Q2 2021 Essex Property Trust Inc Earnings Call
[music].
Good day and welcome to the Essex property Trust second quarter, 2021earnings call.
As a reminder, today's conference call is being recorded.
<unk> made statements made on this conference call regarding.
The 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.
Spectrum those anticipated further.
Further information about these risks can be found on the company's filing with the SEC.
It is now my pleasure to introduce your host Michael Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Schall, you may begin.
Thank you for joining us today.
And welcome to our second quarter earnings Conference call.
Angela Kleiman embarked Pak will follow me with prepared remarks, and Adam Berry is here for Q&A.
On today's call I'll start with our second quarter results, which were driven by a strengthening economy and positive adjusted underlying.
Today, a robust recovery on the West coast.
I'll also discuss the status of reopening the west coast economies and related factors, concluding with an overview of the west coast apartment transaction markets and investments.
Our second quarter results were ahead of our initial expectations entering the year.
As the economic recovery from the pandemic occurred faster than we expected with a strong economy and high vaccination rates. We are now confident that the worst of the pandemic related impacts are behind us.
As noted on previous calls our strategy during the pandemic was to maintain high occupancy and scheduled rent.
Are both necessary for a rapid recovery.
To that end net effective rents surged during the second quarter, along with your year over year improvement in occupancy other income and delinquency.
The recovery in net effective rents continued unabated in July and we are now please.
Pleased to announce that July net effective rents for the Essex portfolio have now surpassed pre pandemic levels with our suburban markets, leading the way while the downtowns are improving but still generally below pre pandemic levels.
Obviously, these higher rents will be converted into revenue.
And she has turned and Angela will provide additional details in a moment.
Having passed the midpoint of 2021 and looking forward. We made our second set of positive revisions to our west coast market forecast, which can be found on page S 17 of the supplemental.
Driving.
As leader changes as an increase in 2021, GDP and job growth estimates, 2.7% and 5% up from 4.3% and 3.2% respectively from our initial forecast.
As a result, we now expect our average 2021 net.
Driving effective rent growth to improve to minus <unk>, 9% from -1.9% from the beginning of the year to.
To put this in 2 perspective consider that our net effective rents were down about 9% year over year in Q1.2021 gig.
Net a current expectation of minus <unk>, 9% rent growth for the year year over year net effective market rents are now forecasted to increase about 6% in the fourth quarter of 2021.
Cash delinquencies were up modestly on a sequential basis at $2.
Given our percent of scheduled rent for the quarter and well above our 30 year average delinquency rate of 30% to 40 basis points.
The American rescue plan of 2021 provides funding for emergency rental assistance, which was allocated to the states for distribution to renters for pandemic related.
66 <unk>.
During the second quarter collections of delinquent rents from the American rescue plan or negligible.
Has the pace of processing reimbursements have been slow since the program launched in March.
We expect that to improve in the coming months.
We expect delinquency rates to reach.
Turn to normal levels over time as more workers entered the workforce and eviction protections labs on September 30th in both California and Washington.
At this point only about $7 million of the $55 million in delinquent rent shown on page S..16 of the supplemental has been recorded as revenue.
Delinquent uncertainty about the timing of collections no additional revenues are contemplated in our financial guidance.
Even with the approved job and economic outlook. The reopening process was gradual through the second quarter with full reopening declared in mid and late June for California.
Kington, respectively.
The unemployment rate was still 6.5% in the Essex markets as of May 2021, underperforming the nation.
Through Q2, we regained about half of the jobs lost in the early months of the pandemic.
Employment in the Essex markets dropped.
And was 15% in April 2020, and while job growth in our markets outpace the nation in the second quarter, we are still 7.9% below pre pandemic employment compared to 4.4% for the U S. Overall.
We see the GAAP is an opportunity for growth to continue.
Hopped over coming months as we benefit from the full reopening of the West coast economies, we believe that many workers that exited the primary employment centers during pandemic related shutdowns and work from home programs will return as businesses reopen and resume expansion that was placed on hold during.
And the endemic.
As we proceed through the summer months, we edge closer to the targeted office reopening date set by most large tech employers in early September.
As recent reports about Apple and Google suggest to COVID-19 Delta variant could lead to temporary delays in this reopening process.
The our survey of job openings in the Essex markets for the largest tech companies continues to be very strong.
As we reported 33000 job openings as of July a 99% increase over last year's trust.
New venture capital investment has set a record pace this year.
Assess the Essex markets once again, leading with respect to funds invested providing growth capital to support future jobs.
Generally economic sectors that fell the furthest during the pandemic are now positioned for the strongest recovery and the reopening process led by restaurants hotels entertainment.
With our news travel is still needed.
Return to office plans, which remain focused on hybrid approaches will continue to draw employees closer to corporate offices, given that many workers won't be required to be in the office on a full time basis, we expect average commute distances to increase.
As we highlight on page <unk>.
At $17.1 of our supplemental this transition has already started in recent months as our hardest hit markets in the Bay area. Once again experienced net positive migration from beyond the Norcal region.
In particular since the end of Q1 the Submarkets.
Surrounding San Francisco Bay have seen positive net migration that represents 18% of total move outs over.
Over the trailing 3 months compared to -8% a year ago.
These inflows are led by residents returning from adjacent Metro such a Sacramento and the Monterey Peninsula.
<unk> per well as renewed flow of recent grads graduates arriving from college towns across the country. A notable positive turnaround from last year.
And Seattle, CBD, we've seen similar or even stronger recent inflows and we're likewise experienced experiencing.
Is going strong.
Market rent recovery.
Yes.
The supply outlook, we provided our semi annual update to our 2021 forecast on S..17 of the supplemental with slight increases to 2021 supply as COVID-19 related construction delays shifted incremental units.
<unk> 2020 into 2021, we.
We expect modestly fewer apartment deliveries in the second half of 2021 with more significant declines in Los Angeles and Oakland.
