Q2 2019 Earnings Call

Good day.

And welcome to the Essex property Trust second quarter 2019 earnings Conference call.

As a reminder, today's conference 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 in the companys filings with the S.P.C.

It is now my pleasure to introduce your host Mr., Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you Mr. show you may begin.

Thank you operator, welcome everyone to our second quarter earnings Conference call.

John Burkart, and Angela Kleiman will follow me with comments before we open the call to Q and a.

Results for the second quarter of 2019 exceeded our expectations with core FFO per share growing 6.1% compared to the second quarter of 2018, we are pleased to raise our full year core FFO guidance by 20 cents at the midpoint.

Which is attributable to strong operations and improving cost of capital and solid execution from the Essex team.

Angela will provide more details about the quarter and the increase to our full year guidance in her remarks.

2019 is playing out mostly as expected.

With market rents for the Essex Metro's remained unchanged at 3.1% as detailed on F 16 of the supplemental.

Generally the tech markets continued to outperform led by San Francisco, and Seattle, While Southern California has lagged expectations.

Looking at job growth on page S 16, San Francisco's estimated job growth was revised upward from 1.7% to 2.6% pushing its estimated 2019 rent growth to 3.5%.

As noted last quarter, Southern California job growth had a slow start to the year and has since experience a modest acceleration.

June trailing three month job growth in southern California was 1.3% equal to our forecast on page S 16.

We will briefly comment on several indicators that support our expectation for continued job growth and housing demand all of which are consistent with our belief that the west coast vibrant economies remain well positioned for future growth.

Beginning with office development, which continues to perform at a healthy pace and is required for job growth.

For the nation under construction office properties represent 2.1% of existing office stock.

Within the Essex footprint, all counties, except Orange and been tour are producing new office space at a greater pace than the national average.

The Bay area leads the West Coast and office development with over 16 million square feet or 4.9% of stock currently under construction.

In Seattle, nearly 5 million square feet of office was under production or 3.3% of stock not including the planned expansion of the Microsoft campus with an estimated 3 million square feet of office space.

We also track the job openings at the top 10 public Tech companies all of which are headquartered in an Essex market.

As of June Thirtyth. These job openings were up 19% year over year and remain near all time highs since we'd be I began tracking the data several years ago.

It's worth noting mentioning that Amazon continues to actively hire in Washington State, where it has approximately 11500 job openings.

Venture capital financing remains at record levels in the Bay area. This past year with about 60 billion committed and the Essex markets accounted for 62% of all U.S. venture capital funding.

San Francisco led all U.S. markets in VC funding the past year with almost 42 billion invested followed by Silicon Valley with almost $19 billion invested the highest levels recorded over the past 20 years.

I'm paralleled access to skilled workers and growth capital continue to attract entrepreneurs to the west coast.

Recent ipos of Hooper lift slack and Pentrust should catalyze growth given.

Greater access to capital and improve liquidity. They joined other publicly traded tech companies many of which continue to expand in the Bay area.

Google for example was actively buying or leasing additional office space in San Francisco and the Silicon Valley communities of Mountain view, Sunnyvale and San Jose.

In San Mateo County, Facebook, and Youtube expanded in San Bruno Burlingame, and Menlo Park.

We believe that a stronger IPO market will likely drive other long term benefits to the local economies.

By one estimate.

Several recent Ipos have created 6000, millionaires, which will ultimately unlock previously illiquid equity positions.

At some point.

Some of that wealth will likely be redeployed, which will increase consumption and set the stage for new startups down the road.

A strong labor market shortages of skilled workers at low unemployment rates continue to push incomes higher.

Essex weighted average unemployment rate was 2.9% as of May and the median household income grew an average of 5.3% in the second quarter.

[noise] with market rents growing in the 3% range rental rental affordability continues to improve in all of our markets.

Turning briefly to apartment supply our delay adjusted estimate of around 36000 apartment deliveries and the Essex markets in 2019 has not changed.

And we expect a similar level of deliveries in 2020, albeit with some meaningful regional variations.

Turning to the investment markets our outlook is much improved relative to conditions experienced in 2018.

Significantly lower interest rates and strong equity markets have substantially improved our cost of capital in 2018, we were a net seller of apartments using the proceeds to really invest in development preferred equity and to fund stock repurchases.

We are now mostly focused on acquisitions and preferred equity investments. We are pleased to announce another accretive acquisition this quarter, which was a high quality property in a market we know well.

At this point, we hope to exceed the high end of our acquisition guidance range of $400 million.

Overall market conditions for acquisitions have not changed much this year. Despite the dramatic reduction in interest rates apartment buyers continue to target value add opportunities.

Which results in greater competition for these deals and leads to compression in cap rate spreads between value add and core properties.

Even newer properties are being marketed.

With a claim of a value add component.

In this environment, we remain focused on our disciplined underwriting process with market selection and timing our primary concern.

Our disposition activity on the other hand.

We'll likely end up below the low end of our $300 million to $500 million guidance range, given our improved cost of capital.

Finally, we note that shortages in new construction Labor force continued to cost development delays.

Both in the Essex pipeline and more broadly.

As noted on our prior calls the combination of long entitlement processes in the coastal markets at a time when construction costs are growing significantly faster than ally compresses development yields.

For these reasons, we continue to believe that preferred equity investments in apartment development deals generally offer superior risk adjusted returns over direct development.

That concludes my comments overall, we are very pleased with our Companys progress year to date and wish to thank all of the Essex employees for their hard work I will now turn the call over to John .

Thank you Mike.

We are starting the second half of the year with strong momentum achieving 3.5% revenue growth in the second quarter.

