupancy worked very well we've pulled back from that we're maintaining occupancy. It's still we're working very hard we're watching things daily but.
Yes.
We're not seeing things fall backwards it when your word San Francisco again, it is an acceptance a little challenged soundlessly falling backwards is just pretty challenged.
Okay and then just the second question on the delinquency it sounds like you guys let people leave.
Who has the ability to do so whatever I'd like New York.
You guys, let people leave.
Brent see delinquency came down the people who are in there do you expect those people to be money. Good or these are sort of the freeloaders that are just hanging out for free rent and they are never going to pay the never going to leave the unit.
There's gonna be I mean, there's no doubt is going to be a mixed bag of of people, but you know as I said in my remarks.
We had 18% arms one of the five assets, where we had positive delinquency in delinquency, meaning that contributed to revenues because people that owed us we're paying back payments. So you know there's a lot of hardworking people out there you know we continually see these headlines as people struggling to get the unemployment payment. So.
Hi, senses as the money is coming through many of them are trying to make a a good efforts to pay us in the end will there be some that take advantage of us there always are but I don't think that's the majority, but how it works out certainly this thing drags on it becomes harder to peg and so we're cautious on how this.
The thing plays out as it relates to collecting delinquency.
Thank you.
Thanks, Alex.
Our next question comes from Rich Hightower with Evercore. Please proceed with your question.
Hi, guys provided as well just to maybe steer the conversation and a in a different direction here.
Mike what what's your what's your updated take I need a policy address landscape ethics, and certainly you know we could be having a very different conversation 90 days from now the next time. Your report so just where do we stand on.
The different bills and ER and.
Perhaps 21 and so forth.
Yes, well theres definitely a lots to talk about so rich if I missed some you can just a follow up and ask again, but obviously the biggest one that we're most focused on his prop 21 here in California.
Which would amend a law that was passed in the in the mid Ninetys to promote housing construction calls Costa Hawkins.
And so severely change out law and bring back potentially.
Forms of rent control that really don't work that really discourage housing production.
In there in all the cities that they adopt it and it's interesting that we already have statewide rent control with respect to be 14 may two two which passed last year along with about 18. Other builds that were intend to do try to jumpstart and to increase the amount of housing there was a bit.
Mobile in California, but and in fact in the case, if a before community to the apartment industry did not opposed to build because we thought it was a reasonable.
Finally in the middle ground of the need for more housing and the need to protect tenants. So we thought that the legislature to a very good job of that and but prop 21.
Is.
Brought by a someone that is not involved in the housing industry. It's a special interest group and so they are continuing that campaign and our case, we decided to keep our entity that we used to five crop 10 in 2018 alive.
And to essentially the same.
Group of people leave that entity and are the opposition team on with respect to prop 21 and.
They've made a lot of progress polling continues to be fairly similar to what it was it as it relates to prop 10 at this time, maybe a little bit better than that.
Because.
Before turning 82 was passed the politics I think are somewhat different and that we already have statewide rent control. So why do we need this other rent control.
Proposal and the the campaign is proceeding well there are.
Something like or somewhere over 100 organizations and you can see them. All you know representing seniors labor community groups et cetera that have joined Essex and opposing prop 21, and there is a website if anyone's interested which is.
No on prop prop 21, Dod boat and go to that web site and see it. So we were optimistic about it we're fully 100%.
Support in support of it and we're raising money and preparing for.
The final showdown. So that is the story on prop 21, rich maybe before I go on do you have any follow ups on April 21.
Or did I get that one yeah, nothing new that there was that was great.
Great summary, Mike you mentioned that polling.
Crop tenet, maybe a little bit of.
Thanks.
Back in is there any anything other than the obvious cobot environment, that's driving that over.
Are there are there any takeaways from that element specifically.
Well, it's difficult to see exactly how cove. It is going to its going to play out as it relates to that obviously rents have declined and certainly since AB 14, 82 was passed rents have declined so why not give 14 82, a chance to work.
Because it seems to be working and again what is the need for another.
Dollar proposition that have effectively a tax the same issue that the legislature is already acted upon and I think that that issue.
Actually helps us because again, we have a legislative solution. So why do we need to go to the ballot box.