While it is still too early to quantify recent volatility in lumber prices and shortages for building materials.
From a <unk> construction starts and the timing of deliveries in subsequent years multi.
Multifamily permitting activity in Essex markets also continues to trend favorably declining 200 basis points on a trailing 12 month basis as of May 2021, compared to the National average, which grew 230 basis points.
Median single family home prices in Essex markets continued upward in California, and Seattle drew on 18, and 21% respectively on a trailing 3 month basis.
The escalating cost of homeownership from block combined with greater rental affordability from the pandemic have increased the.
Financial incentive to rent.
We suspect these trends will continue given muted single family supply.
And limited permitting activity and believe these factors will be a key differentiator for our markets in the coming years compared to many U S markets with greater housing supply turning to.
<unk> apartment transactions.
<unk> has steadily accelerated since we started the year with the majority of apartment trades occurring in the low to mid 3% cap rate range based on current rents generally investors anticipate a robust recovery, especially in markets where current rents are.
Substantially below pre pandemic levels with the recent improvement in our cost of capital. We have turned our focus once again to acquisitions and development, while remaining disciplined with respect to <unk> accretion targets.
With respect to our preferred equity program, we continue to see new deals, although the market is becoming.
Coming more competitive.
Lower cap rates from pre pandemic levels have produced higher than anticipated market valuations, which in turn has resulted in higher levels of early redemption.
That concludes my comments.
It's now my pleasure to turn the call over to our CFO Angela Kleiman.
Thanks, Mike My comments today will focus on our second quarter results and current market dynamics.
With the reopening of the West Coast economy recovery has generated improvements in demand and thus pricing power.
Operating strategy during COVID-19 to favor occupancy while adjusted.
Concessions to maintain schedule rent enabled us to optimize wrangler concurrent with the increase in demand, resulting in same store net effective rent growth of 8.3% since January 1 and most of this growth occurred in the second quarter a key contributor of this accomplishment is the fantastic job.
Our operations team in responding quickly to this dynamic market environment.
Market conditions have improved rapidly during our second quarter.
Driving our second quarter results to exceed expectations I would like to provide some context for why sequential same property revenues declined by 90 basis points.
Compared to the first quarter.
The 2 major factors that drove this decline was 50 basis points of delinquency and 50 basis points and concessions.
Delinquency in the first quarter with temporarily lifted by the onetime unemployment disbursements from the stimulus funds Asics.
As expected in the second quarter delinquency.
<unk> reverted back to 2.6% of schedule rent versus the 2.1% in the first quarter.
Concessions.
Nominal amount increased from higher volume of leases in the second quarter relative to the first quarter of this year to.
To be clear concessions in our markets have declined substantially.
And are virtually non existent, except for select CBD market.
Our average concession for the stabilized portfolio is under 1 week in the second quarter compared to over a week in the first quarter in over 2 weeks in the fourth quarter.
Although concessions have generally improved in the second quarter day remain elevated.
<unk> ranging from 2.5 to 3 weeks and certain CBD, such as CBD, La San Jose and Oakland.
Given the extraordinary pandemic related volatility and rents and concessions over the past year and a half.
Thought it will be insightful to provide an overview of the change in net effective rents.
Compared to pre Covid level.
As of this June our same store average net effective rent compared to March of last year was down by 3.1%.
Since then we have seen continued strength and based on preliminary July results are average net effective rents are now 1.5.
5% above pre COVID-19 level.
It is notable that this 1.5% portfolio average diverged regionally with both Seattle and Southern California up 5.8% 9.3%, respectively, while northern California has yet to fully recover with net effective rents currently.
At 8% below pre COVID-19 levels.
On a sequential basis net effective rents on new leases.
<unk> rapidly throughout the second quarter and preliminary July rent increased 4.7% compared to the month of June.
By CBD, San Francisco, and CBD, Seattle, both up.
Up about 11%.
Not surprisingly these 2 markets were hit hardest during the pandemic and are now experiencing the most rapid growth.
Moving on to office development activities, which we view as an indicator of future job growth and accordingly housing demand.
In general the area.
Area, along the West coast with a greatest amount of office developments have been San Jose and Seattle currently San Jose has 8.1% of total office stock under construction and similarly, Seattle has 7.7% of office stock under construction.
Notable activities include Apple leasing an additional.
<unk> 700000 square feet, and Linkedin announced recent plans to upgrade their existing office in Sunnyvale in the Seattle region, Facebook expanded their Bellevue footprint by 330000 square feet, and Amazon announced Fortune 100, New web services jobs in Redmond.
We expect in the long term.
Some areas with higher office deliveries, such as San Jose and Seattle will have capacity for greater apartment supply without impacting rental rates.
While these normal relationships were disrupted during the pandemic, we anticipate conditions to normalize in the coming quarters.
Lastly, as the economic.
Economic recovery continues to gain momentum, we have restarted both our apartment and renovation programs and technology initiatives, including actively enhancing the functionality of our mobile leasing platform and smart run home automation.
Thank you and I will now turn the call over to Barb Pak.
Angela I'll start with a few comments on our second quarter results discuss changes to our full year guidance, followed by an update on our investments and the balance sheet.
I am pleased to report core for flow for the second quarter exceeded the midpoint of the revised range. We provided during the NAREIT conference by <unk> <unk> per share.
Thanks favorable results are primarily attributable to stronger same property revenues higher commercial income and lower operating expenses.
Of the 8 B 3 relates to the timing of operating expenses and G&A spend which is now forecasted to occur in the second half of the year.
As Angela.
This is Scott we are seeing stronger rent growth in our markets than we expected just a few months ago.
As such we are raising the full year midpoint of our same property revenue growth by 50 basis points to -1.4%.
It should be noted this was the high end of the revised range we provided in June.
In addition, we.
Angela lowered our operating expense growth by 25 basis points at the midpoint due to lower taxes and the Seattle portfolio.