Financial occupancy for the same store portfolio was 96.6% 10 basis points below the prior year's period, and 30 basis points less than the first quarter, while market rents were up in Q2, an average of 3.4% over the prior year's period.

Putting us in a favorable position as we lock down peak market rents.

Our turnover in Q2, 2019 was 46.4% on a trailing 12 month basis, which is down 3.2% from the comparable period ending Q2 2018.

Although there are some pockets of weakness is supply interest local the local market offering large concessions the west coast markets overall are performing above our original expectation largely driven by better employment growth in the Bay area.

As a result, we are raising our same store gross revenue guidance for the full year by 25 basis points to a midpoint of 3.3%.

I'll now I'll note that third party economic research estimates for Essex market rent growth continues to be inaccurate. For example, one vendor stated that our June 2019 rents were up only 40 basis points over the prior year when in reality they were up 3.8%.

Strategically, we will continue to favor achieving market rents over higher occupancy taking advantage of the strong market conditions to lock in higher rents.

Regarding new multifamily supply the pace of deliveries in Essex markets remains in line with the delay adjusted forecast, we introduced last fall and we're maintaining our estimate of roughly 36000 apartment units. This year, which is consistent with 2018 volumes. Our estimates remain below third party projections, but we expect additional construction delays in the back half of the year to bring third party figures down closer to our forecast.

Construction remains concentrated in a handful of urban core sub markets led this year by downtown by the downtown Los Angeles, and Oakland deliveries also remain elevated in Seattle, but strong job growth is supporting the rapid absorption of new units and we are encouraged that the pace of new deliveries in Seattle is poised to decelerate in 2020.

Beyond 2020, we would highlight that new multifamily permits in the six markets are down 11% over the past year on a trailing 12 month basis, suggesting that the near term pace of deliveries represents a plateau followed by gradual deceleration of new supply growth.

Moving onto a market update.

In Seattle employment growth continues to outpace the U.S. and other major east coast markets posting year over year growth of 2.9% for the second quarter of 2019.

Amazon job openings remain at peak levels, while office absorption stored in the second quarter as large deals were delivered and occupied.

Each of our four Submarkets, North South Seattle, CBD, and east side performed well growing revenues between 3.2% and 4.5%.

Moving down to northern California job growth in the San Francisco Bay area averaged 2.5% year over year in Q2 led by San Francisco at 3.7% growth.

As Mike mentioned, the continued expansion and expansion in the Bay area is evident in the recent ipos and sustained highs in VC funding.

And the second quarter, we started two lease ups.

Milo a 476 unit property in Santa Clara is now, 22% Preleased offering one month free rent.

Station Park Green Phase two with 199 units in San Mateo is 24% leased offering concessions up to six weeks.

Last we started pre leasing 500 fulsome with 537 units in downtown San Francisco scheduled for initial occupancy in the third quarter.

Year over year same store revenue growth in the second quarter was strong on the peninsula Submarkets with San Francisco, achieving 5.9% cemetery, achieving 4.4% followed by San Jose at 3.9% and freemont with 3.6%.

[noise], San Ramon and open CVD came in at 2.4% and 2% growth respectively compared to the prior year's quarter.

Continuing south Southern California continues to perform at the lower end of our markets largely due to lower employment growth the region and Lea County, each achieved 1.3% year over year job growth, which is in line with our jobs forecast on page S 16.

Revenue growth in Q2 was led by Woodland Hills, with 5.2% long beach with 4.7% Westell at 4.4% and Tri cities with 2.1%.

Our L.A. CBD revenues were down 2.2% due to the impacts of the supply with downtown lease ups offering six to eight weeks free rent plus other incentives such as free parking.

In Orange County jobs in the second quarter ticked up to 1.2% year over year.

Revenue growth in North Orange sub market achieved 3.3% growth well, the south Orange Submarket achieved 1.8% growth over the prior year's quarter.

Finally in San Diego year over year job growth in the second quarter was 1.6% tend to basis points higher than the U.S.

The Ocean side Submarket continues to lead the San Diego market in year over year revenues, achieving 4.8% growth in Q2, followed by North City in Chula Vista, Submarkets, with 3.6% and 2.6% growth respectively.

Currently our portfolio is at 96.2% occupancy and our availability 30 days out is 5.2%.

Thank you and I will now turn the call over to our CFO Angela Kleiman.

Thank you John I'll start with a brief review of our second quarter results, then focus on the increase to our full year guidance.

Beginning with the second quarter performance I'm pleased to report that we have achieved a core AFFO per share of $3.33.

Which represents a year over year growth rate of 6.1%.

This result exceeded the high end of our guidance and represents 11 cents beat to the midpoint. The key components of this outperformance are as follows.

Three cents from same property revenues three cents from lower interest expense non same store revenue and other miscellaneous items and five cents from property tax savings that refunds, primarily from lower Seattle millage rates for 2019.

This is contrary to our experience from the past several years, whereas Seattle property tax increase has been in the mid double digits range.

[noise] favorable year to date results enabled us to increase the midpoint of our same property revenues by 25 basis points, while the benefits from tax savings and refunds enable us to lower the midpoint of our same property expenses by 80.8 basis points.

The combination of these revisions result in a full year same property NOI growth of 3.7% at the midpoint.

Which is 65 basis points higher than our initial outlook and near the high end of our original guidance range.

In addition, we are raising our core AFFO per share guidance for the second time this year.

For the full year, we are raising core FFO per share by 20 cents to $13.20 at the midpoint.

Approximately 13 cents of this race relate to improve and Hawaii expectations.

And the remaining seven cents comes from a combination of lower interest expense.

Acquisitions and preferred equity investments made to date.

On the preferred equity investments, we have exceeded the high end of our guidance of 100 million.

And this is primarily a result of larger deal size in this year's transactions.