Yes, certainly with respect to sponsor that has very little to do with housing and and fight that battle, So, but that's where we are.
And.
We will see I mean, there will be more coming out on prop 21 in in the coming week. So happy to discuss if you want to call the separately or whatever.
And then I guess I would also mentioned the.
Potpourri of anti eviction ordinances, which are incredibly difficult and like John I give great credit to the Essex team because sorting through.
City County State.
And even federal laws with respect to antibiotics ordinances and.
And all the different things that are that are out there, there's a tremendous amount going on.
They are constantly changing all of these various eviction ordinances be an extended.
Different terms I think that there there will likely be some legal action on some of them because theyre, they're pushing the envelope with respect to I think.
What would what would normally seemed to be appropriate in the circumstances and throw out as an example of that.
San Francisco.
Permanently banning landlords.
From a victim eviction. This is in at anytime in the future for Cobot 19 delinquencies. So I mean, we definitely have a an uphill struggle with respect to collections and.
To the extended almost appears that if you never have to if you never have to have accountability for your delinquency then it almost seems like magenta theres no late fees. There is no interest charges you almost may create a scenario where there is no incentive to two to pay.
The landlord. So this is the the dilemma because.
We're not in many cases allowed to ask for documentation of covert 19 hardship.
And normal things at one would expect so this continues to be an ongoing dilemma.
Okay I appreciate the color there and I guess.
One follow up if I may.
The incentive being a landlord and some of these places might might also be called into question Hawk determining what what's your sense of.
Just to the portfolio from a a capital allocation standpoint, and obviously, it's nothing you can turn on a dime.
Or do quickly, but how do you think about diversification sort of beyond your current core markets in that sense.
Well, yeah, we're I mean, we're here for very specific reasons. So we.
I think were actually pretty diversified as it relates to the major metro is on the West Coast, which again, it's a big part of the Globe Global economy.
One of the California in Washington, or something like a fifth largest economy in the world. So we're not talking about the small area and what we've done is tried to diversify with respect to product and.
In many many cities up and down the West coast. So I think we're actually more diverse then that that might.
That it might seem.
And and having said that why are we hear we're here because supply and demand for housing is very attractive and rents grow better over time and so we if there were other places that had similar long term rent growth as the west coast.
We would likely be there.
But that doesn't exist and so we're trying to maximize the growth of the portfolio over time and do it in a thoughtful way certainly a risk adverse way and.
Diversify the portfolio within the West coast, which can fix again, it's a very large areas. So.
And so we will look at them, we constantly look at other geographies and.
Other opportunities and we'll continue to do that we certainly do that once a year in our strategic planning session with the board which comes up here in September.
And so we'll continue to do that and maybe this will change it a little bit, but I would say.
You know the anecdote to.
Maybe a little bit less diversity is a very strong balance sheet. So you have to withstand the periods of time when.
Theres more volatility and we've done that and as a result, we believed that we have kind of the best to both worlds, we have a very strong balance sheet that can withstand.
Significant shocks and on the other hand have.
Among the highest long term growth rates in rents.
Great. Thank you.
Thank you.
Our next question comes from Rich Anderson with SMBC. Please proceed with your question.
Thanks, and good morning, everyone.
You know, maybe there should be new proposition to cap went declines.
Okay.
Hey, rich will vote for you for governor.
[laughter] [noise].
So I'd like to get back to the concentration Wescos concentration to your point, Mike I get it big economies, Dick take big area, the country, but still a lot of common knitting and in the state of California, that's causing sort of a singular problem.
Well one thing I've noticed about you guys over the years is thanks have a tendency would be to change over a shorter period of time than your peers like I remember back the supply issue in one quarter or youre kind of having trouble implant. The next quarter things subtly were much better and I have that a little bit wrong, but I know I'm close.
Okay, and saying that things change and perhaps measured in months for Essex, where might be measured in quarters for your peers and I'm wondering.
Hi, third quarter have a very different flavors is or is there a real chance that we could have a a conversation three months from now that could feel.
Vastly different than.
The tone of the of the press release that you released last night.
Well that's a that's a very good question and you might take would be that and I tried to highlight this it yeah, we need the drivers a normal drivers of wealth and.