All of this results in an improvement in same property NOI growth by 80 basis points at the midpoint to -3%.
Year to date, we have revised our same property revenue growth at the midpoint up 110 basis points and NOI.
We have like 160 basis points.
As it relates to full year core foot boat, we are raising our midpoint by <unk> <unk> per share to $12.33.
This reflects a stronger operating results, partially offset by the impact of the early redemption of preferred equity investments, which I will discuss in a minute.
Year.
But we have raised core fulfilled by 17 or 1.4%.
Turning to the investment markets as we've discussed on previous calls strong demand for West coast apartments, and inexpensive debt financing has led to sales and recapitalization of several properties underlying our preferred equity and its important to needed.
<unk> loan investments, resulting in several early redemptions.
During the quarter, we received $36 million from an early redemption of our subordinated loans, which included $4.7 million in prepayment fees, which have been excluded from core <unk>.
Year to date, we have been redeemed on approximately $150 million of investment.
Year to date and expect that number could grow to approximately $250 million by year end.
This is significantly above the high end of the range, we provided at the start of the year.
However, this speaks to the high valuation apartment properties are commanding today, which is good for Essex, and then net asset value of the company.
As for new preferred equity investments, we have a healthy pipeline of accretive deals and we are still on track to achieve our original guidance of $100 million to $150 million in the second half of the year.
As a reminder, our original guidance assumed new investment would match redemptions during the year.
However.
I mean mismatch between the higher level of early redemptions, coupled with funding of new investments expected. Later. This year has led to an approximate 10 cent per share drag on our <unk> for the year.
Moving to the balance sheet.
We remain in a strong financial position due to refinancing over 1 third of our debt over.
The past year, and a half taking advantage of the low interest rate environment to reduce our weighted average rate by 70 basis points to 3.1% and lengthening our maturity profile by an additional 2 years.
We currently have only 7% of our debt maturing through the end of 2023.
Given our.
Over the butter maturity schedule limited near term funding needs and ample liquidity, we are in a strong position to take advantage of opportunities as they arise.
This concludes my prepared remarks, I will now turn the call back to the operator for questions.
Thank you ladies and gentlemen at this time, we will be conducting.
A question and answer session, if you'd like to ask a question you May press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star 2 if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key any interest of time, if you can.
And your card limit yourself to 1 question and 1 follow up so we may get to everyone's questions.
Our first question comes from the line of Victor <unk> with Citi. Please proceed with your question.
Thanks, Mike.
We are starting to.
Barb on the comments you just made on the on the preferred equity and debt.
Mezz loans.
In terms of the pipeline today are you seeing any compression on the yields or expected returns.
Or any changes to the competition there.
Hey, John this is Adam.
To answer your question, Yes, we're seeing compression on <unk>.
Cap rates, we're seeing.
It's a much more competitive market now with proceeds going well above where we're typically comfortable and rates going significantly below where we've been in the market. So.
Yeah.
We are seeing the absolute compression on valuations.
Thanks for that.
In terms of the early redemptions that you've seen I mean is there a risk of further early redemptions that could.
At least create an air pocket on the earnings side.
Hi, Nick this is barb at this time I think we factored that all in and based on what we know today.
Marty.
In August so.
I think.
We factor that into the current guidance, so I'm not expecting any more redemptions at this point for the rest of the year.
Thanks.
Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, good morning, guys.
Just come back.
2 sort of trends that youre seeing in your markets.
And I appreciate all the color and commentary you gave us but im hoping you can compare and contrast, what you're seeing in your market specifically versus maybe what someone typically thinks about in San Francisco La San Francisco, Los Angeles, the broader west coast urban markets.
So specifically are you seeing people still continue to migrate in are you seeing people migrate out.
1 of those trends in your markets that give you confidence relative to maybe some of the urban markets current trends.
Hi, rich its Mike I think I'll handle that 1.
Others may want to comment as well.
I think we feel really very good about what's happening here.
Noted in my comments that were fully recovered with respect to market rents.
Versus pre pandemic levels.
I'll only recovered about half the job so far so I think thats a powerful.
Place to start.
But as we look around the west coast, we feel great about what's happening.
Good times continue that consumers Super optimistic.
They save money.
Covid versus COVID-19 by not traveling in a variety of other things.
Millennials forming households.
And.
There is a lot of hiring here on the West coast. So that's why we talk about the top 10 tech companies and how many open positions I have come a long way in the past year. After what we perceive as them pulling back amid COVID-19 on their expansion plans I think that they're now turning that corner or have.
Corner hiring more people pursuing things that they put on hold a year ago.
And so everything feels like it's.
It's been good order at this point in time.
As you go to the cities the main driver of job growth at this point in time has been the recovery of all the industries.
These that have been so dramatic so dramatically affected.
Year ago, including the leisure hospitality restaurants.
Filming in southern California, et cetera, and as we look at the World We're looking at.
Whether we believe these industries are poised for.
Future growth and we think absolutely. They are we think that we're in a fluid areas of fluid areas demand services youre starting to see those services come back in terms of restaurants.
A variety of other areas and so we see this turning around nicely and again I wouldn't have expected.
Fully back with respect to brands.
At a time when we've only recovered about half the jobs that we lost.
Makes sense, yes. It makes perfect sense I was just waiting to see if anyone else is going to follow up debt that's perfect Mike.
Sure.
Yeah.
As we look forward and at the <unk>.
To be asking you to guide, which I'm not.
We had this obviously pretty significant trough that came late last year into early this year.
It sort of reasonable to think that 2022 will be the mirror image of that and then maybe we can we may be even continue to push rents.
Risk of a normal trend over the medium term.
It's a good question and Barb.
Barb will look at me very strangely, if we start talking about 'twenty 2 at some point in time, so and.
We are we tend to be pretty careful in terms of guidance and.
