Q3 2021 Essex Property Trust Inc Earnings Call

Good day and welcome to the Essex Property Trust third quarter 2021 earnings Conference call. As a reminder, today's call is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward looking statements that involve risks and uncertainties forward looking statements are made based on current expectations assumptions and beliefs as well as information available to the company at this time.

A number of factors could cause actual results to differ materially from those anticipated further information about these risks can be found on the company's filings with the SEC.

My pleasure to introduce your host Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. Mr. Shaw you may begin.

Good day, and welcome to our third quarter earnings Conference call.

Our climate and Barb Pak will follow me with comments and Adam Berry is here for Q&A.

I will provide an overview of our third quarter results. Our initial operational outlook for 2022 apartment market conditions, and then conclude with the regulatory environment.

Our third quarter results exceeded expectations, reflecting substantial improvement.

In West Coast economic conditions in housing demand net effective market rents are now six 4% above pre COVID-19 levels and it's notable that we've exceeded pre COVID-19 market rents. Despite having recovered only about 63% of the jobs lost during the pandemic.

As a result of improving market conditions, we reported quarterly core <unk> of $3 12 per share eight cents per share above both our sequential results and guidance provided last quarter.

This is the first of likely many quarterly sequential improvements in core <unk>.

Southern California continues to deliver the strongest strongest growth with net effective rents up 17, 2% compared to pre COVID-19, while northern California is still down five 2%.

Return to office delays that many tech companies and slower job growth compared to other west coast areas were factors in the pace of recovery from Northern California.

Overall September job growth in the Essex markets was five 2% substantially above the us average of 4%.

Turning to our outlook for 2022, we published our initial market rent estimates on page S. 17 of our supplemental package, we are expecting seven 7% net effective rent growth on average in 2022 with northern California. The notable laggard in 2021.

<unk> forecasted to lead the portfolio average in market rent growth next year.

A key assumption driving our outlook for 2022 is the return to a predominantly hybrid office environment occurring over the first half of the year supporting our 2022 job growth outlook and our expectation that the west coast markets will resume their long term outperformance versus U S averages.

Our confidence in the Bay area recovery next year is partially driven by rental affordability. Following a year of solid income growth lower effective rents and exceptional growth in single family home prices.

Median for sale home prices are up 17% in California, and almost 16% and Seattle, making for sale housing more costly relative to rental housing and often impeding the transmission from renter to homeowner.

Finally, despite large increases in for sale housing prices, our expectation for the production of for sale housing in 2022 remains very muted at only 4% of the single family housing stock.

We previously noted that many large tech companies in our market have delayed their office reopening as a result of the Delta variant. This fall, which we believe is a primary factor in the slower recovery is northern California compared to other Essex markets.

Nevertheless.

Recent Tech company announcements regarding office expansion open positions in the Essex markets and new commitments to office space all support our belief that the leading employers remain fully committed to our hybrid office centric environment on the West coast.

Page S 17.1 of our supplemental highlights recent investments by large tech companies, which have continued throughout the pandemic and include apples 550000 square foot recent expansion in Culver City.

Our new 490000 square foot Tech campus that will soon begin construction in north San Jose and our recent acquisition of five office buildings with a total of 458000 square feet in Cupertino.

Google last quarter received needed approvals for its planned 80 acre campus near downtown San Jose and Youtubes, two 5 million square foot campus in San Bruno was just approved by the city last week.

We continue to track the large tech companies hiring in terms of open positions and job locations.

Given us confidence that we continue to grow alongside the most dynamic sector in the U S economy.

Our most recent survey.

Of open positions indicates 38000 job openings in the Essex markets for the 10 largest tech companies up 9000 jobs or 26% as compared to the first quarter of 2020 strong economic growth on the West Coast is further supported by venture capital investments, which achieved new highs in Q.

321 of 72 billion of which 44% was directed to organizations in the Essex markets.

Turning to our supply outlook for 2022, we're expecting 6% housing supply growth for the full year, including 9% growth for the multifamily stock, which is manageable relative to our expectations for job growth of four 1% in 2022.

Overall, our west coast markets will remain well below the national rate of new housing supply growth and especially compared to the rapidly accelerating pace and housing deliveries across many low barrier markets next year.

Longer term residential building permits in Essex markets saw a modest three 5% increase on a trailing 12 month basis, which is favorable compared to the U S where permits have increased 13, 6% compared to one year ago.

While our markets often temporarily underperformed the national averages during recessions, we remain disciplined in our approach to capital allocation, including the cadence of housing supply deliveries with permitting data supporting our west coast thesis.

Turning to the apartment transaction market, we continue to see strong demand from institutional capital to invest in the multifamily sector, along the west coast as evidenced by increasing transaction volume and cap rates in the mid 3% range.

Apartment values across our markets are up approximately 15% on average compared to pre COVID-19 valuations. The company has recently seen more development opportunities and we were able to purchase two commercial properties.

In the third quarter, one located in South San Francisco that we expect to become a near term apartment development opportunity and another in Seattle that we will begin to entitle for apartments, while earning an attractive 6% going in yield with a high quality tenant.

We also recently closed two apartment acquisitions as noted in the press release and our acquisition pipeline is strong.

Barbara will discuss the new co investment program in a moment, which is strategically important given our preference not to issue common stock at the current market price.

Finally, the California statewide eviction moratorium ended September 30th However, a few meaningful local jurisdictions have extended their separate eviction prohibitions.

The net result is that a significant portion of our portfolio remains subject to eviction moratoria and other regulations that will slow the pace of scheduled rent growth in 2022.

Fortunately.

Federal tenant relief program has come to the aid of many of our residents. Although the reimbursement process continues to be slow and require a significant coordination and support from the Essex team I am grateful for this extensive team effort with that I'll turn the call over to Angela Kleiman.