Lastly onto the balance sheet.

In the second half of the year, we have around 100 million of debt maturities and we have the ability to pre pay 290 million of debt, which matures in 2020 without incurring any prepayment penalty.

We will continue to be opportunistic as we consider our refinancing alternatives to optimize our cost of capital.

Currently we have approximately $8 billion available to us and our 1.2 billion lines of credit.

And our leverage level remains conservative a five and a half times debt to EBITDA.

I will now turn the call back to the operator for today.

Thank you.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue in order to get to everyone's question. Please limit to one question and one follow up question then jump back into queue for any additional questions for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.

Our first question comes from the line of Richard Hill with Morgan Stanley . Please proceed with your question.

Okay.

Richard Hill. Your line is now live. Please proceed with your question.

Our next question comes from the line of Trent true Yellow with Scotia Bank. Please proceed with your question.

Hi, good morning out there. So the same store revenue guidance raise was very nice to see and you brought up the low end of the range. So Mike with the positive market conditions. You cited how much consideration did you give to adjusting the top end of the range.

I'll start with that and then maybe Angela will have a comment.

You know obviously, we hit the top end of the range in Northern California, but we were pretty close to the midpoint or little bit above the midpoint in the other markets and so we thought there was plenty of room within the range.

So we didnt need to move it we cannot move rents.

Super quickly because we have to turn the leases and in the second half the year, we we turned fewer leases than we do in the first half of the year. So I think that the guidance ranges appropriate where it is now and will do you have any thing Dan.

We had a.

Guided to a.

Tougher first half an acre.

And they are lighter second half originally with the midpoint is three and given where the first half came in certainly we.

Comfortable with where our guidance ranges at this point, but having said that keep in mind that the second half now, we'll contemplate a heavier supply and so in that environment you know it didnt.

It Didnt make sense for us to raise the high end of the guidance range.

Okay I appreciate the commentary there John you mentioned turnover keeps improving on a year over year basis, or how long is that sustainable and is there a level of turnover at which point you say, you'll start implementing larger rate increases.

[laughter] well is far as the rental increases we.

Are very focused on our customers being fair and ER and their entire experiences of course includes what they pay and so we typically.

We will not raise rents above the marketplace, that's effectively set in the marketplace as far as how low can turnover go I would love to see it continue to go lower I think what's driving the lower turnover at this point in time or a combination of factors one of them being.

The fact that our assets are well located of course. They always have then so that hasn't changed but what does change is the quality of life in many of the metro traffic continues to increase and as it increases it. It makes our assets are better relatively then other options. So that is one angle and other angle as we continue to focus on the customer experience at the sites and we do have room to continue to improve that we will continue to work on making all of our customers have the best experience possible.

And finally affordability overall in all of our markets continues to improve as incomes grow significantly faster than than rents and so it's putting a lot less pressure on people to move for financial reasons, whether it's further away from their jobs or to other areas. So I do think there is some continued room to run I think it works best for both our customers and ourselves to have lower turnover. So we're pretty pleased with it.

Great. Thank you.

Our next question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thanks.

You are seeing more attractive acquisition opportunities at least four since the recent past you mentioned your may exceed the high end of acquisition guidance. So how are you thinking acquisition pipeline today.

Yes, Hey, Nick it's a it's Mike.

The acquisition pipeline is.

It's pretty decent I would say that the the fact that we're going to exceed the high end of the range is more a function of not having a real aggressive high end of the range given conditions at the beginning of the year, which means we had a much higher cost of capital and as we fast forward to today.

Interest rates have declined pretty dramatically and.

There's a lot more interest in properties. So I think it's more a function of.

Theres enough deals out there and our pipeline is a few hundred million, but there's no guarantee we are going to.

Close all or even some of those deals, but we're we are much more in the hunt. This year again, if you go back to last year, we were unable to make the numbers work. We were selling property were a net seller of properties selling property Eightth and hope in downtown La for example for a sub four cap rate and buying stock back. The conditions are just so much different so we are back much more.

Interested in the acquisition market.

Thanks, and then just maybe on the funding side historically, you've been pretty active on issuing a repurchasing shares when it makes sense looks like for most of the second quarter you were trading above consensus that Navy given that acquisition pipeline and.

And as they use for that capital.

Why didn't you issue any ATM equity in the second quarter.

Andrew will have the answer to this but I'll start I mean, the simple answer is that were debt to market cap is about 22%. So we just don't need to de leveraged the balance sheet in fact.

We don't.

Have any interest at all in de leveraging the balance sheet further and as well we feel like we've managed it to where we want to be sort of late in the economic cycle and so we're perfectly comfortable with where it is now and in fact could increase leverage a little bit not that we're necessarily planning to do that but we feel comfortable doing that Andrew do you want to add to that sort of thing.

Hey, Nick in terms of.

The equity issuance activity. If you look at our acquisitions today, we really didnt have a need.

Because.

Fire via email.

Sure and the preferred equity investments they fund overtime Readably.

And so the funding is very small, but generally speaking.

Addition to Mike's comment on our leverage level.

We do look to match fund our investments relative to the cost of capital to optimize that yield.

So even though our stock.

At any given point in time be trading at above consensus and maybe we will still look for ways to make sure that town.

The.

That that funding.

Is the most attractive and we have as you know several alternatives to how we can fund and investment and so it may may or may not be.

Yes, the common equity issuances.

As the first thing.

Makes sense. Thank you.

Yes.

Our next question comes from the line of Austin Wurschmidt with Keybanc capital markets. Please proceed with your question.

Hi, Thanks for the time, Mike You mentioned you view preferred equity today is a more attractive risk adjusted return versus development. So I'm just curious what it would take for you to restart the development pipeline or what spread maybe you'd need between cap rates.