Job creation to do well and we noted a couple of we need the tech world to go back to to growing and growing robustly and we think that they effectively taking a break by letting their people work from home for a time being.
And the motion picture industry needs to come back and we need the normal tourism that we benefit from so I mean, we're really looking at those things as a catalyst for something better to happen during the quarter and that is all intertwined with the cobot 19, and again we were incur.
Credibly I can't tell you how disappointed we were when we had that resurgence of cases and which is.
Now looks like it's starting to abate finally, but yes, so I think it might be a little bit longer term than that having said that we fell off a cliff in terms of occupancy in April and again, because these anti vision ordinances, we were probably more aggressive at letting piece.
We'll move on what their life, if they lost their job and needed more affordable housing than than some of the others and that caused vacancy to decline more and but it also set us up to find a tenant that can be a good long term tenant and so we there were some definite trade offs during the quarter and then play.
And catch up with respect to using concessions to build occupancy as John alluded to.
Definitely cost is something and again as of July we're in a much better position and we don't have that.
We don't have that overhang that we have to deal with so I would say that's incrementally better certainly you know unemployment going from improving by 400 basis points. That's that's going to help us in the quarter. So there is good news out there and you know, but as I tried to allude to in my comments.
We need we need the film production business to come back and that's that looks like a choppy road and and and even restaurants, you all the service jobs and restaurants, and bars et cetera that looks like a somewhat choppy right. So cautiously optimistic.
And.
We'll we'll see but I do think the next quarter will be better than the last that's that's for sure.
Okay and then.
Corollary to the concentration question and you mentioned this you know you're always kind of looking for other markets and I don't remember when it was probably 15 years ago. When you were looking at Baltimore in town and country. I mean is your your radar that far away or is it more closer into the west coast area, perhaps denver or something like that.
Yes, it's it's a little about I mean, what we try to do is.
Look at other major metro's.
Similar to the west similar to the West coast. Some element of supply constraints, we look at the stability of the economy and the federal government in Washington, DC is pretty darn stable employee.
People and so it tends to do better when when things are are not I'm not going well. Although it also can produce of a fair amount of apartment supply at the same time, so that can Bakken heard it but.
Yeah, we look at things much like trying to find markets that are like the west coast, which are very difficult to find and then yeah. We also consider.
Blurring the line so at what point in time might we go to some of the other markets that are near our existing markets, but just a step further out we have we on an asset in Santa Cruz.
Weve owned assets and Tracy.
And the inland Empire and.
You know I'd say.
Our experience there is those are very much time in markets and so is there a possibility of for example, setting up.
Co investment type entity.
Which inherently will have an exit.
Only for a period of time, and then to exit and do more a timing tied trading is something that we also consider and yet so I'm not sure. What we're gonna do I do know that a year from feedback from our board that they are going to want to take harder look at.
At this issue so.
We'll be having more robust conversations about it.
Great. Thanks very much.
Thank you.
Our next question is from Neil Malkin with capital One Securities. Please proceed with your question.
Okay.
Hey, everyone. Good morning.
Good morning rain.
Hey, I'll get so maybe talking about the development side.
Or the external side started a JV development object just curious.
How that side of the business is going and the appetite level.
Hearing that.
Only kind of distress in the market and not really on the acquisition side, but more on the.
Development land pre purchase those types of thing can you just talk about what you see there have you gotten more inbound calls and how do you see maybe the next you know.
Six to nine months shaking out on that side of the leisure.
Hi, This is Adam so I can cover this might feel free to top end.
So as far as distress goes on the on the land side of things.
Landowners are incredibly suburban when it comes to decreasing their expectations on on land values. So so yes lots of inbound calls, but but very few deals that seem to be getting getting and dry now.
We havent seen much if any.
And decrease and construction cost so so that coupled with some some challenging a challenging rental environment theres very little stuff that we see right now that would pencil.
We continue to be aggressive on the on the private equity side. Because there are there are a number of legacy deals that that are out there searching for for funding and construction lending standards have gotten somewhat tighter and we've gotten more conservative with with our Pref underwriting.
But even still there's still a relatively high demand for that so.
