Q3 2020 Essex Property Trust Inc Earnings Call
Earnings Conference call.
As a reminder, today's conference call is being recorded.
Statements made on this call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties.
Well were looking statements are made based on current expectations assumptions and beliefs as well as information available to the company at this time.
A number of factors could cause actual results to differ materially from those anticipated.
Further information about these risks can be found on the companys filings with the FCC.
It is now my pleasure to introduce your host Mr., Michael Schall, President and Chief Executive Officer for Essex property Trust. Thank.
Thank you Mr. Shore you may begin thank you for joining the call today once.
Once again, we would like to offer our best wishes to all of those impacted by COVID-19.
On today's call, John Burkart, and Angela Kleiman will follow me with comments and Adam barriers here for Q1 day.
Our results continue to be negatively impacted by the COVID-19 pandemic, including extraordinary local and state government responses are reported results for Q3 reflect these unprecedented challenges, resulting in a 6% decline in core FFO and 6.7% lower.
Same property revenue.
Despite a variety of challenges, we were mostly successful and our goal of maintaining occupancy and rental rates to the extent possible, which John burkart will discuss in a moment.
Our first priority continues to be the safety of our employees in residence, while deploying technology throughout our portfolio given a strong consumer preference for touchless interaction.
Regulatory hurdles have been pervasive across our markets, creating a new level of complexity and administration for our property teams.
As can be seen on page S 16 of our supplemental package, California has developed a fourq here system applied to each county for determining the severity of COVID-19 restrictions.
Fortunately recent changes have been mostly moving ethics markets into less restrictive tears San Francisco recently reached the least restricted.
Yellow tier four allowing offices, an indoor dining to reopen among other improvements similar positive changes have occurred across several of our markets in recent weeks, which represents welcome news for local businesses and residents.
We have previously noted that the apartment business closely follows local housing supply and demand trends and seasonal patterns.
Given the pandemic these normal seasonal patterns were disrupted by massive job losses, resulting from the pandemic and related shelter in place orders.
In April year over year job losses were 13.7% followed by a solid job growth in May and June.
[noise] job gains then moderated again this summer as shelter in place orders were extended upon a surge of COVID-19 cases.
By September job losses in Essex markets were still down 8.7% year over year, a positive trend from April but still lagging the 6.4% now <unk> national average job loss for perspective in the financial crisis peak to trough U.S. job losses were nine point.
1 million over 20 months this year the nation lost 20.8 million jobs in just two months.
We attribute the greater job loss and slower economic recovery in California, and Washington, two very restrictive shelter in place mandates we.
We see the recovery path ahead as reversing the job losses in the cities and industries that suffered the greatest impact from the shutdowns.
Whereas on travel leisure and hospitality sectors were among the hardest hit and they are concentrated in the urban core various cities the.
The restaurant industry provides a good example.
Using open table data as of last week, the number of dining reservations in Los Angeles fell by 66% compared to one year ago, while Seattle and San Francisco both declined 78%.
This compares to other large cities like Miami, Denver, Dallas, and Atlanta, with only 30% to 40% declines.
Similarly employment in hotels live entertainment.
And local transportation activities are down 37% to 50% and they should have a strong recovery of cities reopened.
In southern California, the TV and film industry is a significant wealth creator and it was decimated by Kobin restrictions in the third quarter. The number of shoot days began to recover from a near shutdown, but remained down 54% year over year the.
The industry is now trending in the right direction and production permits has steadily increased since June suggesting employment will continue to rise.
Younger workers have faced many challenges in the pandemic, including greater job loss and higher unemployment rates compared to more experienced workers.
Employers often delayed hiring and reduce the number of job openings during the pandemic as offices and small businesses close from shelter in place orders. Many college graduates chose to move call rather than relocate in proximity to their new employer as a result of work from home flexibility.
As a result of these conditions the share of 18 to 29 year olds living with apparent increased to 52%. This summer up 500 basis points year over year and the highest level in over 100 years.
The combination of lower immigration.
Our new graduates and higher out migration from young singles has played out.
In different ways across our markets, we have seen pockets of strength and Ventura Orange County, San Diego and outer suburban markets in Seattle, and Northern California by contrast, our urban and tech centric submarkets are deeply discounting to attract residents.
Meanwhile, Tech companies are speaking with their pocketbooks companies, including Google Facebook and Amazon continue to expand their real estate footprint in our markets.
Notably Facebooks expanded campus in Menlo Park, and the acquisition of Ari eyes, New headquarters in Bellevue Googles continued plans for an urban village in San Jose and Amazon's continued growth in Bellevue and other submarkets in the Seattle area.
As always we continue to monitor the pace of job openings amongst the top 10 tech employers in our markets and while these numbers are down year over year. We are encouraged by recent increases in openings for nine of the 10 companies in our survey, while todays 17000 openings our cigna.
Difficultly lower compared to the pre cobot period today's level is consistent with.
With the pace of hiring they experienced in 2016 and 2017 it.
It appears that the most successful tech companies in the world remain committed to our markets and most of them have announced work rich.
Returned to office plans in 2021.
Turning to our initial thoughts about 2021, we plan to provide annual guidance as part of our fourth quarter earnings report there are many moving parts to the guidance discussion, including the impact of the winters Corona virus trajectory, the timing of vaccines and improved therapeutics and any new government stimulus measure.
So with that said, we based our modeling on the consensus of third party economists for next year's GDP growth, which is currently around 3.7% and compares to this year's minus 3.6%.
If that proves accurate we would expect to benefit from positive tailwinds in the form of steady employment growth and rising consumer confidence in addition to the boost.
From an improving job outlook the potential for a covert vaccine to become widely available next year is an obvious positive that would reduce the need for social distancing and shift the work from home dynamic from a requirement to a lifestyle decision to come through several negative such as potential pay reader.
Options for remote workers lack of face to face collaboration and networking and potentially fewer career advancement opportunities.
Finally, with respect to our year over year growth trajectory next year, we would expect to hit an inflection point during the second quarter as we anniversary the steep coated related declines this could set the stage for a gradual improvement in rental growth in the back half a 2021 again, assuming further easing of coping related risk.
Frictions, our data and analytics team completes its own fundamental research on supply, indicating around 33000 apartment supply deliveries and 2021, which is similar to 2020.
While that continues to represent just below 1% of our apartment stock, it's still too much supply until the pace.
Of job growth accelerates further.
As with the past several years, the 2021 apartment supply estimates from third party research providers are well in excess of our expectations, implying a ramp up of deliveries that we do not believe is feasible given skilled labor constraints within the construction industry in our markets.
Turning to the apartment investment markets. We have now sold for apartment properties with a total of 670 apartment homes for 343 million all of which were placed under contract subsequent to the implementation of shelter and place orders in March given the wide discount and valuation for public Reits.
Compared to the private real estate markets, we continue to market additional properties with the goal of funding at a minimum all of our investment needs through dispositions.
Other than the Aimco sales that were part of its announced reorganization very few sizable apartment transactions occurred during the quarter generally the number apart a properties being marketed has been extremely limited since March and is now slowly increasing.
Therefore, it remains too soon to draw conclusions about cap rates going forward in the suburbs, where rents have remained relatively stable since the start of the pandemic cap rates and property values should not change materially compared to the pre pandemic period and those suburban areas, we expect high K.