To justify the risks you see today.

Yes, Austin, it's a good question and again the driving dynamic there is that construction costs are growing faster than rents in general and with.

Entitlement processes in California stretching out three to five years in many cases.

You end up.

In a potential for lower yields on development than you otherwise have I can trust that with the preferred equity where were coming in just before the start of construction. So the all about Predevelopment period is is in the past and were coming in starting construction. The next day and so the risk reward equation is much different.

Having said that we look at a lot of development transactions and so it's not for not trying to make them work, we just have been pretty selective.

Given where we are our perception of where we are in the economic cycle and the risk reward equation.

And to get us interested in direct development, we would like to see between.

A 100 to 150 basis point.

Cap rate premium too.

Stabilized yields which for a quality property, let's say or around 4%.

Right now so we'd be looking for that and again looking at the risk profile of what the entitlement process looks like how long it's going to be in some of those other considerations in terms of our direct development appetite.

Okay I appreciate the thoughts there and then just second for me.

You discussed 2020 supply is going to be projected at this point to be a similar level as 2019.

But you did mentioned there is some variations and where that supply is concentrated could you could you just give us a little more detail of some of the moving parts by region.

Sure of course.

In our our research team.

Goes and drives all most of these sites and so we have really good intelligence and.

As John mentioned some of the data vendors.

Have much different numbers for.

Multifamily supply projections, and we think our our numbers a proven pretty accurate so really.

Kudos to the economic research team for that but so as you point out yes, we have about 36000 units in 2019 and about the same number in 2020.

The Big Movers are number one in Orange County, which goes down about 40%.

And.

Actually San Jose goes up about 40%, it's not a trend, but not a tremendous number of units goes from 2700 units at 3800 units.

And Oakley will go up about that same percentage and then.

And then we will.

And then Seattle goes down.

About a third 2900 units. So those are the driving forces and again it nets out to about zero increase.

Great. Thank you.

Thank you.

Our next question comes from the line of surely Wu with Bank of America. Please proceed with your question.

Good morning, guys and thanks for taking the question good morning.

So John .

Oh and your call you and even previously you mentioned that the series and emphasizing our right.

Dr Rob occupancy.

And occupancy actually was down 10 basis points compared to what you would have been 20 basis points you mentioned earlier this year.

I was wondering what's going on there that the strong man.

And is that going to continue into the rest of the Rts continue.

Back that occupancy to come down to that 20 basis points you mentioned previously.

Sure. So the simple answer is yes for the year I expect it to.

Ticked down 20 basis points from where it was last year, but within that a little bit more detail. So as as mentioned earlier the supply picture Theres more supply that is coming onto the market in the second half it's about an increase of about 25% and it is my expectation because seasonally demand goes down just a normal aspect of our markets. So as the supply increases and demand slightly decreased to just because of seasonal factors I think there will be an increase in concessions and that will.

Caused us at the end of the day too.

Compete harder by either.

Consumer offering concessions at some of the stabilized assets or increasing what we're doing or allowing some things go vacant longer at the end of the day.

Yes, I expect that they'll just be a little bit more pressure and that's part of the answer as to why.

We increased guidance, where we did and we're comfortable with it.

All right thanks for that color and.

Hi.

I noticed that in Q2, it was slightly higher than usual.

Right and I was wondering if that.

I think I'll give more color.

And that was a one time thing and how we should expect capex to trend for the rest of the year.

Sure, Yes, the original guidance anticipated an increase too.

1600 unit range and.

I expect that to be closer to a run rate than where we were theres. Numerous factors that helped drive. This the same factors that drive the increase in development costs that we talked about on a regular basis increased labor and materials cost. So that's the big factor and then of course some of the newer buildings with the systems and other things that we have that we bought and built they also typically run higher in capex as as on a per unit basis, not a percentage, but a per unit basis.

Great. Thanks, John .

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

Hi, good morning out there guys.

Good morning Rich.

So I've got a thanks I've got a two parter on affordability here. So I heard just add Mike that you put out in terms of affordability and.

Rent growth and income growth I'm wondering if you're actually seeing.

Affordability improve empirically in terms of the new leases that you're signing.

If you're noticing that in sort of the screening mechanism and then separately from that.

We started to see home values and home prices in the Bay area, maybe roll over a little bit.

Maybe in other west coast markets as well is there any read through on affordability related to that or is that sort of a separate separate issue.

Yes. Those are those are all great great questions its hard to get down to a very granular level on this affordability issue.

Yes, we've been tracking this for the better part of 30 years now and.

It's one of those market indicators kind of bigger picture indicators that we know is really important and.

By that I would say.

Let me give you a couple of.

Statistics so between.

2010, and 2015, we had 20% higher rent growth versus household income grow so we had rent growth that.

Dramatically exceeded household income growth and I think that caused some of the concerns that we've had and we've been talking about this affordability issue for the last couple of years largely because of that.

That statistic and then from if I look at it from 2010 to now that 20% higher rent growth and household incomes is now 13%. So we've actually moved the needle pretty significantly as it relates to that rent to income ratio. So I think that is incredibly important and.

I think it's one of the things that we would put on the top couple of considerations for these markets.

We have.

Grown rents.

Very substantially over long periods of time I think between 2012 to 2017, our same store revenue.

Has gone up by about by an average of 7% per year. So thats a lot of lot of growth as we know.

Incomes were pretty stagnant coming out of the financial crisis, and so we again think that is a really important issue as it relates to home prices, which as you point out I think they are down, 6% and San Jose and up about 3% in San Francisco and everything else all of our other metro is it between those two numbers and.

I guess, what I would say as the year before.