So we don't want to go too far out there, but I would say that.
I would expect certainly the return to office could be a good thing for the downtown locations because most of the top 10.
Tech companies or most of the tech companies in general have announced.
<unk> type of approach, which means that people are going to have to be closer to the office has to show up.
Let's say plus or -3 times per week as a result of that the people that move to the hinterland. So most suburban parts of our portfolio.
Probably you're going to need to come come back.
It's about Ventura I don't want to pick on Ventura, because it's done great but it's.
It's a long way on a commute pattern from Ventura into where the jobs are in la and I don't think people are even going to want to do that 3 times a week. So I think that kind of frames the dynamics those.
I think I had.
A year given the pandemic could make a different choice about where to live I think we'll likely make a different choice going forward now that there is more clarity about what the.
Companies are going to do with respect to there.
Work from home or return to office programs.
Okay.
The only other thing I would add leases were signing today, we will have a impact to the rent this year trying to rent roll and that will carry forward into next year too.
As Angela.
We had a strong July and so that that is going to only affect part of this year's numbers.
Yes I.
Got it.
Thank you guys.
Not sure that's entirely what I wanted but I appreciate the response thank you.
Brian I just want to offer a couple on guidance.
Sorry.
Thank you. Your next question comes from the line of Joshua.
<unk> line with Bank of America. Please proceed with your question.
Hey, guys hope, you're all doing well.
Just kind of curious what your mark to market is in your portfolio.
And maybe if you have it by region like Seattle, Northern California.
Southern California.
Are we talking about.
Police force.
Yes, please sorry.
That's all right.
Well.
You said the last release, we actually are in a much better position.
And a level even better than pre COVID-19.
Look at July loss to lease for the Essex portfolio, It's now at 7.4%.
And so and that of course varies CIO at the high end at about 12, Southern California in the middle of the pack at about 8 and northern California at their lowest.
So if we're at about 3 and a half.
Okay awesome.
And in your guidance range.
Are you assuming as far as like a recovery for the rest of the year.
And right.
For the northern California market.
I'll start.
With it.
The second half of the year.
As each we have to turn leases in order to impact our same store or our revenue and so as you get towards the end of the year it becomes less relevant and more relevant obviously next year or so.
Take a transaction.
<unk> total you only have 3 months of of that new lease in 2021, and the rest of it is going to be in 2022. So there is an inherent lagging.
Concept with respect to what's going on with market rents, which Angela just talked about versus how it shows up on the income statement. So.
And I think thats important in terms of just looking at market rent.
Tried to provide a little bit of color.
On that end.
With respect to F 17, so what we're trying to to get out that overall R.
Our economic rent growth on F 2017 is it.
Minus <unk>, 9%.
And that's a $1.12 of every month throughout the year. So January 2021 versus January 2020, plus February through the year divided by 12 is what that number represents so we started the year at a rate and then -9 to -10% range.
And that implies to get to 9% minus <unk>, 9% on F 17 debt the fourth quarter would be plus 6%.
And that does not anticipate a lot of rent growth between now and then which is pretty typical we typically hit the peak of market rents in July.
At the end of the peak leasing season, and then it flattens out for the rest of the year. So that's what's assumed in those numbers.
Great. Thanks for the time.
Thank you.
Yes.
Our next question comes from the line of Austin.
<unk> with Keybanc.
Proceed with your question.
Great. Thanks, guys. It seems possible that your market could experience an extended leasing season. It certainly come up on other calls and some seem pretty optimistic about the prospects but.
Clearly as you identified there are some risks to take into consideration. So just wondering.
How you went about your back half guidance and did you assume typical seasonality or sort of that another leg up in demand in the late summer early fall timeframe.
Yes. This is this is Mike and I agree with you we did not we assume more or less the typical.
The trend with.
<unk> to market rent, so kind of peaking in July and not a lot of growth for the rest of the year.
As we think about it. However, there are some things that are different for example will the tech companies continue hiring normally what happens is hiring tails off at the end of the year.
Companies get business.
<unk> at the towards the third and fourth quarter and then they start implementing them in the first quarter, that's what really drives the peak leasing season. So the question here is will companies continue hiring at a higher level given COVID-19 than they have in the past I think theres, a very good chance that that could happen.
Also.
Plus our work from home and returned to office.
Concept could have an impact on that as well.
More people are moving back into the.
<unk>.
The more urban areas from people that were displaced as California, and Washington were shutting down.
A year ago.
Those people continue to come back.
Late later this year that could possibly push rents higher in the second part of the year. So we've again assumed based on our experience and what typically happens to normal curve with respect to rents, but there are.
Down things that are different here and so we could end up with being surprised to the positive side.
Great. That's very helpful. And then Angela I think you mentioned that youre starting to redo that restarting the redevelopment program could you give us kind of the scale of that are the annual run rate and then maybe offer.
Some additional details on sort of the economics.
That'd be really helpful.
Sure thing.
We normally pre call that our run rate was about in terms of units about 4000 units a year.
And what we did was scaled back significantly last year, so second half of last.
<unk>, we only renovate it about 600, a little over 600 zone at 650 units sold.
Target the restart towards the second half of this year.
All of that so.
To achieve close to <unk> 100.
Net this year.
We are looking at a.
Last year average development fee.
Turf for next year that will have greater opportunities.
In terms of.
Yes.
The return on investments, we're actually looking at ranges pre owned consistent with pre COVID-19 levels and so while cost has gone up the rents have gone.
Gone up as well concurrently so we think we're in a pretty good spot.
And what are those what are those numbers on the economics.
They tend to range, depending on the asset and the scope and the market, but I'll give you a range that might be a little bit better than a hard number they tend to range stay in the.
A couple of single digits to the high double digits. So.
So it's a pretty wide range.
Got it thank you.
Our next question comes from the line of Amanda Sweitzer with Robert W. Baird. Please proceed with your question.