Quality properties to sell in the low to mid 4% range in terms of cap rates given significant concessions on hard hit cities recent price talk around possible sales indicate a 5% to 10% discount to pre cobot valuations.
With the few sales that we've seen in these markets, assuming a fairly rapid rent recovery as.
As with previous recessions, Fannie Mae and Freddie Mac.
We have continued to provide very attractive financing was seven year fixed rate financing and the mid 2% range.
Significant positive leverage and active sources of debt significantly limits the amount of distress in the markets finally.
Finally, I'll end with a brief comment related to California prop 21.
Including the extraordinary opposition effort coordinate coordinated by the Californians for responsible housing group.
I'd like to commend the leadership of this group, including our Undrawn UTI for their unrelenting focus and steadfast effort in opposing this flawed proposal prop 21 would surely make housing shortages worsen, California. The no on 21 campaign has assembled an amazing constituency consisting of hundreds of Oregon.
The nations, including veterans groups Affordable housing advocates the California, NAACP the state chamber of Commerce and scores of others, along with Governor Newsome.
Almost every newspaper in California supports defeating prop 21.
We all greatly appreciate your efforts and now I'll turn the call over to John Burkart.
Thank you Mike.
Let's start by thanking the eating throughout this period of extreme volatility and complex regulation, they acted thoughtfully and tirelessly to serve our customers.
We were successful in our objective of building occupancy during the third quarter, our using various pricing strategies, including concessions along with leveraging our technological advantage.
Significantly improved our response times and the overall customer experience.
Our strategy of using upfront concessions when appropriate reduces the impact of the market dislocation on the rent roll as noted in the table on the bottom of page two of our supplemental are scheduled rent for Q3 2020 is down only 40 basis points from the prior year's quarter.
This positions us favorably for revenue growth as concessions continue to abate and our year over year comps become a tailwind.
As of mid October we were offering concessions of three to four weeks on less than half our portfolio compared to over 75% of the portfolio in the third quarter.
No material concessions are being offered in Orange, San Diego, Ventura and Contra Costa County.
Occupancy in these four counties currently average 97.9% within availability of 2.5%.
Like the fact that we are seeing solid signs of stabilization in many of our markets I do want to acknowledge that we continue to hear anecdotal stories of owners, who reacted slowly to delinquency and rapidly changing market conditions and are now attempting to improve their occupancy position during the seasonally slow demand period as a result, there may be up.
Coming challenges in various markets.
Consumer behavior related to COVID-19, including consumer preference for larger units private outdoor space stairs, instead of elevators and communities with within commuting distance to employment hubs yet located in proximity to outdoor recreation amenities continues to impact demand in the marketplace.
Turning to our Q3 2020 results as presented on page two of our press release year over year revenues declined by 6.7%, while the year over year revenue growth continues to decline due to the change in the rental market post co that improvement in the sequential revenue decline is consistent with.
The signs of stability that we're seeing in the market.
Although we're not care currently giving guidance I want to remind everyone that the combination of a very tough occupancy comp of 97.1 from Q4 of last year and the fact that lease transactions on average are below last year. It is likely that a year over year fourth quarter revenue growth will decline from Q3.
Turnover in the quarter increased 73 basis points from the prior year's quarter.
Communities with certain attributes were the key contributors in this increased turnover specifically high rises communities with markets with a greater demographic of college students and Silicon Valley contract and consultants.
On the regulatory front various governmental bodies have adapted anti addiction and other resident protections, California recently passed AB 30, 88, which is a positive step toward replacing the patchwork of local ordinances Govan 19 related delinquency.
Impart Abthirty 88 prohibits eviction for non payment of rent between March 1st in August 31st of this year establishes a minimum future payment threshold to protect against future addiction and establishes access to small claims courts to pursue collection of past few red.
Washington State has similar Reg regulations expiring at the end of this year well, we continue to see many residents paying down prior balances. We also continue to work with our residents on solving delinquency issues.
Lastly expenses in the quarter were negatively impacted by increased property taxes in the Seattle market and COVID-19 related impacts such as pp and higher utilities, driven by increased usage from residents or home lot for longer periods of time.
Utility increases in Q3 were offset by year over year reduction of 12% and electricity costs as a result of the various green initiatives we have executed.
Turning to our markets in the Seattle market year over year revenues in Q3 were down 1.6% while year over year occupancy for the period was flat the greatest decline continued to be in Seattle, CBD, where revenues declined 5.6% followed by the east side with the 1.1% decline.
Revenues in the South and North Submarket saw increases of 30, and 60 basis points, respectively for the same period.
Yeah, it'll job growth in Q3 declined 8.1% year over year, However, Washington unemployment in August remained 60 basis point lower the U.S. average of 7.7.
It's worth noting that Seattle home purchasing activity increased during the third quarter on a trailing three month average from August year over year home prices were up 12% in August.
I'll get the loan home prices were up 17.4% on a year over year basis.
Moving to northern California, and the Bay area market year over year revenues in Q3 were down 8.5%.
Occupancy for the period was 96.2, a year over year increase of 30 basis points. Okay.
Oakland CBD in San Francisco continue to be our most challenged markets in Q3 with year over year revenue declines.
16.5% to 17.1%, respectively compared to San Jose where revenue declined 7.2%.
In the same period Contra Costa saw a decline of 4.6%. However sequential revenues in this submarket increased by 1.6% from Q2.
Barry a job growth declined 9.7% year over year in Q3, mainly driven by job losses in leisure and hospitality and trade transportation and utilities, all heavily impacted by the states required shutdowns.
However, there are positive signs of growth in the market several bay area Tech companies file for IPO during the third quarter monthly Mcafee Air Bnb Nope like and Unity software. In addition in addition, Google unveiled their plans for a 1.3 million square foot Technology Mountain view. This new development will have a capacity from a 6000.
Additional employees.
Barry home purchase activity picked up during the third quarter on a trailing three month average from August year over year home prices in the Bay area, we're up to as much as 8.6%.
In August alone San Jose market home prices are up 20% year over year, while San Francisco and Oakland were up 14% for the same period.
The increases in home prices makes the transition from renting to homeownership, even more difficult and it shows the continued long term demand for housing in our markets.
Got in southern California year over year revenues in the third quarter declined to 7.3%, while occupancy declined only 20 basis points.
The L.A. market continues to be a challenge in Q3, our west La Submarket saw the greatest year over year decline of 16%, while our remaining elissa markets declined between 9.1 and 12%.
Healthy job growth was minus 9.7% in the same period for unemployment remained the highest of our markets at 15% in August.
In Orange County, Q3 year over year job growth declined 10.8% while revenues declined.
2.6% and occupancy increased 1.4% in the same period.
I do want to note that quarterly sequential revenues in our Orange County, Submarket actually increased by 1.9% in Q3.
Finally in San Diego, our year over year revenues declined 2.1% in Q3, the Oceanside Submarket. However continued to grow revenues by 2.3% in the same period.
San Diego, San Diego job growth declined by 8.9% for the period.
Currently our same store physical occupancy is 96.4% our availability 30 days out is that 4.5% and our fourth quarter renewals are being sent out with no increase.
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 on our third quarter results, followed by an update on capital markets and funding activities.
As noted in our earnings release and earlier.
This was a challenging quarter with declines in both same property revenues and core FFO per share.