Thanks, Mike first I'll start by expressing my appreciation for our operations team as we are in the midst of a strong recovery. Our team has been busier and working harder than ever I also want to thank the support departments, especially our delinquency collections team for their diligence to help our customers navigate the comp.

<unk> rent reimbursement legislation.

Onto today's comments I will provide an overview of our portfolio strategy relative to current market conditions.

Unload by some regional commentary and expectations for our markets.

Our third quarter results reflect a combination of the operating strategy implemented early in the pandemic.

And a healthy recovery in net effective rents that began in the second quarter as California, and Washington Finally, we open from the pandemic shutdowns.

As you may recall in the second quarter of 2020, when the pandemic mandated shutdowns halted our economy.

Just quickly pivoted to a strategy that focused on maintaining high occupancy and coupon events with a use of significant concessions.

Now over a year later as our markets recover we are starting to see the benefits of that strategy flow through our financial results.

In the third quarter same property revenue growth.

Same property revenues grew by two 7%, which is primarily attributable to a reduction in concessions compared to the previous period by primarily utilizing concessions last year, we were able to limit the in place rent declined to only one 1% in the third quarter. The benefit of this strategy is also coming through our sequential revenue.

Yes.

<unk> increased three 2% this quarter from the second quarter.

With the market volatility we experienced over the past year. This is an extraordinary results and positioned the company well going forward.

From a portfolio wide perspective market conditions remained strong compared to a year ago as demonstrated by the 12, 6% blended net effective rent growth in the quarter.

In addition rents relative to pre Covid levels have continued to improve further enhanced by a delay to the typical seasonal slowdown in all our markets.

Turning to some market specific commentary from north to south rents in jobs in the Seattle region have had a strong recovery with net effective rents up eight 3% compared to pre COVID-19 levels and year over year job growth of five 5% in September.

New supply continues to be largely concentrated in the CBD, which is less impactful to ethics, because 85% of our Seattle portfolio is located outside of CBD.

Looking forward to 2022 as outlined in our S. 17 of the supplemental total housing supply deliveries for the region is expected to decline compared to 2021, and we anticipate job recovery to continue led by Amazon, which recently announced plans to hire over 12000, corporate and tech employees in Seattle.

As such we are forecasting market rent growth of seven 2% in 2022.

Moving down to northern California, which is our only region with net effective rents remain below pre COVID-19 levels.

<unk> job loss and apartment supply deliveries caused net effective rents to fall further in northern California since the onset of the pandemic.

In addition, the job recovery in Northern California has been at a slower pace than our other regions with only four 4% year over year improvement compared to a five 2% for the entire Essex portfolio as of September.

We believe this is partly driven by more owner mandates delaying normal business activities.

Apartment supply, particularly in San Mateo and Oakland CBD are also presenting challenges for nearby properties.

Turning to financial concessions for stabilized properties four of over a week in these markets in September.

On the other hand, we anticipate that northern California will be our best performing region in 2022 with market rent growth forecast of eight 7% on our F 17 its.

As Mike discussed, we expect hybrid office reopening to continue which will drive additional job growth and healthy demand for apartment units.

With similar level of supply delivery expected in 2022, and this year, we are optimistic that northern California is in its early stages of its recovery.

Lastly, on southern California rent growth has continued to improve in the third quarter and net effective rents in September or 17, 2% above pre COVID-19 levels.

As we have mentioned in the past Southern California is a tale of two markets the urban areas in the downtown la versus the more suburban communities, which have generally outperformed.

In June L. A rents we're still below pre COVID-19 levels, but as of September. They are now six 8% above well Orange County, San Diego and Artur has achieved rents between 17% to 30% above pre COVID-19 levels.

Job growth in Southern California continues to progress well up five 9% in September as the region's economy continues to reopen and recover.

With the exception of the downtown L. A area, where concessions average one week in September the rest of our southern California market has demonstrated solid fundamentals with no concessions recognized in September.

We expect southern California is strong rent growth to continue in 2022 led by Los Angeles, which has just begun to recover the jobs lost during the Covid recession.

Apartment supply in the region is forecasted to increase next year compared to this year and could present pockets of interim softness counterbalanced by a continued favorable job to supply ratio across the region.

As you can see on our F 17 market rent growth for southern California up seven 1%, we anticipate this region to perform at a comparable level as Seattle.

With this backdrop of stable occupancy and that's a favorable supply demand relationship our portfolio is well positioned for the continued growth.

I will now turn the call over to Barb Pak.

Thanks, Angela I'll start with a few comments on our third quarter results discuss changes to our full year guidance, followed by an update on investments and the balance sheet.

I am pleased to report core <unk> for the third quarter exceeded the midpoint of our guidance range by eight cents per share.

Favorable outcome was due to stronger operating results at both our consolidated and co investment properties higher commercial income and lower G&A expenses.

During the quarter, we saw an improvement in our delinquency rate, which declined to one 4% of scheduled rent on a cash basis compared to two 6% in the second quarter.

The decline is attributable to an increase in income from the federal tenant relief programs that were established to repay landlords for past due rents.

Year to date through September we have received 11 6 million from the various tenant relief programs of which $9 5 million was received in the third quarter.

Given the increased pace of reimbursement, we began to reduce our net accounts receivable balance in order to maintain our conservative approach to delinquencies and collection.

As a result of the strong third quarter results, we are raising the full year midpoint for same property revenues by 20 basis points to minus one 2% and.

It should be noted this was the prior high end of our range.

There are two factors I want to highlight as it relates to our fourth quarter guidance.

First as Angela discussed we are seeing strong rent growth in our markets.

While there will be a small benefit to the fourth quarter. The vast majority of the benefit from higher rent growth won't be felt until 2022, when we have the opportunity to turn more leases.

Second our fourth quarter guidance assumes we continue to receive additional government reimbursement for past due rent and contemplates a continued reduction in our net accounts receivable balance for.