Thanks, Good morning lineup.
Following up on some of your comp.
Hi, ramping up your development spending can you just provide an update on areas you're targeting for those potential products projects as well as underwriting yield you think you could achieve.
Okay.
Hey, Amanda this is Adam.
Referring to redevelopment or development.
Okay.
I had thought you mentioned ramping up developing.
Went on along with acquisitions earlier in the call, but I could be mistaken.
Okay.
I'm happy to take that 1 so on development, given where our stock is trading and given.
Some opportunities that we're seeing out there now where we can.
Makes sense of accretive transactions.
We are.
And then when you are looking at ramping up the development pipeline.
I would say our main areas of focus would be.
Primarily northern California, Seattle.
Those I see as probably those 2.
Best markets in that respect, but we're looking throughout our portfolio and throughout our footprint.
4 per deal.
Yes.
And then any change in terms of underwritten yield do you think you could achieve on those projects versus pre COVID-19 levels.
So yes.
Yes. Good question, so what we're seeing.
Underwriting several dozen deals over the last few months.
<unk>.
That we see going down primarily.
Cap rates have definitely compressed so on the development side, we are seeing.
On untried to gross return on costs at about 4.4% to 1 quarter basically.
It's still a gap between where existing deals are trading.
Carl.
During the quarter to 3 and a half.
We're going to look at.
Higher than that.
If not we wouldn't transact at call. It a 4 development deal, but were going to we would be looking at the 4.5 to high force.
Thanks, I appreciate the time.
Yes.
Yes.
Our next question comes from the line of Rich Anderson with <unk>. Please proceed with your question. Thanks, Good morning, everybody.
So.
Interested in the 17 supplemental or F 17, 1 I should say.
Migration trends that you referenced in your prepared remarks.
Yes.
Is that is that everything or is it predominantly kind of close in like Monterrey Sacramento type of.
Net migration or in migration and does it net out people that are leaving California entirely. This is this the full number number 1 and number 2.
What do you think about this 18% is this is this like a sort of a knee jerk response to working remotely but closer to the office of net probably this is peaking out at that at this time and it starts to come back down.
What's the what's the ceiling on this on this graph do you think.
Alright, just as Barb yeah.
And 17 Dot 1.
18% is a net number so if you look back a year ago, we did have out migration and that's what's showing in the negative 8% and now we have people moving back end and they're really coming from Sacramento and some of the outer lying areas within.
In California, but we're also noticing people moving in from College town. Some people recent college grads are coming here for jobs, and it's really geographically dispersed.
There is no discernible pattern from where they're coming from it's kind of all over.
And we do think that.
Does that speak to the strength of our.
And people coming back and returning after the services have reopened and the economy.
<unk> has reopened now we're seeing the people return and so we think it's a good sign and a good leading indicator you should note that this Seattle and our portfolio look similar as well, we're seeing a big in migration in Seattle as well so.
So we didn't show it here, but in the Bay area and Seattle, both have that similar chart, where theres, a big influx and I think you're seeing it in the rent growth that Angela spoke to and San Fran being up 11% in the CBD and and.
Nor Cal and some of the other suburban markets in norcal, having bigger sequential rent growth.
More recently is partly due to this migration.
Hey, rich.
Yes rich.
Got it.
Broader comment.
I would say the broader comment is that the migration out of the West Coast. Our view was largely driven by business is being shut down.
And putting people in a position of not having a paycheck and effectively forcing them to move to somewhere else and I know that the sort of it doesn't fit the narrative. The narrative is that all these people wanted to leave California, I think the reality is completely different from that and therefore.
I go back to my basic comment, which is do we feel comfortable with the businesses that are here and with job growth going forward and when you look at the components of that.
Okay. The hotels are now mostly open here on the West coast. The restaurants are opening and but we were still at 50% of capacity.
A month or 2 ago. So we open completely on June 15th but that process has been relatively slow and I think I think that's why job growth has lagged the U S. As we've come out of the pandemic and but I guess the key point here is most of the migration.
That occurred was not voluntary migration. It was caused by shutting down businesses and then if you look at the flip side of that are those businesses likely to reopen.
Evan.
Covid is mostly behind us and we feel 100% absolutely convinced that that will.
Occur and so when we look we have some more broader information on migration in general and a lot of the same things that we talked about a year or 2 ago are still in place the inflows into our markets tend to be the.
Hi cost East coast, Metros, and the outflows tend to.
B.
Into lower cost western areas. So those trends really haven't changed all that much but barb 17.
$17.1 is trying to.
Address specifically.
The cadence of what's coming in and what's going out and.
To your point, yes of course everything's.
And there we're not here to try to push a narrative that is that is not reality because if we do that we're just going to shoot ourselves in the foot. So theres no evidence I think of of Essex trying to be overly optimistic and.
So we're trying to communicate what's really happening out there.
What we're really seeing so that would tell it wasn't wasn't implying that I. Just you mentioned sort of in your areas in my gross I just want to make sure I was looking at the same thing.
So the second question.
15, 20 years ago, Mike Schall, and Keith, Turkey, where the heroes.
10% plus growth.
And California was was the place to be now.
<unk> made some investments in the sunbelt.
You'd be a hero so the torches past at least for now.
But I assume your reversion of the mean is your mindset certainly it sounds like what Youre, saying and do you see.
<unk> now is a particularly interesting time to be investing in your markets for all the reasons you just described but also.
Particularly special because of what's happened outside of California, and Washington, and what you think might come back.
And that will be sort of a narrowing of the performance GAAP over the next several years.
Yeah, Hey, it's great question rich and.
Our board is pretty focused on this.
Geographic diversity, Inc.
Issue.
Some of the challenges that we've had more recently with respect to regulation and other things, but we don't want to get too far away from sort of this.
Longer term pattern because we.
It isn't like we're going to grow.