6.7% decline in same property revenue growth is primarily driven by concessions and delinquencies we.
We report concessions on a cash basis in our same property results. Because we believe this approach provides a true picture of current market conditions.
The cash impact of concessions was 500 basis points. So excluding death, our same property revenue decline would have been 1.7%.
Set of 6.7%.
Inversely on our consolidated financials, we straight line concessions in accordance with GAAP in calculating core and total EPS, though.
Keeping in mind that when concessions abate oral.
Our approach will impact the future performance in two ways first our year over year comparison on same store revenue growth will be favorable.
Second the opposite effect will occur as the FFO growth because there will be a headwind as we continue to straight line concessions over the life of the lease.
Onto delinquency.
We are encouraged to see total delinquencies declined during the third quarter relative to the second quarter.
On the other hand, given the current environment and the related uncertainties. We maintained the same approach as last quarter and reserved against 75% of our delinquencies, but third quarter.
[noise]. This may prove conservative if California law allows a clear path to collection of COVID-19 related delinquencies, it's temporarily provider in AB 30 88.
The negative impact from a delinquency reserve to same property revenue and core AFFO growth was 1.6% and 4% respectively. Please.
Please see the bottom of page two of our press release and S 15 in our supplemental for additional details.
Turning to capital markets.
In August when the interest rate dropped down to a level close to the 52 week low we opportunistically issued $600 million upon consisting of two or $300 million tranches, and 11 year and a 30 year maturity and an effective yield of 1.75 and 2.67% respectively.
The yield on our 30 year bond, what's the lowest on record of any triple B plus rated issuer at that time.
Since then we have repaid a 300 million dollar bond set to mature in 2022 and have plans to pay off all remaining 2021 maturity at par.
The net result is a very low risk maturity schedule for the next two years was the only a $350 million term loan to repay in 2022.
As for funding plan for investments in the stock buyback.
Our structured finance investments are funded by the redemption and our development commit commitment is less than 73 million over the next two years.
Incidentally, because the pandemic has caused delays in development deliveries I.
Our development and alive for the next year will be lower than we expected because we are not as far along in our lease ups as we had originally planned.
On the stock buyback year to date, we have repurchased around a million shares at an average price of about $226 per share.
We have match funded the stock repurchase with 343 million a property sale, which is comparable to our pre cobot consensus and navy of close to $290 per share.
Well, we have been opportunistic in arbitrage and the compelling discount between our public and private entity.
We paused our share repurchases when cold at night, and caseload and hospitalization search this summer.
City or shelter in place orders were issued.
Even though we have transacted on a leverage neutral basis and have reduced our net debt selling assets also reduces EBITDA.
Accordingly, we continue to be mindful of the impact on the debt to EBITDA ratio in the context of our stock buyback strategy.
In summary, with minimal near term funding needs nothing drawn on our line of credit and approximately $1.7 billion and total liquidity.
Balance sheet remains strong and we continue to have the flexibility to be opportunistic while maintaining our disciplined approach to capital allocation.
Thank you and I will now turn the call back to the operator for questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is in the question queue.
You May press Star two if you would like to remove your question from a Q4.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
In the interest of time, please limit yourself to one question and one follow up so we may get to everyone's questions.
Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.
Thank you and I appreciate all the operating updates on the call if.
If I'm looking at page S 15 of the supplemental the operating statistics for October I know, they're gone on a gross basis and not taken into account.
Sessions I know you said concessions were up 18, but I'm wondering if you could give the operating numbers do renewal blended when taking into account concessions for both October and then the third quarter.
Well, let me let me see if I can give you some more information I mean, I'll give you everything there, but let me give you some more information number one on that note it shows that the.
Market rents the decline in market rents as has improved and that is true but the the fact is is last year, we had an easier comp. So I want to make sure. We have the context whatever you know it's all it's always a challenge with transparency given out more information and then I'm not having all the context so.
As a little bit of a head fake when it shows how the.
October rents have improved year over year, but that said our markets are doing well and a across the board is showing signs of stabilization or they are actually improving so I.
Want to make sure we get the right message across as we get today read in further you'll see that number reverses a little bit I don't want people thinking Oh now things are getting worse its not the case its just year over year comps, but as we get into what's happening in October as far as for concessions go. We have we started the October reducing concessions and this.
Is off of a Q3, which is over 75% of our transactions had concessions. It was roughly a month and then we moved into October. The first couple of weeks and we were at less than 50% and then as we move into the second half of October we're actually now at less than 25%. So we're doing that while maintaining occupancy.
C or improving occupancy and while maintaining low availability. So all those pieces are going in the right direction at SXE again, we don't we're not the market where part of the market, but we're performing very well within that marketplace.
When we look at the break between renewals and new leases, there's definitely more leasing incentives on the new leases typically running 3.3% as what we have in there is accurate on the new on the renewals, it's usually less than a week I'm. Obviously, there's less of an incentive. This is you know this is already the people already.
In the property does that answer your question Nick.
That sounds that was very helpful and especially the color on the year over year trends, maybe just the second question to answer I appreciate.
The commentary on the share repurchase program.
What would get you to restart it and I'm wondering obviously the stock is below where you are purchasing minutes for some of the reasons that you discussed so what would get you more aggressive there is it price or should we expect it to be positive for the near term regardless of price.
Yeah, I think you know like I, if you look at how we manage our capital allocations.
We are not really going to deviate too much from that plan and so the key commentary I have is really to make sure that we also at the same time preserve our debt to EBITDA ratio and so it'll be a little bit of all of the above what are we selling and what price and what's the end.
Pack on the EBITDA reduction at the same time, what our opportunities to reinvest the sale proceeds so is there a.
If we have.
Well prefer equity for example, then that certainly would be an important piece and of course, the other pieces, where the stock is trading right and so it's it's all of these things that gets that factored in.
Thank you.
Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
Hi, This is somewhat here with Nick I'm just it just a question on a cash delinquencies I know, they're at 2.2% of scheduled rents and you recently at a conference held in September I spoke about.
Positive delinquencies, so could you provide us with an update on how collections are trending.
On the delinquency side and how much of this two point do will likely head into mid 2021.
Also do you have any delinquencies creeping into your utilities expense side like some of your peers.
Yeah, Okay. So.
Overall delinquencies are definitely improving and you even can obviously see that from you know Q3 versus Q2, there are some underlying trends there that that occur and so what's happening is we are collecting a little bit more in.
Prior delinquencies, which is a good thing again I've said all along we're working with the with all of our residents and the great great. Great majority are showing very good behavior. So we are getting a little bit more on the current months delinquency is a slight uptick it kind of ties in with the reduction of the federal aid.
But it's really not that not that material overall again the pitcher with delinquencies is improving and so my expectation as we move forward. We continue to have the economy opening up we have although we still have negative year over year job comps, they're getting better and better and so if on a local level, we actually had seasonal jobs on c. would actually show.
Show seasonal growth so things are actually improving out here and my expectation is that delinquency, but we'll continue to approve improve as we move forward as it relates to utilities or any other line item there really running a similar a path to the rental deliver delinquencies of the people who are unable to pay rent.
Yes.
Our really you know not paying delinquencies and but you know there there's not paying all of it so or they are paying a percentage, but the percentage of ties. The same so it's a very parallel path that makes sense.