Thus, we expect our reported delinquencies as a percent of scheduled rents to be above our cash delinquencies, which is consistent with the third quarter reported results.

As it relates to full year core <unk>, we are raising our midpoint by <unk> 11 per share to $12 44.

This reflects the better than expected third quarter results and changes to our full year outlook.

Year to date, we have raised core <unk> by 28 or two 2% at the midpoint.

Turning to the investment markets during the quarter, we raised a new institutional joint venture to fund acquisitions. As we believe this is the most attractive source of capital today to maximize shareholder value. The new venture will have approximately $660 million of buying power a portion of which is expected to be invested by year end.

As I discussed on our last call. We are seeing an elevated level of early redemptions of our preferred equity investments due to strong demand for west coast apartment, and inexpensive debt financing, which is leading to sales and recapitalization.

For the year, we expect redemption to be around $290 million roughly.

Roughly 40% of these redemptions are expected to occur in the fourth quarter.

Given the current environment, we could see continued elevated levels of early redemptions in 2022.

In terms of new preferred equity in structure finance commitment we are on track to achieve our 2021 objective as outlined at the start of the year.

Year to date, we have approximately a closed on approximately $110 million of new commitments. As a reminder, it typically takes three to six months post closing to fund our commitments given they tend to be tied to development projects.

Moving to the balance sheet as we expected we are starting to see an improvement in our financial metrics driven by recovery in our operating results.

In the third quarter, our net debt to EBITA ratio declined from six six times last quarter to six four times.

We believe this ratio will continue to decline through growth in EBITDA over the next several quarters.

With limited near term debt maturities and ample liquidity.

We remain in a strong financial position.

That concludes my prepared remarks, and I will now turn the call back to the operator for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first questions come from the line of Nick Joseph with Citi. Please proceed with your questions.

As we look to.

<unk> 2022, how do you think about ethics his ability to capture that MSA market rent growth of seven 7% that you discussed although either from a regulatory standpoint or the lease wall perspective, just trying to tie with the initial same store expectations to the market rate.

Data that you provided.

Hey, Nick It's Mike and Angela My follow me with comments.

We're feeling very good about conditions around us again.

We have high occupancy throughout.

And a very strong loss to lease and Thats been noted before and everything looks like our markets are recovering we expect to outperform the U S with respect to.

Job growth certainly going forward.

We view the.

The catalyst of the.

Return to office in Northern California has been.

Sort of the last piece would probably be the relative underperformance that we've had thus far relative to the peer group and we see that as still being a very.

Strong part of our portfolio historically, northern California produces the highest CAGR of rent growth over long periods of time.

We expect that dominance to show itself and.

A lot of the reasons why were embedded in the various comments that you heard from from all of US. So hopefully that all makes sense. The number of open positions for tech companies. The big investments at the Tech companies continue to make within the northern California markets et cetera, I think it bodes well so we feel.

Really feel great throughout our footprint, but the key piece going forward I think there is northern California, we feel very good about that too.

Thanks.

Maybe following up on that the return to the officer or hybrid.

How do you think that impact seasonality over the next few months.

Employees, maybe move back into northern California, specifically.

I think that.

Given that we carry high occupancy into this period of time any incremental.

Growth and jobs should have a very positive impact on market rents.

So again, our expectation is.

I would say northern California was probably shut down to a greater level than most other markets, maybe law would be number two but.

It has had the most muted recovery yet it has I would say the strongest and most dynamic job base. So.

Again, we're looking forward to that where we were hoping it would happen earlier.

But again I think the Delta variant is postpone that but again, we feel we feel strongly we think all the all the things all the conditions that we would expect to see from number of open positions for these companies.

Major commitments to campuses in lease commitments for office space et cetera, all seem to be.

Focus on a return to office program, probably in a hybrid.

For these companies so I think that's before us in the not distant future.

Yes.

Thank you.

Yeah.

Thank you.

Thank you our next questions come from the line of Handel St. Juste with Mizuho. Please proceed with your questions.

Hey.

Thanks for taking my question.

So first question I guess is on.

The topic does your inflation and all the ways that it's impacting the business. How are you thinking about that impact in regards to payroll R&M utilities, and what offsets could you, perhaps what levers can you pull to offset some of those costs into next year and then maybe some broader comments on your technology platform.

You are in terms of the rollout of that and how that could be a help you as well. Thanks.

Okay.

Thanks for the question, it's a good one and I'll, let Angela.

Handel B.

The technology piece of it.

Help me.

Was your first part.

Shannon inflation.

Yes, so I mean, we've studied the inflation thing the historical precedent.

Going back a long time actually into the early eighties and.

No doubt, we are feeling quite a bit of pressure on the cost side.

Certainly finding.

Finding.

Because it positions, especially onsite positions is challenging and.

Compensation is going up for sure.

On the.

The one piece is good in California, obviously is property taxes because of prop 13 limits that increase and so hydro, but I'll go back to raise rents are obviously the big thing, we're a high gross margin type of company and therefore.

The rent growth really matters in this equation and I think.

In an inflationary world French do very well and.

So I would expect that.

Our rent growth would more than compensate for.

Whatever cost increases that we have and I think it would be I'm, not saying I want this to happen, but I think if.

We were in a more a stronger inflationary period I think it would be in that.

Positive in terms of the financial performance of the company.

Obviously, if inflation goes up all asset values decline in value so maybe.

That would be one sticking point as well because.

Youll, probably cap rates change and some other things happened as well.

Andrew you want to comment on.

A sharp I think Barbara I, just wanted to follow up on that one I know the other thing that we've done over the last several years to take advantage of the low interest rate environment and lock in our interest rates for long periods of time, and we have very little debt maturing next year and the following year. So we're not susceptible to rising rates from that perspective.