Like I said, we continue to.
Have a robust craft pipeline and that's that's probably where the the main focus is going to be a for the immediate future.
Okay great.
Other one for me.
Kind of been talked about but seems like on each call. You know the talk about regulation and things like that continued to get I don't know worse or more extreme.
You know.
Can you just maybe talk about a couple of things in particular, AB 14, 36, which I think is the state wide.
Bind the state wide advocacy moratorium.
Either the the sooner of the end of state of emergency plus 90 days or April 2021, just you know maybe what's going on there and then the other thing I guess part B would be that you look at like Chopper Kaz in Seattle, you look at a lot of these things that deep fundamentally a lot of.
The issues that you know, although you are diversified light as you say, they're they're very much.
A function of the California and.
Washington, and I'll say mentality type.
So I'm just wondering how you navigate through that process or approach. These these things that seem to kind of come out at you.
You know on a more frequent basis.
Yes, it's it is a great question and.
I will say that we are surprised at the.
The incredible those number of eviction related antenna protection related bills that come out of this and it's certainly in the short term we had our own.
Our own self imposed limitations for 90 days on evictions and rent increases and a variety of other things so.
I think that that is something that is just appropriate and proper.
In the.
In dealing with this with the pandemic.
But theres, a point at which and I would guess it we're getting near that point that.
You know things go too far and so what we've tried to do is both certainly comply and understand all the existing ordinances that are out there and again there at all different levels of government and they constantly change and.
And at the same time try to advocate you know in our discussions with.
CA and others you know like for example, if a resident if this goes on for some prolonged period of time it for resident owes us a certain amount of funds shouldn't they have some affirmative.
Responsibility to prove their cobot 19.
You know effect or impact or something like that EM and worked with their their tenant. There is this fear out there that there's going to be widespread evictions.
Following this situation and.
I look at it as we're realistic people, we have no interest and just.
Massive fictions at all and tax we're better off working together, but it needs to be on separate level level, playing field, we gave them too.
Essentially prove their or acknowledge their cobot 19.
Issue and then we can react and try to do what is what is thoughtful for for both of us. So.
The laws as they are currently constructed don't don't do that exactly so there's a bunch of laws out there as you point out that.
Prolong the eviction process and.
Not not just limited to the one you mentioned, but just on it on on an ongoing basis and it still remains to be seen what happens with those laws I am I mentioned in San Francisco the inability to.
Vicki anyone at any time.
Indefinitely for Copel 19 delinquencies and.
Im not sure exactly how we get paid back on on those those particular.
Delinquencies. So this has been a and ongoing.
Issue and certainly it's disappointing from from our perspective than that we have no ability to control, our destiny and and it seems like people have the ability to.
Essentially do things they shouldn't be allowed to do so I'll leave it at that.
Our next question comes from Alex.
Thomas with Zelman and Associates. Please proceed with your question.
Hi, Thank you for taking my question I'll, just looking at your noted discrepancy between public market cap rate.
Hi.
Right.
Or would it make sense.
So the match fund your stock buybacks.
Dispositions or are you looking to get a little more.
Aggressive on.
Thank you.
Thank you.
Yeah, we yeah Angela in her remarks talked about matched funding.
Virtually everything that we do.
Going forward, so bad that definitely is the plan and.
So not just buying stock buyback, but preferred equity and others. So NAND Angela outlined the her sources and uses for the rest of year. So I think we're.
I think we're on the same page with respect to how we're going to do that.
Maintain a very good balance sheet.
Got it thank you I think farm.
And just looking at run collection month over month.
What's unusual cadence for catch up on the falling off.
There are doing Quinn.
It's a little bit hard to hear your questions all repeated hopefully I get it right you're asking what's the usual cadence for rent collection, if someone's delinquent I think and you were just in a different time, because normally if someone's delinquent.
We're going to obviously communicate with them.
Either come up with an agreement with them.
In which case were pretty reasonable if they over the months, rather we're going to love how the prepayment plan, that's going to work over a reasonable amount of time, if they don't want to communicate we're going to give them a three day notice and startup process and work through that so normally that's how it would go where it is today.
Some of those options are not available the communication is and again I'm very pleased to see that without.