Every year the same conditions change, but we remain focused in our analysis on which areas have the highest CAGR of rent growth over time and it may surprise you because.
You can say.
The West Coast has dropped off of that more recently, yes, but if you look back let's say 15 years, because I have these numbers right out of our strategic plan in front of US Seattle led all the major markets.
Bond with a 5.6% 15 year rent growth CAGR from 2004 to.
2019, so to the pre COVID-19 level, and northern California was pretty close to that.
And when you start going down the list and certainly Boston and Miami are pretty attractive in that respect as as northern New Jersey, but then there are a lot of markets that really have fallen well below that and so.
No.
Our whole thesis here has been let's try to identify the things that promote long term rent growth.
And let's invest in those markets and we can as you know we've looked at some things on the east coast before and we'll continue doing that but I guess is.
As we.
Let me just make a simple comparison, let's compare San Jose with Austin.
There are cities of about the same size same population.
Boston has about 28000 multifamily units in construction, whereas San Jose has about 8000.
We also.
Don't produce very much housing for sale housing in San Jose.
And the median price is well over $1 million. So as an apartment owner, we look at that and say.
Are we better off being in San Jose or in Austin.
We conclude that it's better to be in San.
Jose I mean, Austin has to get extraordinary amounts of growth over and above.
San Jose, which of course is driven by the tech companies, which are doing really well and they hire a lot of people. So I guess I would say the bloom is not off the west coast.
Yes, we grew really fast.
From 2011 through 2016.
By the way.
We had job growth in the 4% to 5% range on the West Coast and then it slowed down because of the affordability issue because you can't have.
Rents grow.
License fastest incomes over loans.
Long periods of time without creating an affordability issue. So there is a long term.
Our approach to the business.
<unk>.
I think that debt.
Debt, making vast portfolio decisions based on.
With all the unique circumstances and Covid would be missed.
Got it.
Really great color. Thanks, Mike I appreciate it everybody.
Thanks Rich.
Our next question comes from the line of Neil Malkin with capital 1 Securities. Please proceed with your question.
Yeah.
Hey, everyone. Good morning, Keith.
Yes.
Yes.
Mike Angela.
Seems like in your prepared comments.
The risks.
Excuse me of Covid.
Or the Delta variant thrown a wrench into the recovery seem like maybe I'm understanding wrong like lower or something that you're really not.
Not maybe waiting a lot.
And I guess my question on that part.
Are you have you thought about.
The Delta variance.
It's spreading a lot quicker I think I've just seen per studies that say like vaccinated people can also.
Read it as well.
Like as easily as on vaccinated.
And the markets that you're in or are most likely to re re shut down or re implement.
Restrictions.
If cases rise.
So they can drive etcetera so.
So given that.
That's likely to happen as the fall comes.
<unk>.
What kind of weighting do you do you kind of get to that notion of a potential hiccup.
From from re imposed restrictions.
Yes.
A good question and an important question.
I guess I would say unfortunately, we have no way to really.
Figure out what Covid might do.
Going forward and but we are definitely aware of the risks.
1 thing that I think is a little bit different in California, clearly, we've got population densities that are pretty high and so.
The risk of cope Covid is perhaps.
Haps, greater given that and I think the government actually has done a very good job here of trying to provoke vaccination rates in the Essex markets and.
I think our vaccination rates are are pretty high relative to the rest of the world. So.
The information I have is it.
Net.
The people with at least 1 shot and 12 years and older were in California, and Washington about 82% vaccinated versus 67% for the U S. So I think that what's happened here is we've tried to the government is trying to.
React to that risk by really.
Really pushing the vaccination rate and they've done a very good job of that so I think that lowers our exposure to some extent, but no doubt.
Areas with <unk>.
High population density.
Have.
A different COVID-19 risks than some of the other areas in this case I think it's been dealt with effectively.
Okay.
That's really helpful. Thank you for that.
Other 1 for me.
Your previous comments you talked about.
Not not making rash decisions or thinking about things on a historic level.
And I guess, if you look at.
<unk>.
Large.
People don't like to say names, but coastal players have.
Recently announced.
Speaking of capital.
Plans in Raleigh, Charlotte, Atlanta, Dallas, Austin, and I would imagine they have.
Board and a lot of stakeholders that they probably consulted.
Good with before they allocate a lot of capital.
So you know kind of.
With that being said.
Does that.
I mean, you give credence to that at all I mean does that.
Does it make you think maybe a little bit more about that I mean, you referenced that permitting is down in your markets and maybe.
That is like a good thing maybe thats like a bad thing.
People are focusing their their growth prospects and capital elsewhere.
Yes. It is.
Good question and very valid and this is why we spend so much time in our prepared remarks talking about bolt on with the top 10 Tech companies.
We created that index.
So that we could keep our eye on where are the open positions for the top 10 Tech companies are they moving more to some of these other locations and if so what do we do about it so I didn't mean to imply actually that we're so focused on.
In your CAGR of rent growth.
So definitely the historical information is important but we're trying to supplement that in 100 different ways with a ton of data sources that.
That are either confirming or raising questions about what the future looks like that's why.
<unk> Angela is talking about how much office construction, if you're going to build office buildings, presumably they're going to be employees in there and we're going to need to build apartments to households employees. I mean, these are all indicators of what's happening in the future.
Keeping our eye on the top 10 tech companies and their hiring trends again both.
In California, and outside of California, Super important and in that regard.
Again I go back to the industry is what are the driving industry. So what are the industries and sort of drive the entire machine. We can it's certainly not the hospitality and restaurant workers that are driving it.
Both will be the result of.
Affluent wealthy areas demand dealer services and guess what they pay a lot more than in other places of the country because of that and so I think what's happening here is we're growing in the process of all of those people that were displaced from shutting down the restaurant.
<unk>.
And other services.
We're going to need to draw them back into the area, but I think that given.