Locked in our interest expense effectively and we have very little limited.

Variable rate exposure as well so we feel good about where the balance sheet stance from an inflationary perspective.

Great and on the technology front handle what we have been doing is really focused on ramping up the <unk>.

Contactless interactions, which also allows for efficiency and allows us more flexibility for our site teams.

So we are going to continue that path and further refine and enhance them.

Jos.

Technology and what that means is that it will allow our staff to probably specialized more and hopefully continue to be more efficient and that will help I don't think it will be say an immediate relief as far as the payroll expenses that youre looking for but over time it should benefit.

The business platform.

So without putting words in your mouth it sounds like the near term outlook for inflation doesn't necessarily spook, you, perhaps there's a little bit of pressure building in the business but.

Maybe not to the degree to perhaps put a mid single digit type of expense growth.

Outlook for next year.

While we're not done.

For next year.

Yes.

And barb drove that in.

Prior to the call. Please don't give out guidance.

Sure.

Yes, I guess the point I would make.

Hi.

High gross margin businesses.

Even if you get some expense pressure.

Still the topline is so much more important so.

Thank.

In my view, we always look at rents, what's the relationship between rents and incomes and so in an inflationary environment. If incomes are going up we're probably able to pass through most of that in the form of rent and if that happens we will do very well in that scenario.

Got it got it fair enough.

And the second question, if I could ask about the the two office acquisitions here in the quarter maybe.

Maybe some comments around the math the thought process and should we be thinking of these as opportunistic and more one offs or some perhaps more reflective of the low cap rates in your markets.

Which could be making more.

More conventional acquisitions more difficult and if that's the case thoughts on culling.

Some of the portfolio a bit or maybe taking beds at some of the pricing.

I handle this is Adam so I'll touch on both of the two office acquisitions, but that Mike touched on the.

In the opening remarks.

They are both kind of separate which is why im I'll cover them separately. The first one which is in south San Francisco, we've had that tied up for over three years and so during that time, we work with the city to.

To determine what sort of zoning and we could get and during that time, we're basically able to increase the density by over 100 units. So coupled when you take that coupled with the cap rate compression that we've seen in the market.

The deal made.

It made more sense than really any development deal that we've tenfold in the last couple of years. So.

So there is in place income on the on the existing use which I mentioned the call. It high three kind of cap rate range.

Is fine and that will that will get us through two entitlements, which we would expect in nine months to a year or so.

The other one somewhat of an outlier. It's a single tenant single tenant office deal in Seattle really good location Theres still another nine years on the lease and we have a personal guarantee for that for that term. So.

It's north of a six cap on current income it does pencil on todays <unk>.

Family underwriting and it is actually zoned for multifamily, but but we'll we'll revisit that.

567 years from now to see what makes the most SaaS, but for now that's.

That's a very solid covered land play from our perspective.

Great I appreciate the color. Thank you.

Sure.

Thanks Annabel.

Thank you. Our next question is coming from the line of John Kim with BMO capital markets. Please proceed with your questions.

Hi, This is hilarious Kang for John Ken.

Thanks for taking my question. So I was just wondering a little bit about the regulatory risks in your market I know, we've kind of touched on that here and there.

But R&D is increased risks kind of being priced into valuation.

Other parents were citing that as a reason to reduce exposure.

Farhan I was just wondering how you guys are thinking about that.

Adam well I'll start and I'll, let Adam chime in here.

Obviously dealt with regulatory issues.

For many many years really for the 35 years I've been here and historically.

The bigger the loss to lease gets because of Rent-roll, let's say the more buyers and sellers will start pricing in <unk>.

A portion of it or want a higher cap rates given the delayed impact of rents, but generally speaking all apartments or.

Valued based on market rents today, not desert again, the loss to leases.

[noise] determination based on facts and circumstances, so with California.

With California rent control allowed the statewide law.

CPI plus five Max of 10% annual increase I don't think that that in and of itself will cause significant valuation differential and I think thats. The key part, but if youre moving the old rents by CPI plus five let's call that eight.

Or something like that most buyers will think that that has plenty of compensation for.

For the transaction and I don't think cap rates move all that much.

Because of that Adam do you want to comment on that just one additional comment the most onerous rent controls within California.

And Francisco or Santa Monica or Berkeley, there's just very little of the trades. There. So thats, where you see that larger loss to lease a bigger gap between in place and economic and that's that's where pricing would fluctuate more but as far as 814 82, guys. The California statewide one.

It doesn't it doesn't really factor in to really anyone's models from what I can tell.

Yes.

Okay. Thank you. Thank you for the call.

Going back to the inflation piece too.

How how is that affecting you.

Your plant development that you briefly talked about the other commercial acquisitions and how.

Relative to multifamily those are still good traits, but.

You know kind of moving forward in the development pipeline like is that something that you're really thinking about.

It's something we consider in all of our strategic decisions.

We're not focused on the office market I wouldn't want to be.

Very clear, though that the two opportunities that we had are really.

One offs, but.

I mean, we look at all of those factors in determining where and what to invest in.

Yes, I think I think we estimated about 9% between today and when we would start construction for example on the South San Francisco deal that Adam talked about earlier could that be high or we don't know, but we build in a estimated cost escalation and but.

Really drives all these deals if cap rates go from.

Four in a quarter ish down to three and a half or so the built in value of those transactions of a development transaction until of course land sellers.

Until land sellers adjust their price.

It makes it.

<unk> and <unk>.

There's a lot more value created in that process Adam yes. So just one one final follow up there we're always looking at the spread between where stabilized.

Acquisitions are stabilized assets are trading versus versus our development yield and so whether deal is entitled around entitled We're going to we're going to look for a different spread between what in place cap rates are and so that escalation that Mike referred to.

We assume on everything whether its three months out six months out or two years out.

That factors into the into the denominator and so.