Hey, guys a Nick Nick here are just a question bigger picture, but bigger picture question, maybe for from Mike You know.
What is what is sort of the biggest selling point you can give investors right now about your portfolio and you know addressing some of the bigger worries out there such as potential increase in rent control in California, The fact that.
Tech workers are room, working remotely and they are in some cases moving to other states like Washington, where there isn't a state income tax.
You know with all that being said why why is you know what are people missing about to ask story right now and I guess the other thing I'm wondering as you talked about it sounds like transaction cap rates staying low.
Much lower than where your stock price implied cap rate is right now so I mean, how do you think about asset sales in this environment as well.
Yeah, Nick a those are great questions and I guess I would start with the latter point you made which is the disconnect between.
Public real estate markets, and private real estate markets and trying to monetize that difference and as Angela stated we pause.
Paused a bit in the quarter when the cobot cases, we're we're increasing and it's interesting we think thats just an obvious benefit you know for.
Operating the machine and forward direction, we are issuing stock and incurring debt and buying property at a positive differential or arbitrage and we think that that works pretty well in reverse.
Direction as well so I'd say that is an obvious way to add value add NPV per share and AFFO per share to the company given the current dislocation I'd.
Also mentioned that you know when we look at the amount of job loss we've had.
The rent growth or the rent reductions that we've seen.
Our really I guess I would say to be expected and I know everyone is focused on this work from home issue, but if you just look at your L.A. jobs still as of September down, 9.6%, San Francisco down, 10% and Oakland down 11%.
And largely driven by things that we.
Well, a big portion of them will come back like for example, the tourism restaurants hotels.
The motion picture business in Southern California. Those are the Tech industries. There is nothing fundamentally wrong with them and I think that most of the.
Rental revenue loss that we've incurred this just a directly attributable to job growth and so I think that this will unwind itself and has already started to unwind itself.
As mr.
Mr. Burkart just outlined in your.
No numbers that are you know slowly getting better we're still I would say and ill.
Okay.
Pretty tough spot with respect to employment, we need that to recover but the balance sheet is incredibly well positioned and we do have some ways to add value to the company and so we see we see opportunity there. So I guess, that's how I would answer your question question [noise].
All right. Thanks, Mike.
Thank you.
Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.
Thank you My first question actually was similar to that last question, but Mike maybe we could dig a bit deeper into the work from home part because you know as you see that that seems to be.
The number one concern for the stock I believe you said again as Nick said cap rates are flat in the suburbs and and did you see talk at least is only minus 5% in the cities versus I think your stock is the is implying more of a 20, 25% discount to the work from home.
Well, maybe I guess can you just talk about that a little bit more in and why you're still comfortable that that's not going to impact Essex.
Yeah I had again.
Great question, Jeff Thanks for joining the call.
Do you I guess, our thesis is that the hybrid model will likely prevail and.
You know.
Many of the jobs that are in the city's require a physical presence I would make that point of virtually everything that connects with a customer from hotels to restaurants, two bars et cetera. The motion picture industry worry, it's pretty hard to film without people being present et cetera, and so.
So we see that as you know probably a.
Yes, too much focus on let's say the tech community and not enough focus on.
The number of jobs that are required to actually physically be there to do your job, but you know I guess and thinking about this and looking at what others have said, it's pretty interesting. There's a obviously a big debate out there and you know that net flicks CEO. For example said it doesn't see any positives from working from home.
And another CEO the Zillow CEO says you know the easy decision the easy part of the process of working from home is making the decision. The hard part is actually implementing it and I think what he means by that is there are some pretty serious issues that come along.
Yes work from home that are going to take a lot of time and effort to work out and I would I would mention let's say your potential for less pay to the employees how does the compensation issue workout the productivity issues. How do you continue you know a culture of collaboration and a vibrant culture.
So when people don't see each other.
And I think it's you know I, we found were largely remote at this point in time, we found that it's pretty difficult to resolve.
Significant business problems were you know senior executives have different perspectives on things when in a work from home type of environment, you're much better off together so.
Again were we.
We are thinking that the hybrid model is probably the going to be the main path going forward.
The hybrid model will have requires some tether into an office at some point in time to try to keep those.
Collaboration and the vibrancy of the culture together and so we still see ourselves has been pretty.
Pretty well positioned so someone may not live in a city, let's say, but we'll live somewhere.
Potentially nearby certainly within driving distance and we don't see that is a bad thing we have properties. In fact, most of our properties are actually out in suburbia and so we think we're well positioned for that and by the way. The other key point here is.
We're not producing a lot of housing and there is not going to be a lot of housing produced out there. So already as John said earlier already we're starting to see rents increase now in suburbia as that dynamic that dynamic plays out and theyre, reducing in the cities and the areas that had previously had higher rents.
And so.
The market is compensating for.
You will all of these issues as it always does and the decision a renter might have made.
Six months ago can be is very different from the decisions that they are making today. So net net we think we're very well positioned and again, we have properties throughout these markets and throughout the commutable locations near the job centers and ER.
We think that's still the right strategy.
Thank you my follow up would be is are you able you mentioned I believe that nine out of the 10 companies you're tracking you're seeing an increase in job postings are you able to track.
For those postings you know I guess, if their advertising you know hybrid work work from anywhere.
We don't quantify that or or not no. It's not possible. Yeah. It's it's Jeff it's hard to do I mean, we in our September presentation, we gave out the.
The dates for office Reopenings of some of the top 10 tech companies, but the reality is that they are moving back.
To some degree you know as you know if.
If there is another.
Phase a surge of Kelk cobot cases.
Yes, multi though maybe those get pushed back.
If you know it appears and looking at there was a recent Microsoft announcement that gave us greater work from home flexibility et cetera, but I guess from our perspective most of the top 10 Tech companies have worked returned to work dates out there and I think that's significant because.
If they were going to all of them were going 100% work from home as you know a couple of smaller tech companies are doing that would be one thing.
But most of them have returned to work days and even if they get pushed back a little bit I guess the significance here is as long as they ultimately are going back to the office assets in some way or another I think that will solidify the connection to the office and you know either way no one's going to pick up the Apple spaceship and move it somewhere else. So.
Is there for a reason there are a lot of services there, including you know daycare and now all kinds of things and you know if it's met its there for a reason and I don't think that that motivation goes away anytime soon I guess, you're back to the truck to the top 10 tech companies and that the job outlook you know those.
Sure.
Those are data that we take off their web sites and do our own survey and have tracked what they're doing for many years because they are so important to our mission and.
They as I said, they're they're off their peak, which was actually in March of this year, yes.
Hi, a reasonable amount I think looks like somewhere around 27000 jobs in March.
You know open for the top 10 tech companies down to about 17000 about 18000 is the most recent number and but now starting to move back in the other direction. So it looks like that is starting to get better not worse.
Great. Thank you.
Thank you.
Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.
Yeah, Hey, good morning out there guys.
Covered a lot of ground, but I guess, Mike just a follow up maybe on a on a prior thread you know as we think about covert cases rising.
Here in the U.S. and globally and you're seeing a renewed lockdowns in places like Europe, I mean, how does that make you feel about California potentially being first in line to two tickets similar posture in the in the months ahead. You know if current trends continue and then I guess on the flip side I mean given.
Lower seasonality in terms of leasing volumes do you think the impact of that happening would be.