Given the demand for those services and given the B wells that has been created here by the Tech community by motion Pictures in Southern California, and other people that want to live near a beach, let's say.
Strong.
Those services are in demand and theyre going to come back at some it'll take a little bit of time, perhaps to do that but again, we're trying to say, okay, let's stay focused on.
What are the drivers of the economy here.
And again as I look at it and hopefully everyone will agree techs, not going away or Hasnt gone away.
Certainly all of the information that we've given out with respect to the tech companies over time confirms that thesis that they're here, they're not going away. They continue to invest in our markets.
Motion Pictures in Southern California, you cant shoot.
Film films, where you require a 50 to 100.
So on a set during COVID-19 completely shut down demand for content not going away anytime soon and therefore, there is a very good chance that that is going to resume and I can go I could go on beyond that but I think that that discipline. If the drivers are intact.
The things that follow the demand.
People services restaurants, et cetera will follow and the.
The thesis of the company in terms of job growth remains intact and net if you don't produce enough housing supply I would view that as a good thing.
Okay I appreciate it thank you.
Yes.
<unk>.
Thank you. Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning.
So Mike 2 questions first the data on.
F 17 debt is super so.
Like if we were out in the Bay area like a month ago in South San Francisco sort of empty are you, saying that with this 18, 18% increase that now like San Francisco would be active and all of the apartment Reits that have reported this quarter, who have all shown that San Francisco.
<unk> to be the weak.
<unk>.
That will you are saying that we will see that changed substantially in the next few quarters.
Alex So you are referring to the.
This moving back to the inner Bay area portfolio and $17.1 per.
I will say that the trend.
Link trend is reversed and.
The.
The movement back to the Bay area has begun.
Yes, I would caveat that I think most of that is the.
The service businesses restaurants.
Leisure hospitality as the leader in terms of.
<unk>.
And back then that was the area that was most severely disc.
Disconnected during the pandemic, but and then we have coming at us in the not too distant future.
The tech companies and the return to office program. So I think that that continues that trend.
Again, there are a lot of restaurants that converted to takeout only mode. I think I think we will go back to more normal.
A situation, where those restaurant workers continue to come back as well so yeah I think it's.
It's mending not as fast as we want to again go back to the initial premise, which.
Which as we go.
And all of the rent that all the rents back to where they were pre COVID-19 with half the employment I think thats a pretty powerful statement.
Okay, but I'm just trying to I guess, Mike if you look at like Manhattan. I know you guys are not in New York City, but the city came back a lot quicker than than many expected even though.
Work from home you know only whatever 20% of the buildings have people in them, but city rents and the occupancy rates have rebounded strongly whereas San Francisco and Seattle downtown respectively. We're still lagging so I guess I'm curious if your view is that within a few quarters, we will see the downtown San.
Dan Francisco and downtown Seattle rebound strongly like we've seen in New York based on what you guys are showing in this in this attachment at 17.
Yes.
It's a good question Alex So New York, If you look at trailing 3 month job growth in New York It was.
10, 2% San Francisco was 5.2% and San Jose was 5.2%. So you have a pretty dramatic underperformance with respect to overall job growth. So.
Tribute that to.
Again, the west coast needing to open.
We were still well into June.
For.
50% of capacity in restaurants, and that type of thing, whereas I am assuming that New York I don't know exactly what they did but they did something to cause a fairly dramatic difference in.
In terms of their resurgence in employment that hasnt happened yet on the West Coast I.
I think it's coming but.
We're just a little bit slower than some of the other metros, including New York.
Okay and then the second question is.
Barb on the on the guidance you said that because of the mismatch in terms of accelerated debt and preferred equity redemptions versus what you.
What you guys can put out there is about a 10 cent drag so is that 10.
Only in NAREIT, <unk>, but not in company <unk> or is it both.
Yes.
This is.
Because the prepayment penalties or fees that we received this year about $7.5 million.
Those are only in total off also in non core fulfill but what I'm, referring to is just a timing issue.
Been redeemed got money back early so we don't have in any of the interest income.
Some of those investments and we haven't put any money back to work and so that's the 10 minutes that I'm referring to.
We're looking at.
We're looking at sort of debt prepayment penalty is really compensated us for.
Having our money outstanding for a certain period of time.
I'm advocating with Barb too.
Change out so that it's not a non core.
Items because we.
It's really we have a minimum earn.
<unk>.
Preferred return and unfortunately, it's showing up in the non core category rather than core.
Mike that was going to be my point you guys are very productive on this and whether you get paid out over time or you get redeemed early but they pay up and pay you a penalty for that that is.
A core part of your business. So that was my question is why you would exclude the.
The positives that come from this platform and I mean, it sounds like you guys are having that internal debate, but.
Successful at it and no point in not really showcasing the earnings potential there.
Yes.
Yes.
We have looked at it we obviously have to follow GAAP accounting rules and so it's more complicated than it appears on the surface, but yes. There is an internal debate internally, but what we've booked year to date has all been non core for the prepayments.
Yes.
Okay listen.
Listen thank you.
Thanks, Alex.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you.
Regarding northern California, and the recovery I think Angela mentioned in the prepared remarks that July effective rents are still 8 for.
Simple low pre COVID-19.
And I'm not sure if that was a market rent concept for Essex, but I was wondering if youre going against.
These are comps given you were more aggressive on concessions beginning of third quarter last year, and if the recovery could be faster than net and we think.
Yes, I'll, let Angela comment.
On the.
The number for San Jose, but I would say whats happened here is.
We had.
We had colors on previous calls that have said hey.
With a negative job growth how are you able to maintain high levels of occupancy.
In the cities and obviously a great.
Great question and the answer to that was of course that we drew people because the price point was lower we drew people from other places into some of the better location. So they improve their location given lower rents and so now you look at this equation that we're 96% occupied people is starting to come.
Come back and there is no availability and therefore market rents are doing what they're doing so I think.