With this cap rate compression, we've seen especially on these two deals and there are a couple of others potentially in the pipeline where.

That spread has increased and those are the deals that we are pursuing aggressively.

Thank you. Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your questions.

Hey, guys. Just a quick question could you may be quite as some details on your loss to lease across the various different markets and compare them to the rental rates you disclosed for your macro forecasts.

Sure happy to Angela here.

At September the portfolio loss to lease was.

Nine 8% and <unk>.

It's a widespread is from northern California in the force now to southern California.

Low single digits around 13% and so.

And we understand that typically look to this loss to lease to.

Model next year, and so I want to just make sure that provide a little more context on that because we would want to consider a couple of factors.

Yeah first.

This year was unprecedented year, because we started out the year with a huge negative rent growth and has turned positive. So it's a very steep.

Curve and so this trajectory is not likely to.

Repeat next year.

But because of that and.

The delay in the seasonal peak.

It has created a small drag on revenue for next year and secondly in some markets.

10%.

Broadly speaking will be our Orange County, San Diego and Ventura counties.

They have.

They are above the 10% cap yeah, Brian control cap and so that will that does that will be a factor as well.

Got it.

Was actually exactly what I was looking for just maybe one other question.

When we think about leasing spreads versus list right is there a lead lag there some of the data. We look at is the listing rates seem to be a lot higher than.

Then the signed leasing spread so I'm just wondering if the listing rate is its leading indicator on how you think about that.

I'm not sure if I'm following your question.

Yes, so what I'm asking.

Are you talking about asking versus achieved is that what you mean, yes, yes.

Or are you asking.

October November December higher than where it's been site.

Yes, I see what you mean.

Okay.

Normally it is well, let's put aside for now it has been higher but thats pretty typical what we tried to do is forecast what the rent level is going to be one or two months out you know whenever we sent a renewal and so.

What that means is sometimes it's higher sometimes slower. So we think that we are now.

Once they are sending out renewals now for say <unk>.

December January its not likely to be a whole lot higher but backing for ascending bring all of that in March for renewals in may or June it tends to be higher so it really depends on the timing.

And the market conditions.

Thank you our next questions come from the line of Austin, where Schmidt with Keybanc. Please proceed with your questions.

Yeah. Thanks, everybody I was curious going back to the market rent growth forecast. If you could just give some additional detail of kind of how you thought about.

Our baseline scenario that maybe doesn't include some type of hybrid back to office and how you went about determining what that additional growth would be layered on top.

With that back to the office scenario playing out we know you guys tend to take a conservative approach. So just trying to understand.

The.

Baseline versus you know what what the upside look like.

Yes.

Great question and I'm not sure we approach it that way.

Our research group.

Paul Morgan.

They use a variety of datasets and theyre not looking at any one thing not creating some base case scenario. The simple part of it is looking at what we expect job growth to do and how many units of demand are represented by the job growth and then how much supply do we have and so.

Fortunately again, we're 96% occupied and all of these markets. So it isn't like we have a hole to fill before.

Before the demand oversupply situation takes hold so we're already there but.

Included in some of the things he looks at which I think some pretty interesting data for example, Seattle.

Has.

[noise] recovered 79% of the jobs that they lost in the pandemic and he is expecting them to be at 110% by the end of the fourth quarter. So they will actually be above their pre COVID-19 employment level, whereas almost all of the other markets are still below pre COVID-19 level by the end of.

2022, so it's so it's not that not that simple he considers affordability with affordability is a key part of what we do in <unk>.

If we look at things now because theres been such incredible.

Growth in rents in southern California, the screen and the way we do affordability is on a market basis, not a property by property basis.

Because we're trying to look at the overall dynamic in the marketplace and southern California, because it has such great rent growth is screening a little bit expensive and northern California, which has the highest incomes.

And.

Rents that are.

Pretty moderate given what's happened here.

So that's what that's what leads to that better growth rate.

Northern California next year, just by way of background I'll give you a quick comparison, so rents in Seattle and Los Angeles, The median rent market rent not Essex portfolio is about $8816 in both cases.

But in.

Seattle.

Median household income is 102000 and in L. A it's about 88000, so Paul would look at that.

Relationship and say that's a positive for Seattle has about the same rent has a lot more room to run with respect to incomes and that would factor into his equation in terms of what we expect market rents to do.

That makes sense.

Yeah, No. That's that's very helpful color.

So in that scenario.

Demand, where do you exceed.

From a job growth perspective, you talked about kind of the jobs versus supply piece. So it's back office does drive increments all demand above and beyond that is it conceivable to think that you could benefit from a pricing power perspective, but also see some upside to occupancy as well.

Well occupancy is a little bit different a little bit different element and that really has has to do with how aggressively we're pushing rents and so youll occupancy some have noted.

It has actually declined a little bit, but that's really because we're pushing rents when you push rents you hold out a little bit longer and you are willing to accept a little bit lower occupancy level.

But going back to our basic thesis if we have 530000 jobs created next year and the typical relationship between the household in a job is two to one so we have somewhere around.

265000 units of demand for apartments, and we produce the total supply of 64000 homes, we should do pretty darn well in that scenario again affordability becomes the key issue.

And affordability.

Affordability is different by market with screen relatively inexpensive in northern California, and relatively expensive in southern California, but just look at the basic supply demand we should be in great shape next year and so we don't know exactly.

What's going to happen, we think seven 7% is a big number but we're.

We'll wait and see.

Thank you. Our next question comes from the line of Rich Hightower with Evercore. Please proceed with your question.

Hi, everybody. Thanks for taking the question here.

So I guess outside of.

Restrictions within the confines of a 14 82 in California are you guys self limiting.

Any any markets or submarkets with respect to renewal rents just kind of in that.

You know sort of corporate spirit.

And being a good guy from.