Any current hammers, we're seeing people step up and make payments on what they have so.
Some people wanting to enter payment plans, others, not they're concerned about whether they'd be able to keep those but theres still paying more than their rent.
And so we're seeing good behavior out to people in general hopefully that answers your question.
But I'm I'm looking more like for as a percentage catch up so if you're collecting 94% of April.
End of April.
Uh huh.
Well, Matt is there.
As a basis point catch up that you have been seeing or mostly negotiating.
Yeah, Hi, this is Angela here, if you were looking yet the amount of.
Revenue that is not reserved.
We are essentially.
Yeah.
Over 100% Kolenda for same store, which means some of that of course goes towards delinquency, but keep in mind. This is only July you know, it's one month and so to John's point.
We are seeing good behavior and most people are trying to be responsible but it's just too early to be able to say, okay. What does that trending given this is July.
Numbers.
Got it thank you.
Thank you.
Our next question comes from John Polaski with Green Street Advisors. Please proceed with your question.
Hey, Thanks for continuing the call longer just one follow up for me John can you help me understand a little bit your comment where.
Elevated concessions aren't exactly indicative of where market rents are in certain markets. It feels like every a lot of big private and public developers are four to eight weeks free so it feels like didn't market clearing price of rents to incent demand market rents across your portfolio. If all you can.
Editors or 40 weeks free is down in the neighborhood of 15%.
Just could you just elaborate on that.
Yes, I'm glad to.
The first half they give you guys. Some credit you've done a nice job trying to track things. So I appreciate that getting the facts out there, but it would say what impart what we're picking up and what Essex does it got a frustration out of not having great market data can some of the vendors are doing a great job we created their own proprietary database. So we've got over a thousand.
Assets in we're tracking them and what we find is.
Different days different competitors are offering concessions, they're doing it a different units and so there are commonly assets out there that are offering maybe four to eight weeks, but that doesn't mean that those are the only units that are renting.
And what we saw back in June was many of the bigger owners were trying to gain occupancy increased absorption just like a very large development lease up ultimately are multiple lease ups competing against each other.
That worked for us and I can't speak for our fears that that worked for us and so we're backing off and we're continuing to find that we're achieving leases in many cases without concessions not although that gets at San Francisco is different and.
Asset by asset we have different plans, but.
That the idea of having the concessions to.
Help pay the moving costs have been since I'm going to move has paid off for us and we again were generally backing off now where you get into very competitive spots like downtown Oakland, and the CBD or San Francisco or downtown San Jose There's lease ups going on in La Theres lease ups going on so things get blurred.
A little bit because you've got the lease ups that are offering concessions. If you are stabilizing you're down the street, you're probably still offering loads concessions. So there is a little blurring going on but we are seeing as you get down to other markets like say Ventura.
Lots lots of Orange County, San Diego.
In many cases concessions just drying up and that kind of what can happen with concession is there in the market and then they just dry up rather rapidly and we are seeing that happened. So overall again really as it as a tool to increase absorption.
I understand your idea the net effective but the reality is we try to using the increased absorption and they worked well for us.
Does that answer question.
It does it sounds like it's more of a debate over duration. So if these concessions over to continue for the next six months. He effective rents have to be down 15 ish percent across these markets are I mean it just.
Oh, sorry, just to make lucrative or market yet.
Yes, no fitness went on forever.
Again with US yes, why referenced we gained 200 or 190 basis points in occupancy because there was an impact from you know we offered concessions. We increased occupancy is a direct impact and we're backing off of that so that worked well due to create excess demand. So yes, no I. If they went on forever. Yeah, then they're part of the market that'd be different.
Okay. Thanks.
Yes. Thank you.
Our next question comes from John Kim with BMO Capital markets. Please proceed with your question.
Thanks, Good morning, John mentioned in your prepared remarks that the value proposition of downtown.
That's a defined suburban and I was just wondering if you could remind us of the breakdown that you have or that you identify and downtown urban and suburban immature market.
Sure well, yes, we look at about 10% urban and 90% suburban.