Be a lot less material than what occurred during the sort of the second and third quarter.
Yeah, Rich Hey, you know what I got to say I greatly appreciate the work that Evercore ISI has done on on this issue on the the cobot tracking et cetera, it's been fan.
Fantastic and and we all use it so yes, thanks for that.
I think that California has been Super Conservative when it comes to dealing with co bid and as I said in my prepared remarks that means that did you accomplish two things at once it.
Really curtailed a number of the case spread throughout.
Throughout California, and at the same time, it muted our recovery very significantly so.
We're now I think in a place in California, where things are actually in pretty good order not that it can't change and I believe that what will happen is the state will be very vigilant in terms of pushing us back into a more restrictive tier if they have to but but I think as we sit here today I think we're in a better spot.
But then some of the areas that have been more open and have left their economy flow more freely so.
We'll take this on a day by day basis, but you know we look it looks like California, and Washington are actually.
Very well positioned and and I don't think that you would see this.
The chart on page S 16, I don't think you would see this pretty significant movement to reopen the economy.
If that wasn't the case.
Yeah that makes sense.
And then just.
Kurt for quick clarification I think.
As John mentioned, a 4.5% availability 30 days out at this particular moment.
Just how does it did give us some context around how does that compare to sort of normal for this time of year or a year over year or.
Along those lines.
Sure, Yes, that's actually very good overall, I mean going into this part of the season ethics as a general rule, we like to have higher occupancy and lower availability going into the season, where there was a decline in in demand seasonally and sitting at 4.5% right now availability.
He is a it is a good spot it's consistent with where we've been in the last several years. The team has worked very hard to meet the market and you know varying tactics trying to understand what the consumer wants and offer that and lease or units up and get quality paying tenants and I think they've done a terrific job you can see it in our.
Higher occupancy even into October at 96, six I mean, that's just really really doggone. Good now you know again as I mentioned in my prepared remarks in Q4 of last year.
We were at 97, one the market was very very strong.
And so we still have some headwinds, but you know in context I think the whole portfolio is doing very well it's either.
Signs of strength you know in some markets like a then Tara Contra Costa Orange and San Diego or we see good signs of stabilization in many other markets.
Sure I'll mention say in in San Francisco and Oakland for example, we see the beginning of this backfill that starting to happen and we mentioned this before how in our markets. They are desirable places to live and so when it's it's really a value proposition. So when the price gets to the right point can.
Tumors make changes and so what we're starting to see now.
From January through.
September the average was about 6% move ins came from the outlying areas and this is far off commuting places like say Antioch that we're moving into the Oakland area and or San Francisco and the numbers vary, but they're fairly close to that 6% average all the way through pre go bed post go that all the way through.
Sure.
And now in October that number jumped to 14% literally just jobs and you look and you say, okay. What's going on there I would say this is the super commuters. The people that you know that they're tethered as Mike said to the employers employees are opening up.
They're looking insane I have now my value proposition is to move into San Francisco move into Oakland and at a lower price point avoid the commute. This is a great deal. It works for me and we're starting to see that that's a real thing that actually happened. So when I look across our markets again I get to strength in certain markets I get the stability now.
Others, and I get to very positive signs in the most challenged to places like San Francisco and downtown Oakland.
Okay got it thank you.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thanks, Good morning.
You provided some helpful commentary on the incentives are in response to make Johnson's question.
But I was wondering if you could provide some additional granularity it's hard to be effective blended rate growth rates in the third quarter and October.
Well I guess I'm going to look at effective it at a one month is 8% right and so if we go to three weeks or do you have three quarters. It adds about 6% off of our lease rates and that would be one way to look at it.
To get down to that number but the reason why I'm not going there is I think it's a little bit misleading to be honest I mean, we tend to get into this almost bonds mentality of doing a calculation and if we did that I would have gone back and the last several months at GE rents fell this huge amount net effective and today I would be saying Oh, my gosh rents have moved up this huge.
Because concessions are abating and I think both of those can be a little bit misleading as Mike has said for years concessions can come into the market and go out rather rapidly we view them as a tool to increase occupancy is leasing incentives.
And to a much lesser extent and renewals and so my preference in this case is to really look at it and say, okay. What's going on with our street rents are market rents are our coupon rent and then concessions where they are they came into the market in a really big way in June we use them to increase occupancy pretty dramatically that's worked.
The concessions are abating, we're pulling them back and I think that's the bigger story, but if you get lost in the net effective rents I'd say you'd have to go all the way back and say they sell a lot and now they are increasing and I think you know.
Don't think that's the best way to look at it.
Should we be adding that free rent period to the 12 from leaf or if its 12 month inclusive.
The three month.
In other words, the 12 month leaves or 13.
Yes, typically 12 month leases and yet if you if you try to get to net effective again as I said, you just take the concession them out and say okay. If it's if it's a month is 8% and you would make that adjustment. So that's I mean, that's the simplistic way to to get there, but again I just don't think that's the the best way to look at what's happening in the marketplace right now.
Okay and my second question is on your suburban portfolio I was wondering if you could categorize what percentage of your suburban portfolios transit oriented or densely populated suburban versus I guess your more typical garden style suburban portfolio and if you do have to break down is there a difference in the performance between the two.
[music].
Well I don't have the details of the breakdown with that but I will tell you as it relates to performance transit oriented is really not what's driving anything right now.
It basically a lot of people are taking the transit so they're not on Bart and they're not on.
No not on Cal train.
Third commuting there on the road.
We've seen that many different ways, but we also see that and how much are.
Used cars are getting bid up people are opting to drive, but what we what we do see is you know again, the walkability as I've mentioned previously.
Is the higher the Walkability typically relates to the higher the price per square foot in rent and that if you were to look at one correlation that would be units that are that are negatively impacted the most and on the other side the lower dollars per square foot or lower Walkability are the units that are have benefited the most in this.
Situation, if that if that makes sense.
Hey, John This is Mike.
In our September.
Presentation Thats on the on the Internet there actually is a there's a chart that describes exactly what John shows here, which is the.
The change in asking rents by walk score. It's on page 21 of that of that presentation. So hopefully that will help and if you have any follow up questions give us a call.
Very helpful. Thank you.
Thank you.
Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, guys. Thanks.
Thanks for taking my call John I have a question for you because I I think we maybe have a little bit different take on some of the <unk> questioning on this call I look I think the market understands that apartments are under pressure.
That's one of the worst kept secret in the market right now.
And I I frankly don't think that market has surprised that same store revenue is going to get worse and for Q1, Q I think what the market's looking for these things to be less bad and if I think about what you are what you reported last night, particularly for October.
You showed that right occupancy improved leasing spreads were less bad and so I think you were making some really important comments about demand as rents come down. So my question is are really I guess, a really simple one in theory have we seen the bottom do.
Do you think that rents have come down enough to attract that.
Due to attract that incremental demand and are really are we going to start to just re accelerate from from here because I really think that the market just needs to see less bad stable to improving occupancy and less about leasing spreads. So if were there I think that's a real positive.
Yeah I wish you could ask me this in June of 2021 as well.
[laughter] towards the popped up but you.
You know, obviously I don't know its future what I'm trying to point out is we do have signs of strength that a third of our of our portfolio is actually move increasing occupancy rent.
Stability in large portions of the portfolio.