It was exactly the opposite we had exceptional home price growth and I think there is a lagging indicator here with respect to interest rate. So I don't think youve seen home prices recover given pretty significantly lower interest rates. So I would expect is home price numbers to get better from this point on just given mortgage rates.

Okay. That's.

Yes, I think thats helpful color.

And my second one here.

Maybe as a follow on topic do you care to opine at this point in the calendar on the the rental affordability Act that is I think currently gathering signatures.

As far as the ballot initiative for next year.

Yes.

The we keep track of it and and for.

Those that.

We don't know what that is it's essentially the industry is calling that prop 10, 2.0, and where there is a potential for a ballot proposition that would amend costa Hawkins.

And on the 2020 ballot and Theres been a certain amount of money.

That has been contributed by Michael Weinstein to support a signature gathering effort.

It's.

I think too early to tell exactly where thats going rich, we obviously track it pretty carefully and we kept our.

Our entity California's for responsible housing.

Alive, and well and organized in case of this so.

Yeah, we'll wait and see what happens and because there is also.

The Assembly Bill 14, 82, which is a state wide rent control law, which started out as a.

In any gouging type of proposal and it's currently in the Senate and it would cap rents at CPI plus seven.

At least that's the current proposal again, it's in the sand it could still be modified from here, but.

I think that that is pretty indicative of a better balance with respect to the discussion on housing on the need for housing in California, again going back to the Governor's campaign.

Campaigning on producing three and a half million homes in California by 2025, Thats about 600000 a year.

By way of background, we produced about 80000 year for the last 10 years on average and so he.

As you recognize the need for more housing and at the same time trying to balance that with the protection of the of the tenant base as well. So I think it's a more balanced discussion and I I think that.

We will have to see where these things come you're going to see action on AB 14, 82 long before you see get an update on what might happen with respect to prop in 2.0.

All right very good thanks.

Thanks.

Our next question comes from the line of Alexander Goldfarb with Sandler O'neill.

Please proceed with your question.

Hey, good morning out there.

Mike maybe just following up.

That last question.

On the whole rent control in discussion on California are you seeing any seepage of what happened here in New York, where the the restrictions and the end there.

The regulation that was passed when they renewed rent control are so onerous that it actually discourages.

Landlords and housing are you seeing any of that creep into the California, political landscape, where California would want to be outmaneuvered by New York or is it.

We're sacramento sort of being led by governor new stem that wants to promote housing and as more cognizant of.

Factors or legislation that would inhibit that.

It's a good question Alex and.

Thank you for that I guess in New York My perception is that that all happened very suddenly and there was a proposal and it was passed almost before.

People could have time to properly react to it and understand the unintended consequences of it.

Whereas I think its different in California, because we've had this dialogue.

Going back to the prop 10 discussion a year ago and in so doing this dialogue of of.

Regarding rent control in general has been ongoing and again. This is why I think the governor.

His comments are so important noting another thing you noted was that there is a perverse incentive not to produce housing in California for a variety of reasons and again he is recognizing the need for balancing that equation and so I think we I think we have a better discussion here and I think that it's been thought through at a greater level than probably it has and some of the other states around the countries.

Okay, and then moving to Seattle, we're actually Bellevue, specifically with all the investment that Amazon is doing in Bellevue and focusing their office development. There are you guys sort of reassessing, how you want to play the Seattle market do you think that you that we would see you guys do more investment in Bellevue or.

Yes, or maybe your existing footprint, you're happy with where it is based on the growth that Amazon is looking at for Bellevue.

You know it all depends on on yields and risk, we we love Bellevue, We love.

Downtown Seattle.

I'd say in general, we're becoming more suburban focus then urban focus because of.

A number of issues there is more supply in the urban core I'd say actually both with respect to office development, but also with respect to apartment development and so trying to avoid the cities that are having these large concessions because you've got three four or five lease ups competing with one another at the same time, so it's difficult to.

The project forward that for these concessions literally change on a weekly basis and so.

I think our strategy is evolving to hey, let's just try to avoid the areas that have massive development.

Given that the rent growth in those areas has been suppressed for.

Pretty long periods of time now so.

We will continue to monitor and I can't predict whether bellevue or Seattle is going to which we're going to outperform were until we're a lot closer to looking at a deal.

Thank you.

Yes.

Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.

Hi, good morning.

John you talked about the development pipeline and concessions earlier when you layer on you know a new supply and stuff that was completed a year ago the might be having its first renewal. The five developments that you either currently have and lease up or will in the next quarter or so are any of those of a concern in terms of concessions that you guys think that you're going to need to lease them up I think you said Milo is currently one month free and then I think it was stationed green. The first phase was six weeks anything that's going to be outside of that sort of range.

Well, let me give a give a broad answer there. So when we have delivered vacant units were greatly incented and this is this is really.

Why it's logical why many of the developers are doing what they're doing as far as free rent, it's not a matter that the market's weak it didn't matter that they're trying to drive a significant amount of absorption fast because Europe option. One is vacant unit option. Two is a lower net effective with the qualified residents and getting cash flow. So we have the same economics, there and of course, it's different when we own the asset I mean, when we have our same store assets right, but we're one of those players on the development. So what we try to do is look for what works best in the marketplace and what the consumers are looking for and and react to that so I expect we'll increase our concessions over time. It is within our plan to do that because it usually happens as we get into the fourth quarter will but we make these decisions literally daily and definitely reviewed intensely weekly. So we'll we'll just follow it but all of our you can tell by their pre leasing performance. The markets are strong and we feel very good about.

All of our developments where they're at.

Any of them facing extreme new supply as Mike was alluding to.

Before.

No we're not in in at this point, we're not in a situation where we have extreme combat.

Okay, and then Angela.