Vis vis your tenants that you guys have employed in the past you know, thereby sort of exacerbating that growth in the loss to lease as things go forward.

Yes, that's a good question and this goes toward.

The social responsibility yeah.

Part of our corporate governance, right, we have a self imposed cap of 10% for many many years and and really the.

Yes, the approach behind that is to avoid being viewed as anti gouging.

And so and that strategy has worked well for us for many many years and it really has not materially no.

Negatively impacted the returns of our shareholders.

Okay, and Angela which which markets.

Are you sort of employing that.

Our strategy at this moment, if you don't mind.

Well, it's broadly across the portfolio and sell it to wherever we have that are hitting the loss to lease of up 10% and so so it happens to coincide with the 14 82, so it's the Orange County, San Diego and niche for us because they're all above 10.

Last week.

Uh-huh.

And Seattle, perhaps.

Yes, Seattle as well.

Alright, great. Thank you.

Im not 14, 82, but yes.

Right.

82, that's what I meant yeah, that's perfect. Thank you.

Thanks Rich.

Thank you our next questions come from the line of Brad Heffern with RBC capital markets. Please proceed with your questions.

Hi, everyone. I was just curious in the Bay area, if you've seen any change on the move and stats if maybe more people are coming in from outside the metro versus what you've seen more recently.

It's a good question.

The granularity of that data is kind of difficult to follow and so it's hard to say exactly whats happening recently, we do have job growth and the job growth is exceeding the national average so from that.

From that statistic alone.

We feel like there were there was some positive movement back to the Bay area, and clearly occupancy et cetera.

As.

Confirm that and so but we don't we don't think that the major shifts as has happened we expect it to pick up here in the next couple of months as we approach year end.

And hopefully accelerate into 2022 and that's the premise, but again, we don't we need I would say we need.

More job growth than what we have currently to achieve the 2022 forecasts. It is on 17, but we will do fine either way.

Okay, Okay got it.

And then on delinquencies can you walk through sort of what the underlying trend has been and I know there's noise, obviously related to the rental relief payments, but has the underlying level come down and how do you see that sort of playing out.

Yes, Hi, Brad This is Bob So you can see we report our delinquencies.

For the quarter, we were at one 4% on a cash basis and keep in mind. We Didnt report in July last quarter and that was at two 2%. So that implies August September had come down that was around 1% on a cash basis and then October is about 1% and that's really being driven by the reimbursed.

<unk> as I mentioned during the call, we got $95 million in the third quarter most of that hit in August and September and we have seen in <unk>.

However, we've seen a commensurate amount so that's kind of where we've been at we've been stable I would think the last three months its been pretty stable in <unk>.

Terms of our our net delinquencies.

Thank you. Our next question is come from the line of Neil Malkin with capital One Securities. Please proceed with your questions.

Hey, Thank you.

It's still morning out there for you.

Just on that last question when you say they are the delinquencies, 1% that is net of the amount that you collected.

From the the delinquency reimbursements from <unk>.

California in other jurisdictions is that correct.

Correct correct.

So without that it would still it would be in that like two plus range is that what is that around the world.

Exactly it would be hard.

But out of those reimbursements that the reimbursement is and what is driving that number lower correct.

Sure Yeah, I was trying to understand.

What's baked in and if anything's changed in how you recognize.

Bad debt now how that what would that look.

I get you.

Okay.

Thank you for that.

Okay.

And just in terms of.

The people moving into the San Francisco, I guess focus on that one.

You mentioned that.

In general your portfolio has seen people come back and I wonder given the in San Francisco that rents are still down.

Down from pre Covid levels.

And can you comment on are the demographics.

Changing a little bit from the people who are moving in.

Are they the same in terms of income jobs or are more people, who are coming in sort of begin moving in from the outskirts looking for a deal.

Im kind.

That would potentially.

Impact your ability to retain those once market rents come back.

You know that it's Angela here. That's a good question, we have not seen any.

Any meaningful change in the demographic profile.

And I think this question was also.

Early on when.

Rents.

Decline or when we were giving out significant concessions.

Concessions.

I think at the end of day.

It's becoming it's all about jobs and so while it's slightly more affordable people are not going we just don't see people randomly moving into the city.

And then not being able to.

Tuesday.

Does that makes sense.

Yeah, Yeah, Yeah I appreciate that.

Yeah. So just one follow up maybe just talk about <unk>.

Development and that sort of outlook.

You kind of touched on this earlier, but I.

Given everyone understands there is a lot of inflation with input cost supply chain disruptions are hard to get labor et cetera, but you made the comment that you're seeing increase in developments and a commensurate increase in mezz opportunities can you just maybe.

Elucidate that a little bit.

Just.

You think that that it would be a tougher environment, but can.

Can you talk about what's driving that and then what kind of opportunities you're evaluating right now and potentially the size.

Actually maybe I think there are several parts to that and I think we may need to clarify the question a bit here, but.

Overall, we think 2022, we'll have roughly 4% more supply than 2021 and part of that is because there was.

Yes.

Delivery delays caused by Covid and eventually they will catch up.

In Q2, 2022, but not enough to be really meaningful in the scheme of things, especially again when you go through that the job numbers that we have.

The implied demand from 530000, new jobs across our footprint footprint, notably on the supply side.

Seattle.

Is the one market that's down pretty substantially about 12%. So thats another goldstar, let's say for for the Seattle market there.

Barbara.

Neil as far as on the street opportunities that we're seeing.

So just kind of echo your point with costs, having rhythm now that being said our.

Costs are well down from where we were kind of at the edge.

Lumber peak in mid summer, but.

Taken all that into account.

We're seeing a steady flow of deals, but fewer deals. It seems that are penciling and that's both on the on the <unk> side as well as on the direct development side.

The one thing the one point I made earlier about with cap rates compressing on existing products.

Sure.

There also.