And there is obviously can be some blending that goes on certainly as you get into some of the locations in southern California, where it's kind of blended but overall, we'd look at 10% we have very little in San Francisco under thousand units in downtown downtown market and our same store portfolio.
Okay, and then on the concession discussion, which I know it's already in your same property resolved but.
We are assuming four weeks of confession, using an average might be higher than that and the second quarter. Then that would imply your new leases were down 10% renewals were down 8%.
And I think there's a commentary and anything you know july's gotten better than even the compression level, but I'm not really sure. It's on an effective basis level, it's gotten better just given where the rates you quoted have gone. So I was wondering if you could quantify that difference to the second quarter in July.
The effective rent change.
Yeah, well I can I can definitely tell you. If you were to look at it purely on on net effective and disregard the increase in absorption. So just weird advanced transact net effective they definitely did get better in July and and on the they're going to comment on the.
Renewals.
Not all the renewals God concessions and in many cases, it was a week or something like that so what it wouldn't be it wouldn't translate to a let's say at an average of at 8% or one month on the renewals that that's the renewals were.
Closer to offer.
1% somewhere that in that area, but on the new leases again, the focus was on the new leases with the concessions to increase absorption. So.
In some of that as it has gone away and so the if you looked at it purely that way net effective yeah definitely rents are up in.
July over Jim.
Our next question comes from Zacks Silverberg with Mizuho. Please proceed with your question.
Hi, Thanks, and good morning out there I'm just a quick one on capital allocation I'm just curious as street in the press release, you mentioned more stock buybacks.
Where does the stock buyback program fit into your best use capital today, and how do you view this moving forward.
Yes, Hi. This is this is Mike yeah, we've we slowed down a little bit on the on the stock buyback.
And.
The the thought there is that the effects of coven 19 are going to be with us for a longer period of time and so the the.
Impetus to do a lot of stock buyback.
Quickly is less important.
We are constantly watching debt to EBITDA and some of the other balance sheet metrics and so if you're selling assets to buy back stock that you're going to need to de leveraged along the way because as you sell an asset obviously your EBITDA shrinking so.
So we're mindful about.
About how we do stock buyback was still very interested in it. It is still one of the things that is important to us.
But and again.
Funding it along the way with with asset sales is at an imperative actually with respect to all of all of what we're doing so I'd say at this point in time as Adam mentioned that probably the preferred equity pipeline is going to be our our go to source given that there are fewer providers out there and therefore, we have better selection of transactions to pick from.
And and data be bad and definitely like co investment transactions when the transaction market.
Gets better and we see more quality assets that are trading.
And that obviously it depends on what the what guys are trading out, but this idea of buying let's say.
Four and a half type cap rate with.
Cost of debt in the low to mid twos that generates a whole lot of cash flow and is.
Pretty attractive transactions so.
So I think we're going to have opportunities on the external side and.
And to actually you know I think this is this is the fun part of the business. It's when there's disruption in the marketplace and lots of opportunity and we get to pick.
What the best use of capital is.
Thats, what we do exceptionally well.
[noise] fed answered Josh.
Yes. It was that was perfect I appreciate the color and Dan just another quick one from me you guys mentioned, a mobile leasing happier developing do you have any sort of.
Project return targets around this and what percentage I guess of your portfolio is completely touchless for the Q.
For a customer.
The lease up process.
Sure so.
Yeah, we're not giving away the metrics at this point in time on that but I can tell you will be quite a change from a perspective of the customer being able to come in and lease.
On a mobile iPhone literally set up obviously, some setting up the appointment all the way through to getting approved.
Instantly and and moving forward. So we're very excited about that we think that will give us a.
Great customer experience and position us very well going forward when you're talking about the touchless.
This point in time really we have.
On the tour perspective, and otherwise we can go touchless all the way through other then of course once they get to the site, they're going to move in but.
We are touchless across the board in that in that sense does that answer the question.
Yeah, I think I got it. Thank you very much for your time.
Thank you.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Michael Schall for closing comments.
Very good. Thank you operator, and thank you everyone for joining the call today.
Certainly our best wishes to you and your families. During these very challenging times and we hope to see wall either in person or on Tsum someday soon have a good day.
This concludes todays conference you may disconnect on it at this time and we thank you for your participation.
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