If I look at the same store expense growth year to date, 2.9% sort of implies a low ones for the back half of 19 is that all on.

Property taxes.

Or is there something else that's going to drive Ics same store expenses down into the low 1% range for the back half of 2019.

Yes, Youre right Youre right, its actually mostly driven by property taxes. So between the military coming in lower than expected and we of course have some refunds that term that that we're recognizing in the second half.

Sorry to keep two key drivers.

Okay, maybe squeeze one more in.

Maybe other than market concentration, what's keeping you guys sort of triple B plus from the rating agencies versus an a minus like Avalon in equity.

Believe it or not it's really market concentration.

Okay. That's that's the key driver.

Okay. Thanks, guys.

Yeah, I think the rating agencies are so focused on the number of states versus.

You know the relevance and.

Oh, the actual state I mean, California is we all know has this is like the third largest GDP and incredibly diverse and large having said that.

Yes, I think just the fact that it's a one state is what's tough for the rating agencies to to underwrite.

Okay. Thank you.

Our next question comes from the line of Karin Ford with M.U.S.G. Securities. Please proceed with your question.

Oh, hi, good morning.

Google announced it was looking to develop about $15 billion of real estate in the Bay area with land lease sounds like a significant chunk of that is earmarked for residential do you see this is a significant a medium to long term supply threat and that could be large enough potentially affect my rent growth market rent growth in the region.

Yeah. This is Mike.

There are they are not alone Microsoft has a program I think Stanford University has.

Some discussions about mainly student housing, but there are there are some other proposals of corporations getting involved in housing it remains.

Difficult to figure out exactly what's going to happen in the short term I don't think there'll be any actually short term impact. These are mostly over longer periods of time and I think a lot of the corporate housing is probably strategically important to them and their hiring given that one of the key reasons not to come to the Bay area is concern over housing and housing price. So if you can.

Sure. Some on this relocating to the Bay area that they have a home I think thats a major positive in the hiring process overall I don't think that any of this given the cost of housing.

And the size of these programs I don't think we're going to have a material impact on the markets.

But again, we will face that down the roadways.

Got it and then my second question is going back to your development pipeline Youve got an extraordinary amount of lease up.

Gentlemen, coming in the Bay area in the next six quarters, including 500, Fulsome and you talked a lot about the strong environment in those markets do you think your yields on those could outperform your underwriting and can you share where the deals are penciling today.

You know I think that we've talked about stabilized yields a little bit.

And maybe I'll echo those comments stabilizing somewhere in the.

Five and a half range and this is not today this and won't be in next year, but it will be a couple of years out.

As you can imagine development deals have for example, retail components in the retail components are important because you don't want to have a lot of people don't want to move into a construction projects. We want all of that that construction to be done so.

So that yield is a few years out and.

So I think that for the next year or so you will see some positive.

Increment, but not dramatic.

And is is that five and a half yield number on trended rents are on rents today.

Non stabilized rents.

Pretty much right. Okay. Thank you.

Our next question comes from the line of drew Babin with Baird. Please proceed with your question.

Hey, good morning.

Quick follow on question on them.

Hi, good morning on the lease up properties coming in getting delayed good that explicitly cogs.

Increase to the FFO guidance, where some of these properties you might have some initial drag obviously taking on your expenses.

Mid lease up that might now occur early next year.

Is there any kind of dynamic there and 19 versus 20 with those development projects getting pushed out.

[noise], Yeah drew on on the AFFO guidance, the delay in path, which ultimately I think your.

Looking at the higher capitalized interest on our own.

As 14, it's a it's a couple of pennies of say two cents.

And for this year.

So what that means of course some of that dilution is going to get push next year as we continue to lease up but I think.

The one positive is that this dilution instead of being as concentrated as we thought that would occur this year. It will be more moderate it and it'll just accrue over time similar to feel the impact of supply deliveries that if they all come at once it's obviously much tougher to Digest affairs, they happen more ratably over time, it's much more manageable.

Okay. Thanks for that and I guess, one more topic kind of related to the corporate housing question.

Some of these projects really the rubber meets the road and some of them get entitled some of them proceed.

Im would Essex under the right economic conditions ever consider partnering with one of the corporations and some kind of project and I guess, what would you need to see for that could make sense for us.

Drew this is Mike.

A lot of these corporate housing entities have.

Or proposals have included an RFP type process and so there might be some opportunity to.

To work with some of these companies and there'll be.

There'll be exposed more broadly to the development community. So it probably isn't going to be just us and it will be several projects over periods of time so.

I'd say, it's too early to tell exactly what it means.

And again, we track pretty closely as you know the total amount of competing properties is going to be entering the rental pool down the road. So if we saw a huge impact.

I think during the construction period gives us time to react as well so.

What exactly would those terms be we.

We work in a joint venture on.

Many development deals.

And.

There the markets for those terms, depending upon what side you're on change over time.

And we're looking to actually add some joint venture development.

Deals as we speak.

They're complicated enough that I don't think I can reduce some to magnitude were going to look more broadly at.

The yield premiums that two acquisitions, a measured today with market rents today that I talked about a little while ago and whether we do it in a joint venture or is or ourselves really as a function of how much risk is or upfront in the deal how much money do we have to spec and how long a period of time to have to spec it.

In the Predevelopment period before you begin construction and every deal is a bit different.

Okay I appreciate the color. Thank you.

[noise].

So we lose.

We lose the I don't hear anything.

Operator are you still there.

Operator.

Hector.

Oh.

Our next question comes from the line of Wes Golladay with RBC capital markets. Please proceed with your question.

Hey, good morning, everyone glad we're still on.

Good morning, looking at that slide you put in like last quarter, you had the one about the permits falling.