Diminishing some on the on the development yields so.

So.

There are kind of competing factors as to how deals are being made today, but.

Like I started with.

There is a flow of deals happening, but again those that are actually penciling or I would say fewer and further between.

And then Neil I, just want to make sure that.

In my prepared comments I did say that we had $290 million of preferred redemption. This year.

Given the current environment. If it is to continue low interest rates and high valuations for West Coast assets. We could expect early redemption of a comparable amount in 2022 I would imagine so.

Could still face headwinds there just given this environment, we're seeing a lot of developers able to take us out early.

For a variety of reasons himself.

I want to make sure that you have heard that as well.

Okay.

Thank you. Our next question is coming from the line of John Pawlowski with Green Street. Please proceed with your questions.

Thanks, a question for Adam I think in the prepared remarks, Mike referred to apartment values being up 15% versus pre COVID-19 levels I'm curious in the hardest hit market to the Bay area, where you think current values are relative to pre COVID-19 levels.

Yes, Thanks John.

As Mike pointed out in the opening remarks.

On average so.

As it relates specifically to the Bay area, there's been very little to trade.

<unk>.

Substance.

I think that number in the bay area is going to be anywhere between 5% and maybe upwards of 20%.

But again theres been reasonably.

Just two class AA deals that have traded and then some some kind of b and C deals that have traded so we're talking about very very limited dataset.

Okay, and that's sorry to clarify 5% to 20% down or up.

Up.

Okay.

No nothing down John.

I'm just kidding nothing trades.

Yeah.

Okay.

Yeah.

One one final question for me and then I'll jump out.

That's just drill down on San Mateo.

We see job growth improving migration job, but sequentially, each and every quarter revenues keep declining in San Mateo.

Can you just tell me what's going on in terms of the renter behavior, the durability of demand gains or last few quarters and.

When does it turn the corner.

Yeah that's.

That's very interesting.

Question in that.

The data set itself.

I think just give a little context, because I think that matters, our San Mateo.

Market only Ashley has four properties in the same store.

And so because of that you are going to see a lot more volatility.

And in addition, there has been well good job growth and it's a good market for US there has been lease up competition in the area and so.

We're talking about a interim period when you have <unk>.

Competition from these up is.

While there is job growth is still at a slower pace relative to our other markets.

And you add that with a small dataset, it's going to just be a lot more volatile it's not that there's anything fundamentally.

<unk>.

That were concerned about with this market.

Thank you. Our next question comes from the line of Amanda Sweitzer with Baird. Please proceed with your questions.

Thanks apologies if I missed this but on your co investment platform has the interest from institutional capital to partner with you change the economics of those deals at all or is the increase attractiveness that you've talked about really been driven by lower debt cost in the market today and the higher Ltvs that you can use in those agreements.

Hi, Amanda <unk>, Yeah, we do.

Use the co investment platform for many many years and we like it because it is an alternative source of capital win.

We don't like our equity our stock price and so we use it from time to time, we do think it's a good.

Good.

Source of capital for Us and in terms of economics, we were able to you.

<unk> reduced the hurdle rates and improve the economics for Essex cap rates have come down over the past year 75 to 100 basis points.

We were able to change terms accordingly, so economics of the joint venture didn't change materially from what we've done in the past but.

We will continue to use this source of capital going forward, depending on market conditions.

[noise].

That's helpful. That's it for me.

Yeah.

Thank you. Our next question is come from the line of Sean <unk> with Goldman Sachs. Please proceed with your question.

I think it is sufficiently noon on divest goes through I'll say good afternoon, everyone I'll start with T. Our redevelopment program. If you could perhaps give some color I believe you started that last quarter, where you're at and how you're thinking about it in 2022.

Sure happy to Ms. Angela here.

We started ramping up and I mentioned that last quarter.

And we're going to continue to do so, especially in light of the recovery and the strength of the recovery and of course, our expectations for market rent growth next year and our goal.

At this point is really to.

Double the number of renovations for next year compared to this year and then ultimately get back to pre COVID-19 levels, because it does take a little more time to ramp up these activities and.

As market conditions prove we also make sure that we underwrite the improvements and ensure we don't have capital destruction and make sure that we're meeting the market and optimizing our returns and so it's not a turn to switch on and we just we are just much more it just wont be diligent about it.

And then Angela I as a follow up to that I mean house auto like you know looking at an onset of does our redevelopment is that consistent with pre COVID-19 levels and is there a big range to think about there just trying to understand that if you could throw some color on that as well please.

Sure no happy to.

Target or a ROI at pre COVID-19 levels, so, but keep in mind, it's driven by market rents.

And so what that means is that.

You know that that RLI.

<unk>.

Unlikely.

The way we approach it is that we wouldn't proceed with with a a reinvestment opportunity if we're not achieving our targeted ROI.

And therefore, if you're concerned that there has been any compression or deterioration there there has not been.

Gotcha and then you know my my sort of second question would be you know yacht.

One of your peers talked about earlier today about some impact on leasing velocity from Amazon's policy shift on return to office just wanted to you know.

Check with you what what are you guys seen from your standpoint. Thank you.

Let me make sure I understand your question are you talking are you asking about.

Our leasing velocity.

Whether it has changed because of Amazon.

Amazon policy shift on return to office you know the announcement a couple of all of the <unk>.

Yes, I see what you mean.

We have not seen any impact from the Amazon.

Shift because keep in mind well, yes, they have.

The corporate mandate.

Mandate, but they also have a lot of workers throughout the region.

And so that's and of course all of the businesses that that tend to support Amazon, but practically speaking we.

We have not seen an impact on our turnover, we have not seen an impact on our occupancy and certainly not an impact on our ability to raise rents.

Thank you. Our next question comes from the line of Daniel Santos with Piper Sandler. Please proceed with your questions.