A lot of this is really driven by our our strategy during the pandemic and.
Now it'll be interesting to see what happens over the next couple of years because market with market rents.
Now.
Back to where they were.
Pre pandemic level.
What is the movement within the portfolio.
Both in and out of those locations that have much higher rent. So in the case of San Jose San Francisco, and Oakland Theres still substantially below the prior rent. So there is still.
<unk> <unk>.
Reason to believe that those people that moved in given lower rents will stay but that may uncouple over the next several years.
And so was that 8%.
Figure that Angela quoted was that for Essex or for the.
Market overall.
So that was for FX.
Okay.
Yeah.
Mike you mentioned cap rates in your markets or low to mid 3%, which sounds like it's compressed about 50 basis points at least from last quarter.
Can you comment on the assumptions that you think the market's placing now that's changed.
Whether it's rental growth our exit cap rate.
And whether or not you agree with those assumptions or I believe the rational.
Yes, I'll start with the comment in the comparison in the last quarter and then flip it to Adam to talk about cap rates more generally, but I think last quarter. What we said was in some of the hard.
As debt.
Buyers, we're pro forming some rent recovery. So it probably wasn't hole 50 basis point reduction it was really that.
They werent using really the current.
Net effective rents they were assuming a bit higher rent level, so that reconciles.
<unk> is part of that but Adam you want to talk about cap rates in general Yeah. Sure. So I think I think the general assumption that buyers are making is that there will be a full recovery by.
By that I mean with rents.
Greater than pre pandemic levels, and we're already seeing those ramp as we've already talked about during the call. So.
Sure.
Yes.
It's in the low threes I think.
Pretty robust rent growth over the next few years, and then probably mellowing out is what I.
The various people that I've talked to that to what their modeling and then non exit caps I think it's as aggressive as ever so I don't think theres much.
<unk> assumption that there's a big expansion on the on the exit side so it.
Underwriting has has definitely gotten more aggressive.
Is there a big difference between your markets or.
Versus suburban.
Yeah. Good question So go.
Going kind of north or south Seattle, we've seen we've actually seen a pretty big pickup in transactional volume and that's probably.
Amongst the most aggressive markets that we're seeing in the CBD is on kind of current net effective rents, we're seeing tie twos to low threes and.
And the markets that really didn't see much of a hit on rents.
Seeing those like maybe.
3 in quarter, 3 and a half range on that is much more suburban outer markets.
Then going down very little northern California's traded so it's hard to really opine there but.
It's in that property low.
Threes range, and then down in San Diego Orange County.
Those markets performed better from a rental aspect. So those cap rates on current net effective arent quite as low as what we've seen in those harder hit markets. So it's probably closer to that 3435 kind of range and very little in la has traded as well.
So it's down in the kind of low 3 years, but theres very few data points.
Okay.
Thanks for the color.
Sure.
Keith.
Our next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, everyone.
On the Federal Fund I think you mentioned in the prepared comments that there was a negligible amount received to date and that there really isn't much in the guide either I was curious if you had any figures around.
What you have applications out for some sort of risk assessment of what you might receive on that.
Yeah, Hi, it's Angela here so out of I think we reported that we have about $55 million of delinquencies out there and we've applied for about $18 million and to date, we have received $4 million of it is still about 27% recovery rate.
Yes.
As far as we could tell it.
It's really more of a slow going because California, just has a more complicated and.
Slower reimbursement process. So in our view about $18 million, we don't view that $18 million as having significant risks.
Risk from that perspective.
The reason, we didn't bake it into our guidance for this year is really the timing is the question.
And just given that the rate of the reimbursement has just been much slower.
And so that's really the key driver of why it's now and this year's guidance.
Okay got it and that 4 million I assume that's largely been this month.
And you said there wasn't sort of negligible in the first half free is that right.
Yeah, Yeah for the most part of this month.
Okay got it and then just 1 administrative sort of wonder if I could in the press release, there was a 6.3%.
<unk> blended rate number for July, but then in the commentary I heard a $4.7 number I just wanted to verify what those 2 things were talking about.
Oh sure. So the 4.7% is a sequential month to month. So what I was trying to do is provide a real time pitch.
Picture.
<unk> of what's happening in our markets. So comparing July to June this month, it's already up sequentially 4.7% on a net effective basis.
So whats in our supplement that blended lease rate as a year over year. So that compares July of this year to July of last year.
Okay perfect.
Keith.
Okay.
Okay.
Our next question comes from the line of Alex Kalmus with Zelman and Associates. Please proceed with your question.
Alright. Thank you for taking the question looking at your Southern California Occupancies.
Great. Thank you hi.
We've heard a lot this quarter from <unk>.
Others.
The delinquencies are.
And their portfolios or sort of concentrated in this.
Part of the country. So I'm just curious.
What would happen if once the moratorium.
It's clear off does that affect the occupancy levels.
On a physical basis in your mind or how do you see that playing out there.
Yes. This is this is Mike.
It's a good question, yes, we agree with the others debt.
Southern California, and really specifically.
Los Angeles is a big.
Big part of the.
Delinquency at the largest part of the delinquency and therefore, there is some question about what might happen.
It's not a huge percentage and.
We expect to work with our residents to the extent we can.
Williams.
So I don't think it will have a huge impact on occupancy overall, so but it remains to be seen it because we can't envision exactly what that scenario is going to look like.
And so we but.
But it's just not enough I think to really.
Severely impact us.
Yes.
Okay got it. Thank you very much and just thinking about the regulations on rent increases that our employees when you're sort of internally discussing the difference between holding occupancy or pushing rate.
Is there any momentum to say.
You'd rather keep.
Keep the base rates pretty high to then.
To expand a little more there and maybe lose a little occupancy.
As a sacrifice or.
As it is still hold occupancy is a primary driver.
It's different by in each region and so there is a 1000 different.
Yes.
Pieces to that equation, because theres been so.