Quite a bit I'm trying to use that slides through African supply data I Wonder if you guys can give us some insight on when you think peak supply will be in your markets. It looks like next year will be comparable but is it going to be the same thing in 2022 as well in 2021.

Well, yeah, I know that this is John our expectation as it starts to tick down so as I mentioned, we're really at a post plateau right now and we expect it slowly starts to tick down going after next year. So.

Yes, where you put it that way were at peak supply right now.

Okay Fantastic and then when we look at those permits I mean, they're falling quite a bit since the start of that by the middle of last year is that mainly due to the cost that you cite where the the rents are not growing fast enough where do you think the political uncertainty is also having a big factor in that.

I think Oh, yes, yes, both its all the above its how much risk do you take and what types of yields are you expecting high do you get compensated for that risk and.

I'd say, maybe adding to that is yes. The project sizes are getting bigger and bigger and that with the cost per unit is has increased pretty dramatically. So.

Any more.

We are more equity in a lot of these deals on it as we see this in the preferred equity environment, where.

Predevelopment period.

Costs are going up faster than rents and when we come in with preferred equity. Sometimes these deals are short of equity given cost increases and that's causing some delays there. So it's all of us but yes. It all involves.

The relationship between.

Between construction costs and.

And development deals.

Okay and one final one if I may do you have the new and renewal leasing for the quarter and your most of your loss to lease.

Sure I can give that to you so the.

New leases for the quarter second quarter were up 3.4% year over year or prior years quarter and the renewals in Q2 came in at a 4.4% year over prior year and a loss to lease the last we're at 3.5%, which at this point in time because of seasonality, it's going to be at a high point saw compare it to last June . So last June were at 3.3%. So it's about 20 basis points better than last year and within that.

No. So Cal has ticked down sums up to 2% loss to lease and nor Cal and Seattle has gone up so nor Cal is 4.6, and Seattle is a 5% all average rate of three and a half.

All right. Thank you very much.

Yeah, you're welcome.

Our next question comes from the line of Rich Anderson with BC. Please proceed with your question.

Thanks, Good morning out there.

So I recall many years ago, you guys were kind enough to offer 10% cap on annual rent increases.

And I'm wondering obviously thats, a moot point today, and Mike I'm asking is that situation of excessive rent growth fundamentally over in your opinion in your markets or is or is it simply supply and that has to kind of readjust, where you could get there or is there enough. The political side that if you dare to go there again that you get you reignite sort of the rent control conversation to a higher level.

Yeah, Hey, rich it's a it's a good question I think.

The where we are in the cycle is probably a key consideration there you tend to get.

More rent growth when you when you go through recessionary period, there is very little development and so jump start growing and you end up with a supply demand imbalance for housing and you can push rents.

More aggressively than than we can now now being constrained primarily by by income growth and affordability type issues. So as it relates to the 10% Youre exactly correct we.

Okay internally tapped our renewals at 10%.

For many years, while when we had much more robust rent growth and we would do it again I think it's.

Number one the right thing to do but I also am always concerned about we're always concerned about.

The impact on.

Local regulators et cetera for example, when residents get a very large rent increase.

They often go into the city hall in and tell the local officials about these huge rent increases and.

We get phone calls and pushed back almost immediately and in fact in some cases in connection with CA and some of the.

Rental groups, we take part in trying to mediate some of these situations. So.

I think it's just a good practice to cap renewal ransom at 10% and it's something that we've done and we would do again.

Okay, Great and then.

On your earlier comments on office development found interesting as I, usually do but I'm wondering if you guys also track pre leasing of the of that office development, which is really where the rubber meets the road as it relates to future demand for multifamily there could be some stupid development in there.

Yes, Hey, rich did it for sure will can change and but eventually I think the those office buildings. We would all agree will be will be completed so yeah, you're right in the short term absorption really matters in the longer term. The fact of the property exists is probably what matters more John you want to comment yeah, and I'll just add in the developments on the West coast overall that Mike was referencing there about 75% pre leased on average across the market. So huge pre leasing going on and that is the nature of most office development. These days. They typically have a big portion of their tenants before they break ground or at least in our markets and let me. Let me end with one final comment rich and that is we're always concerned that people are going to find California, less desirable and some of the tech jobs moved to Austin for example, so again, the fact that big investments are being made.

In.

Our markets is really important to us we view that as sort of a leading indicator what are the tech companies doing.

Can everyone's concerned about migration out of California were concerned about it as well again, we try to cobble together, a number of sort of leading indicators that give us some sense of what decisions are being made by developers and some of the big Tech companies.

No I think its good practice I appreciate it thanks very much.

Thank you. Thank you.

Our next question comes from the line of John Paul Lasky with Green Street Advisors. Please proceed with your question.

Thanks, Angela could you remind us what you're expecting for property taxes in Seattle property tax growth rate to be this year.

And are the favorable Reassessments do you think it's the beginning of a multi year trend or you know the fever prop finally, breaking in Seattle.

Well on the.

The tax piece, we're expecting.

Come in at the midpoint Corral.

Say in the high 1%, so say 1718 ish somewhere around there.

In terms of the trend boy, that's a tough one I wish I had that crystal ball.

It's interesting because in the past three years.

Our Seattle property tax has gone up.

Tweens say.

15, I think it was 15% for two years and 17% for one to three years.

And this year it was a decrease.

And so.

That that and we actually didn't budget.

The 15.

I certainly that budget decrease.

So I'm not entirely sure what's going to happen next year I think we're going to just try to take up best estimate talk to our consultants and get some advice on that but if you have a better solution by all means please call me.

Well I guess the I guess the short question is there is there anything lumpy one time benefits this year that won't persist.

In Seattle.