Hey, good afternoon. Thank you for taking my questions. So my first one is on your stock price you didn't issue equity in the third quarter, yet on our estimate and based on the streets estimate of MTBE, you're trading at a premium.

Instead of issuing equities are going to disposition and JV route. So I just was wondering if you could give more color.

Commentary on your views on your stock price and maybe using more equity going forward.

Yeah. That's a good question I mean are we always remain very disciplined as it relates to.

What source of capital we use so we look at a variety of different sources <unk> equity one joint venture equity and one disposition.

And keep in mind with values up 15% from pre COVID-19 levels that puts our NAV and where we think the value of the company and its up quite a bit from where we were at the start of the pandemic and so that's a factor that we look at whether we want to issue equity today or not the other factor to keep in mind is we have a lot of money coming back from preferred.

Equity redemptions were using that to fund that.

The new investments were making along with using the joint venture platform. We really do you think it creates a lot more value for our shareholders given that.

The fees and the potential for promote.

Hurdle and given where our stock prices change we don't believe we're at a material premium to NAV at this point.

Okay. That's helpful and then lastly.

How much more are you expecting benefit from smart rent and what's your timing on that.

Yeah.

Yes, no that's a great question.

The value of our smart rent investment is about 75 million today.

And our third quarter financials, Theres, a lag effect there because we report them.

Shares are still held within <unk> and so we come out of lockout and their financials are one quarter in arrears for us and so we would expect a fairly substantial gain in the fourth quarter it could be up to $40 million.

And then we would also have to recognize an unrealized deferred tax provision as well.

That could be up to $12 million both of those numbers are not reflected in our full year guidance for total <unk>.

Just given the uncertainty there is a lot of other moving parts within <unk> that we don't try to predict.

That gain or loss, but those are the numbers related to smart rents in and of itself.

Yeah.

Thank you. Our next question comes from the line of Alex Thomas with Zelman and Associates. Please proceed with your questions.

Alright. Thank you for taking the question I wanted to touch on SB, nine and 10, and what you expect the long term impact to be on California housing supply there.

What youre seeing on the ground if anything yet.

Yes. This is Mike good question.

Still waiting and sort of guessing as to what might happen with SB 910 and of the two the one that's more impactful as SB nine because that would effectively have the state override local zoning laws as it relates to the development of <unk> <unk> units and so.

Potentially allowing more <unk> units to be built in the suburbs. So.

I want to note that they are previously was a.

AGU law that was passed earlier this year in this whole situation has been quite politically active with respect to the <unk>. The yes in my backyard versus the Nimbys. The known my backyard groups and that's going to be an ongoing battle. So I think personally given that there wasn't a new law that was out there.

Before and it had relatively little impact that that's going to continue to be the case.

There was a.

La times article.

That was recently written.

And it said estimate I don't know where this estimate came from them, but I'll just mentioned it for the sake of the.

Of transparency it mentioned that estimated one 5% of single family homes are likely to use SB nine.

So I suspect that will be high and but the back drop of this is that governor newsome and various other sources.

Indicated that the state is short millions of homes and the likelihood the SB nine in SB 10 will change that I think is very unlikely.

Alright, Thank you very much there and I'm just wanted to touch on the trajectory of potential renewals going forward given the CPI.

Regulation.

Would you consider putting it pushing a little more on that lever and future rent negotiations.

Two to make sure that you know.

Over the span of a few years youre able to get to market.

Quicker or do you see that being just playing out similarly.

Similarly, how it has in the past in terms of the <unk>.

Difference between renewals and new move in spreads.

Well you know.

The CPI.

Plus five.

It's that it's capped attack so it is not.

It's not a metric that that we have flexibility to push.

At our discretion and you know we've been operating in this market. Even before 2014 82, we have assets that have rent control and over a long period of time.

Comparable growth rates and we've operated well under these circumstances. So we just we don't think this is going to fundamentally change our ability to.

To achieve our return targets.

Thank you our next questions come from the line of Joshua <unk> with Bank of America. Please proceed with your questions.

Yeah, Hey, guys. Thanks for the question.

I was just.

Kind of curious how youre thinking about pushing rate fall winter it looks like some of your markets you saw a little bit of an occupancy dip.

Maybe maybe.

It's a different strategy across markets would be great too.

We discussed that as well.

Yeah.

Yeah happy to.

What was so this is an unusual year in that normally we peak around July.

And so starting say end of July we start to have a deceleration for six months.

This is an unusual year in that we had this huge ramp up yeah. We went through a big negative I think it's like negative 10%.

Market rent growth in Q1.

Pete.

Around.

It depends on which markets Seattle and.

Northern California peaked around August and Southern California is just peaking now like as we speak.

So.

Very different from that perspective, having said that.

That natural seasonality.

Does it play itself out and so the question is really a manage your issue.

<unk>.

What youre going to what we're going to.

We'll continue to do is focus on at this point.

Wherever we can push rents, but more likely as we head into November December and now focusing on occupancy and I think some people noted that in the third quarter.

A lot of occupancy to fall a bit but I want to emphasize that was because of the strength of the market and now we are.

Turning to preserve those friends and focus on occupancy.

We see that deceleration continued to continue.

That's great.

Maybe just a follow up on that comment that Socal is just taking now.

Is that later tober peak.

Has it been a leveling off or starting to maybe see a little bit of a pullback just kind of curious where it is.

It's kind of it's kind of between mid October and now so say in the past week.

Okay.

Okay great.

Got it.

Thank you there are no further questions at this time I would like to turn the call back over to Michael Schall for any closing remarks.

Thank you operator, and thanks, everyone for joining our call today.

We'll look forward to seeing many of you virtually speaking at the upcoming NAREIT until then stay well and again, thank you for joining the call.

Thank you for your participation. This does conclude today's teleconference. You may disconnect Goodbye.

Have a great day.