We are not the market where participate in it and there are some others in the market that are trying to play catch up right now so I see volatility going forward and then recognizing that seasonally usually Q4 and Q1 are the low points.
Yes, it would be hard for me to say that I would believe that Q3 is it turns out to be a low point, but theres just volatility in Q4.
Lot of pieces out there no one knows what's going on with Covidien everything else, but we're feeling good there's certainly things have improved from what we saw in June and July which was tremendous amount of activity trying to find where the market was we found the market.
Where the consumers are interested to your calling that he'll has places like San Francisco and open I brought that comment not because we are starting to see that people from outlying areas. The super communities are now moving in that.
Value proposition works for them and that is a very good sign. It's only it's you know I'd call. It a leading sign so that is a good thing those markets are still are still tough.
And the word acceleration gives me heartburn, but you know.
The.
Stability, yes strength in some other areas certainly we're starting to see a sequentials improve in those four counties that I mentioned so.
Overall, I feel much better than they did last quarter, let's put that way.
Hey, Rich Larry This is Mike sorry, Mike. So let me just add one additional item to that and that is normally this time of year, we feel pretty good about giving guidance for the next year and as John said, Yeah. We don't this year largely because of the the co bid uncertainty or unknowns that we talked about in the us.
Opening script it it's just.
The world can change so rapidly and for the better or for the worse in it and it's not it's things that are completely outside of our purview of understanding. So you know we regret not giving.
Our normal guidance on on page 16 for next year and that but we just we just can't there. There are just too many unknowns one thing that we're focused on EPS is so important on page S. Nine of the supplement our average monthly rental rate is down 40 basis points and we're trying to hold occupancy.
We're trying to hold rate and if we can do that you know it.
You know with again with the jobs still down 8.7% on average and and down 11, 11% in the Oakland and 10% in San Francisco, you know trying to hold rate, while we have that much jobless worsened the financial crisis I think is a an amazing feat. So that's that's what.
We're trying to do and we remain focused.
Yes, that's really helpful guys and look I would just reiterate to you.
Given where given where valuations are right now.
I don't think the market needs to see you get back to where you were in one Q 20, I think the market just needs to see less bad and I think that's why October was encouraging.
Thats, maybe a long way of saying, if we're not catching a falling knife anymore and it feels like there is some stability emerging that sounds like a positive so look forward to future updates guys.
Good work on the quarter.
Thank you appreciate it.
Our next question comes from a line of pull asking with Green Street Advisors. Please proceed with your question.
Thanks, just one quick question from me John.
That's your private competitors play a little catch up on the occupancy side.
And as larger rent resets kind of ripple through Submarkets, you Amir outside of your portfolio do.
Do you expect occupancy to slide here come next several quarters.
I don't I wouldn't say that I expect it to slide I think that the team is doing a phenomenal job. Yeah. We we are very aggressive getting data we have proprietary data hub and we pull all the data together, we have daily meetings pricing in strategy meeting.
And it is just an amazing team with.
Leadership, all the way through it and so we're meeting the market. So we know that a unit that's vacant does not earn any revenue and profit should we.
For years last at the proud and vacant concept is it just doesn't get you anywhere. So we typically are doing 12 month leases and we meet the market and try to understand it meet it and stay occupied so I don't see the occupancy declining a lot 96.6 is high but.
Maintaining I'd say 96 in north of 96, I think is a well.
What I would expect to see for the next couple of quarters.
And then you know normally as we start to get into the Threeq.
Three Q2, Q3, Q there starts to be more turnover that that has an impact on on reducing occupancy just because of the nature of the turnover, but we will continue to try to maintain higher occupancy and I just expected to be volatility and I brought that up because I don't want people to be surprised by headlines from different vendors, saying this is happening here and that's happening there.
I also think that the the whole market is going away. There's just individual players that are really struggling right. Now there are some people even lost occupancy in the third quarter, which was probably not the best strategy.
Now, they're trying to figure out what to do.
I have one follow up there or any markets, Northern California, where you've taken concessions off and you think you'll have to put them back on into the winter.
No.
Yeah, I mean, it's it floats around I mean, right, we're going to we're going to use them, where we need them, but we have you know.
It is.
Well again, we're meeting on a regular basis to figure this out and figure out where the market is and what's happening, but I'm not.
I'm now looking right now and expecting huge obvious weakness in one spot to another I expect volatility and so to that extent you know what I mean, but as yet we'll make pricing adjustments.
As necessary, if things pop up but its more like whack, a mole and then trying to.
Maintain a good position throughout the throughout the situation.
Hey, John one most of the comments Mike.
Just one quick follow up yes.
Here with to what John said generally nothing great happens in the fourth quarter.
Because.
Hiring and which is also affected by Kobin, but generally in Q4, you know companies.
Companies, just wait until Q1, when they have new budgets and business plans in order to regain resume hiring activity. So you end up with sort of the the worst of both worlds you end up with less hiring and of course, the supply deliveries keep coming in so.
Keep in mind that that dynamic is definitely is probably you know greater this quarter given the pandemic related issues than it has been in the past so really I think we need to get into the new year before we have really a great sense of what direction, we're going to be going in.
Got it thank you.
Our next question comes from the line of Austin.
Our summit with Keybanc. Please proceed with your question.
Everybody. Thank you for taking the question first.
First just curious given you guys were more aggressive what concessions over the summer to the extent that others are are playing catch up Q.
Curious where are you kind of plague peg your your in place effective rents today versus market rents.
Our IND.
In place if the effective rents well you mean like loss to lease where we at Joe. So Joe do you take yeah, if you take into account concessions.
Looking at your effective rents today, how far below our market are you so to the extent things do soften further you you you know you've already put in some cushion and to the extent the market is coming to you versus you having to cut further ultimately.
Sure again, most of our cuts have really been along the lines of concessions and we backed away from those you know as as we noted our our ER market rents are down about 5.8%.
In Q3 20 over you know Q Q3 19 so.
So weve made adjustments down it varies by market, obviously with San Francisco being greater in other markets much less.
But the.
The market as a whole is really hanging in there.
As a general rule with the consumer has been looking for is concessions leasing incentives and we continue.
Continue to structure, our pricing along those lines to meet the consumer where they're at but what we've seen is that that over the recent time certainly over the summer things were pretty intense and then as we got into the fall.
The need for concessions backed away and the more we backed away. The more we are able to continue to maintain occupancy and lower availability. So.
Yes.
If necessary, we'll adjust but right now we have already dropped our market rents by say, 5.8%.
Okay, Yeah, I guess im just generally looking for sort of a loss to lease type number gear or you know you're more full today and yes no no.
Yes, our loss to leases like 3.6%, if we look at it that way ups, yeah upside down okay, Yeah, candidly Scott gain to lease.
No that's not to say that if you say lastly, we have gained at least right. Okay. All right that's fair enough.
And then yes.
So on work from home and you think things kind of get more back to normal over time, you guys are more suburban.
So as restrictions get lifted concerns around the virus E services are back up and running perhaps.
Perhaps you know the urban cores, you know take a little longer so the concessions remain elevated there is there a risk that you lose residents you know that had moved out to more suburban locations, but but ultimately want to move back into urban cores in closer to their offices.
As things do begin to return back to normalcy.
Yeah, Austin This is Mike and John alluded to some of this a minute ago. When he was talking about the October movement of other north.