Nothing significant we have some refunds, but there.

Those numbers are not big enough to Uh huh.

To this five year over year comp.

Okay.

And Mike on the regulatory front, and Washington, or what are your political contacts, saying about a 2020 legislative session and rent control chatter gain steam again in Washington.

Thank you.

Our next question comes from line of Hardie Gol with Zelman and Associates. Please proceed with your quick.

Hey, guys can read some strong quarter on the guidance raised I just had a couple of questions for you.

The first one on common anything John made.

So permits are declining your over your across from markets.

But the delay environment that's persisted.

Do you think there's risk that even though supplies plateauing now and it's kind of getting smoothed out with you know consistent delays.

But there's still this pipeline of supply that you know is.

Started but not yet completed or maybe you know stuck in pre development that you know already has been permitted in past quarters.

That will continue to dribble out supply even beyond 2020.

No early 2021 and onwards.

And my second one is is easier.

Sorry, you go ahead I'll ask it afterwards, yeah no. They didn't say so you know again is is we've said we literally drive all the different sites. We we take down from a process perspective, we have multiple vendors providing information as to.

Permit that are obtained sites that are started et cetera, and then we have a mobile a program where people drive all the sides and upload information into the cloud as to where they're at what's going on and we cleaned up that day do quite a bit in reconcile what we what we get from the from the vendors to to what we see on the street. So I think we have our hands around what's going on really well probably better than than most in so that's what's in construction right now and then you know the permits we reconcile that permits to the actual as bills and obviously, there's typically some linkage going back the other way things more things get permitted than actually getting billed for various reasons, but at the end of the day I I think we have our hands rather pretty good I think we're at this point in time supply has plateaued, we'll start to see a chick down and it would take something else like this you know increasing rents or something to change the pitcher but it is Mike has said many times construction costs are growing faster than red.

So it at this point, it's it looks like we've had the hit the P.

Thanks, that's very helpful. For my second one stuff should be pretty straightforward I guess on the Seattle kind of tax savings.

How much of that was just a marketing will probably benefit you know others were and you know on assets there.

And how much was that was something that was you know an ethics push where you have an appeals process or some kind of mechanism, where you try to get you know a favorable appeal or saving.

Yeah that sounds good question, it's mostly market driven so this is a seattle millage rate assessment and sell it to assess across the board.

As far as the savings Sweet go through a refund process every here and there.

There's some benefit there, but that's not that's not.

Yes, good morning out there.

Welcome Adam Okay.

Mike I guess I'll start with an oldie, but goodie.

What.

Your current view on the Essex footprint, California is not getting easier cost taxes regulation keep keep on increasing.

Senior peers going to Denver, you had once been in Portland, the weather's nice and there's seem to be buried in Honolulu.

I'm curious if your view on your footprint here has changed or evolved at all and if so how.

Well handle it's a good question it is.

The probably the most essential and important question of all of them and we go through a process each year review of strategy with our board and.

We kind of start with that that very question and we look at.

Many major metro is around the country and try to distill them down into supply and demand and what it means and so it's an ongoing question and an ongoing process here in Essex.

From.

Where we ended up on this in the last year is we think that the resiliency of the technology World is something that's going to probably will be with us for several cycles and that that along with.

The supply constrained nature of these markets and the difficulty of building here is going to keep.

A premium on on housing and there's this virtuous cycle high cost of housing drives wages higher.

And which allows rents to go higher which you see in very few places and so.

We concluded and continue to conclude we are well positioned in the west coast markets.

Thank you for that.

And then.

I guess.

Back to I guess growth.

As you very well know, it's very hard to buy in California, not much trade hands prop 13, being a clear headwind. So building is really the only game for the multifamily guys.

For growth in a Golden state. So I guess I'm curious if there's anything your shadow or future pipeline that pencilling, yet on getting close to pencil and given the continued rent growth notwithstanding the rising construction costs you guys have mentioned.

And if so where and as an add on to that maybe you could talk about potential interest in doing mixed use development as well.

Yes, it's a good question anyway, and we do have some land inventory Theres a phase four of station Park Green.

And there are a couple other.

Smaller projects that.

Our behind our current pipeline.

That we will likely.

Be active on and as I said earlier, we continue to look for.

Development deals.

And.

The challenge there as we stated earlier is that construction cost growing faster than rents, which means we have to see a fairly quick.

Period between when we are financially committed to when we start construction because that's the period of greatest exposure. So.

If it's pretty challenging I would say again, we continue looking and we have some deals that we are working on.

Remains to be seen whether we move forward with them or not so and again transitioning over to the preferred equity where we don't have that upfront risk because we're not we're not financially committed from wind during the entire month period from when the interim period starts until when you start construction we come in at construction, we eliminate that part of the risk and we've been very active in preferred equity and we will continue to do that as Angela mentioned were above the top end of the range of share in terms of.

Commitments there so.

If this is kind of a mosaic and we put the pieces together in every deal is unique unto itself and we try to make decisions that that makes sense and the broader scheme of things and it's hard to.

Bring it down to kind of larger trends because every deal is a little bit unique so I would say that more of the same that we will look at.

Element deals whether they have a mixed use component because obviously there are many.

Deals that have mixed use components there are.

Other actually other recent other landowners that are interested in having a multifamily component.

There.

No shortage of discussions out there for sure and we will look at all of the above and try to make good value decisions and make sure that I think the key part is that we are compensated for the risk that we take relative to our other opportunities.

Great sounds great. Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Michael Schall for closing remarks.

Thank you operator, and I'd like to thank everyone for joining the call today, we hope that you are having a safe and enjoyable summer and we look forward to seeing many of you at the B of a Merrill Lynch Conference in September have a good day.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.