Northern California markets back into San Francisco, and Oakland doubling from the previous number so that definitely there is a there is movement and largely it's because of the price differentials. We've discounted now so much in the cities that they are a relative value compared to the suburban areas and suburban.
Areas rents is more recently have actually increased which again as long as as long as that price differential continues to expand between the cities and the suburban areas you're going to see more people move in backend. So we think this is just a normal operation of the markets and compensating for you know find the rent that you know so.
As the units in the marketplace and.
So most people don't focus on that relationship of what rents are doing in the suburban markets versus the urban markets. The reality is it very much affects consumer choice and so now more people are choosing to live in the cities at a lower price point.
Okay that makes sense, okay. Thanks for the thoughts.
Our next question comes from the line of Daniel Santos with Piper Sandler. Please proceed with your question.
Hey, good morning, Thanks for taking my question most of my questions and answers. So just two quick ones from me I was wondering if you could comment sorry, if you covered this already on any sort of future further operation or balance sheet initiatives that you could look to for cost savings just in the face of continued revenue decline and then second I was wondering if.
You could comment more specifically on whether or not you consider investing in markets outside of California, just given all the California the issues, California faces, both near term and long term.
Yes. This is Mike actually I would say the pressure on costs are have increased.
In Kobe as you can imagine we had a relatively small collection department. It's now much larger as you can imagine so.
Selling and and.
You're changing pricing strategy is much more complicated now so I'd say the business terms operating the business it's more complicated.
But as noted in our.
Again, our September presentation.
There are some bright bright.
Things that are happening and one of them involves technology, where we said that technology will probably lead to a 100 to 200 basis point improvement in margin over time, and you know as I said in my prepared remarks that the consumer has accepted technology actually prefers technology given coven and.
That has allowed us to move pretty strongly into.
Deployment of various different types of technologies and so there is definitely promise therefore reduced reduce costs and I'm sorry, what was the second part of your question.
I was just wondering if you could comment more specifically on whether or not you considered investing in markets outside of California, and all the like Howard.
Yes, you know, it's we've can come to believe that.
Advocating for good housing policies in California is something that we're going to do we're going to be active in it we're going to spend a lot of time in some money doing it we think that overall.
It makes sense to do that because it's pretty hard to find what we have here you know the combination of supply constraints.
And very vibrant businesses that are growing rapidly.
Which is really what drives rents you know it it forms is virtual cycle of Brent.
Rents.
Bush up wages, and then wages allow higher rents and you will find that in very few markets. So we we do have a process involved in our strategic planning activities that look at other markets that are similar to the west coast we.
We don't think any of them are quite as good as the west coast, but we.
We continue to look at it obviously you know we're just interested in one thing we're interested in adding value for shareholders and growing the company and so if we see the right set of conditions, we would we would be compelled to take a hard look at it.
Got it thank you.
Thanks.
Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Thanks, guys. Good morning, Thanks for Oh.
Dan I appreciate you give me the time.
First one is on the preferred.
Equity side I mean are you continuing to be active in that it looks like you.
Originated a couple one was stabilized and that is that the person I've seen you do that can you just talk about you know.
What that what that market kind of looks like I thought that you know Dave.
Hey, buys assets are easy to finance with the agency debt.
If you just maybe talk about if that's a new trend you're seeing or maybe overall and opportunities you see.
In that part of your business.
Sure Neal this is Adam.
So yes, we've definitely seen we're still very active in the market and and have seen it more as a hey there.
There is ample debt out there for stabilized assets.
But underwriting has definitely has it has been more challenging for some sponsors. So so we are seeing more and more opportunities on the stabilized side and you saw the one that we just stop funded this quarter and probably a couple of more in the pipeline coming down.
Okay, Great appreciate that and then I guess my question is for Mike.
Have you both talked about the coastal issues, but you were talking about Amazon and Google.
Going in Seattle, Northern California, putting their money where their mouth is with all the states I. Just you know again kind of maybe want to go back. It you know I've looked at some subleasing data it looks like yet.
Avail square.
The square footage available for Subleases, Don from like 1.5% to 4% in Northern California you.
You look at companies like Facebook, and Google, who have talked about like around 50% of their workforce being.
Remote or in regional locations, and then read it that they're not going to adjust compensation based.
Based on location, usually these companies followed each other's moves I guess, you know I guess, how do you think that the the framework around you know the tech markets or at least in those areas in the west coast isn't at least partially impaired arms given the main driving force in from those large companies.
Well I guess this is the moment that I would say I'm glad I'm not an office company because I agree with what your sand you know definitely there's some.
Ah Theres plenty of lease space out there, although you know the vacancy rates that I have don't show huge increases yeah, this quarter versus last quarter, but obviously these things take time to play out and you know I guess I'd be.
I'd be cautious to say that you know.
It seems like things are changing rapidly and but I still think that we should take some time to wait and see what happens because right now on the work from home thing again as noted in the script.
It's a pretty much a mandatory thing right now as opposed to a lifestyle choice that it will be sort of in a post cobot period. So.
I think there's a lot of changes being forced upon US again, we believe in the hybrid model and we think that that's what will.
Take place going forward and in fact, we think will.
Adopt that model as a company as well because there are definitely some benefits to it but at the same time.
I'm hyper focused on.
The culture here and the vibrancy of the company as we all are everyone. In this room is.
And that.
That is critically important to us I just don't see how you maintain that.
Yeah with it exclusively and work from home type of format. So so I don't know I don't know whats going to happen exactly with these things, but again I think there's good reason and a lot of issues that need to be resolved on the work from home model for it to be successful and no doubt there will be some bumps in the road so.
As long as those employees remain within the major Metro's I think that we're in good shape and they they may not repeat not get the rent growth in San Francisco, but we will get it out into in the suburbs suburban markets and we'll continue to do pretty well I think.
[noise] I appreciate the.
The feedback thank you.
Our next question comes from the line of Alexander Thomas with Zelman and Associates. Please proceed with your question.
Hi, Thank you for taking my question.
Trying to wrap my arms around.
Going back to the public and private.
Values, if we think about.
The in your opening remarks, you said that there was a 5% to 10% discount and the pre covert pricing.
But if I think about where volumes are today, there's a significant drop off from last year. So.
If we were running at a hypothetical normal rate would that imply a deeper discount. If we were you know if we were there right now.
Alexander does Adam So I think I tend to Mike's comment at the in the earlier script.
The 5% to 10% discount that he was talking about was it more urban core markets.
We've actually seen we've.
We've actually seen valuations on suburban assets be at or above pre go the bundles.
You're right in that volume has definitely.
Dan off of what it historically is that.
That being said, we're we're constantly in the market talking to potential buyers on on potential dispositions and.
There are there are enough out there that that the market is being Matt I'd say at that kind of at or above pre covered pricing I mean, just as an example, the deal we just sold and in Glendale. This week, that's all that I have on pre carbon pricing in our pre covered rents at about a three eight cap.
And that was about 4% above our pre pre go value tack on concessions and and you are in the low threes. So yeah.
Yes, we're still pretty confident that the that the spread.
And what Mike and mentioned that 5% to 10% discount on core markets. We think that that's still kind of flows through despite the lack of volume.
Got it would you call it even a scarcity premium for those assets.
Yeah, there is definitely that potential yes.
Got it thank you and.
Well just in some of the tax plans are saying in the Biden administration. If you were to when you think about 10 31 exchanges and eliminating that I just talked to the kids as how big of a factor that would be in California transaction market are you or do you know what percentage that would be.
This is Mike it's hard to tell I mean, you know this year given lower revenue, which is not a good thing we have plenty of room.
In terms of taxable income to sell some properties and and does not have a you know.
Read or dividend issue, so, but it will vary from year to year and they're.
They're already given you know property and they're already it's already a headwind in selling some of our California properties as well so it's.
It's hard to tell its that's more of a hypothetical question that it depends on the circumstances and what we see going forward. So it's a difficult one to answer.
Okay. Thank.
Thank you for the color.
Thanks.
Our next question comes from the line of Amanda Sweitzer with Robert W. Baird. Please proceed with your question.
Great. Thanks, just a quick one from me here.
Seen a change and tenant credit quality and the patent market values is intended to prevent including supercomputers you referred to you and then just for contacts in past downturns, you see greater turnover among those value consumers. When you do eventually look to raise money.
Yeah, so as far as the tenant credit quality no we have not seen any decline there.
You know, it's a situation where if you have a job you continue to maintain going forward and then you're able to rent and if you don't it's a terrible situation, but you're not going to become a new renters. So we haven't seen any declines there as it relates to turnover.
From that type of a situation yeah. The answer is yes. There are sometimes I can think of a almost a funny story, where we had a resident that moved from.
One of our outer properties up in Seattle downtown they transferred with NSX and then as the market picked up you know this is after the last the financial crisis. They moved back into the profit if they had started with and they're very nice person and they wanted to stay with Essex is in Essex client, but.
But they really did take advantage of the pricing changes and again its that value proposition that they were making personally between their commute in pricing at everything and making that decision and that's what we do see it goes on of course, you know that the backdrop. There was the rent rents in Seattle went up because the economy is growing demand was increased because of jobs and so the fact that.
That person moved out.
Really didn't impact the overall economic picture it was a mid rise and then.
Make sense. Thanks.
Sure.
Our next question comes from the line of handle St Juste with Mizuho Mizuho. Please proceed with your question.
[laughter] Oh, yes, good morning out there they have got a.
Good morning.
Yeah. Good morning, first question for me and I'm, sorry, if I missed this but did you guys discuss what drove that $8 million increase in non residential revenue from second quarter is up to 19 million and I guess I'm curious what was behind that as well and if there's some level, we should be forecasting near term for that line item.
He handled its Andrew I'm not sure I see a 90 million dollar increase I have.
On the revenue.
It's sequentially, it's it's from $11 million to $90 million this quarter, so eight months.
One to 19, you know what I'll have to get back to you because when I look at our EPS to from quarter to quarter from second quarter to third quarter grows from five to 6.3 million, So, let's say $1.3 million. Thanks.
Well when you look at where are you looking.
I'm looking on the Oh, sorry, one second page essay and say looking at the non residential other line item in third quarter, and 19.8 million versus the second quarter of 1.4 million.
[noise], we can follow up offline I was just curious if that was something that Uh huh.
Italy available, but that certainly can can follow up if it's going to take a bit more taking oh no no no.
No it's straight line rents.
I think that's where you're looking at.
Hey, like Brad.
Nonresidential other income 19 point $8.7 million right. So.
Does it look like.
[laughter] another event with the problem.
Mike maybe I guess.
Following up on <unk>.
Straight line rents went on commercial and.
On commercial.
I think that's what it is but we'll follow up with you, but I think that's what that is.
Okay fair enough yes.
A question then following up on Daniel's question about new markets, we've talked about this.
Over the past few quarters few years.
I guess I'm curious what are your views much in Salt Lake City, specifically, so I'm curious to know how to market like that brings on your hypothetical this and maybe could.
You know.
Disposition proceeds could that be a use of a yeah.
The use of a source of capital for entering new markets or.
Given what seems to be a.
He has been a tier two upper more stock buybacks.
[noise], Yeah handhelds, it's a it's a good question actually there's a bunch of cities that you could put in that category, they're smaller metro's.
Boise would be another good example.
But there are others as well I guess, you know from our perspective, we want to see enough liquidity in the market from an investment perspective enough local buyers and sellers to create a pretty strong market and that's one of the issues that in each of those markets. The other issue is relatively inexpensive single family.
Homes, and I think everyone should be very careful with this.
At this point in the cycle, because we're starting to see rapid increases in single family home prices and as soon as you get to a level, where it's more attractive to buy a home than it is to rent an apartment those markets tend to get hit pretty hard. So this is why the supply constraints, we measure very broadly.
To include.
All types of housing.
And for sale.
As well as rental housing.
Because we've learned that lesson before we were on your once upon a time in the city of Portland. Another. Good example of this although it's a bigger metro than Salt Lake City, and Boise, but in this in the city of Portland, We made some investments based on an urban growth boundary that surrounded Portland that limited the amount of housing production and we eggs.
[laughter] Portland actually because they they expanded their urban growth boundary to allow for the production of 10000 single family homes at a relatively inexpensive price, which made our apartments much less.
Attractive in the overall housing choice that were available to consumers. So.
So I hear you.
We like those markets are growing very rapidly there.
Theres definitely money to be made but there's there's definitely a higher risk.
Associated with them.
Got it thanks for that Mike and one final question not to split hairs, but I guess I'm curious on what you got is seeing on the demand.
Syed floor studio apartment. So you just given that they tend to be younger more nimble renters and its people that live in the city certainly some more space curious, how the incremental demand or any pricing power emerging in that that part of the portfolio. Thanks.
Well I wouldn't use the word pricing power and the attached at the studios.
The basically what we see and we look slice and dice it numerous different ways, but in the as it relates to say just.
Unit type clearly the three bedroom have higher demand than two bedroom than one bedroom then studio at the bottom Gen.
Generally what we see within the marketplace is a studios now have lower occupancy and again this ties back to some of my comments, where when we look and see where turnover was or where there's demand issues.
This is connected in part to say student. It's also connected to Silicon Valley consultants and those types of things at.
It also connects to the cobot preference, where people want more space and lower price per square foot and what more private outdoor space use. These studios have limited private outdoor space. So yeah. There's no question that studios are.
Impacted more than the other unit types if that answers your question.
Oh, certainly, but also curious if there's been any incremental move certainly the idea that we're looking for some improvement in the second derivative securities are you starting to see any at all on that more challenge piece the portfolio.
Fair enough.
We're doing a little bit better, but we're also.
Doing everything we can to figure out the best way to market those those units whether they be you know as a second office or whether it be.
You know, it's a different a discount prices. So yes, there is a little bit more incremental demand.
Context, I would say that its a.
It's a balanced picture because we're working very aggressively to figure out how to how to market. Those are what I would say is the decline has stopped you know that there was a there was a noted decline that occurred in the spring on studio say occupancy that's stop it flattened out and we are now improving a little bit but again.
And I think there is other factors involved.
Fair enough. Thank you guys.
And there are no further questions I would like to hand, the call back to management for closing remarks.
Very good. Thank you operator, and thank you everyone for joining the call today, hopefully we will have a chance to meet with many of you at the upcoming May read in November stay safe out there thanks for joining us.
Good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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