Essex Property Trust Inc (ESS) — Q2 2020 Earnings Call Transcript

Thank you for joining our call today. The unprecedented reactions from the COVID-19 pandemic have presented many challenges that have affected every part of our business and indeed our lives. We'd like to offer our best wishes to all those impacted by COVID-19 and thank you for participating in the call today. On today's call, John Burkart and Angela Kleiman will follow me with comments and Adam Berry is here for Q&A. Our reported results for Q2 reflect these unprecedented challenges as we reported a 5.1% decline in core FFO from a year ago, representing an abrupt turnaround from very favorable conditions throughout this economic cycle. Our first priority upon receiving COVID-19 related shutdown orders was to ensure the safety of our employees and residents while reacting thoughtfully to shelter-in-place restrictions and regulatory hurdles that had been especially pervasive across our markets. Unprecedented job loss from mandatory shutdown orders in March suddenly insignificantly reduced rental demand, leading to lower occupancy in April, followed by a steady recovery throughout the quarter. Ultimately, occupancy fully recovered and was 96.2% in July. Delinquencies also spiked due to job losses and anti-eviction ordinances, which often contain collection forbearance provisions. Proposed regulations that could further impede the collection of COVID-19 related rent receivables led us to adopt a conservative approach to bad debt. During the second quarter, the direct cost of the pandemic in the form of greater residential and commercial delinquency, lost occupancy and COVID-19 related maintenance totaled $27 million. We view these costs as mostly temporary and have seen improvement in each category in the second quarter. John and Angela will provide additional detail as part of their remarks. Fortunately, the economy improved quickly from its April trough as measured by resumed job growth, lower continuing unemployment claims and fewer WARN notices. In addition, many businesses have found ways to adapt to the virus by creating new safety protocols and procedures. After declining nearly 14% in the Essex markets during April, by June, year-over-year job declines had moderated by almost 400 basis points to 10.1%. We expect gradual improvement to continue in the second half of the year. Turning to the West Coast markets, technology companies are a primary driver of wealth creation and growth in the Bay Area and Seattle. Most of the leading tech companies remain in growth mode with minimal damage to their business models and many of them, such as Amazon, Netflix and Zoom have benefited from the shelter-in-place restrictions, resulting in greater market share. Generally, it appears that many large tech companies have slowed their pace of growth while allowing greater flexibility for employees to work-from-home. For example, we track the open positions at the 10 largest public technology companies, all of which are headquartered in an Essex market. Recently, these companies had approximately 17,000 job openings in California and Washington. These large company tech jobs are down by about a third on a year-over-year basis and are now at about the same level as we saw in 2017. Many of the top tech companies including Apple, Alphabet, Microsoft, Amazon and Salesforce are planning for employees to return to the office and have established related dates, which range from October 2022 to July 2021. This is consistent with our comments during our June NAREIT meetings, whereby we expect employees in the post-COVID era to have greater work-from-home flexibility while also needing to report to the office at various times to maintain team dynamics, acclimate new hires and pursue career opportunities, all of which require periodic face-to-face contact. Venture capital has continued to flow at a healthy pace according to the most recent data. However, we understand that the mix of investments is more focused on companies that have business models that are not directly impacted by COVID-19 and have lower cash burn rates. Southern California has a more diversified economy that has outperformed during previous recessionary periods. While San Diego, Orange and Ventura counties have generally continued this trend, Los Angeles County has notably underperformed. L.A.'s preliminary unemployment rate was 19.5% in June, well above the level implied by recent job losses of 12.3% on a trailing three months basis, and partially explained by the usually large number of gig and freelance workers in L.A. that are not captured by the BLS payroll survey. Filming and content production is the key contributor to jobs and wealth creation in Los Angeles, and the industry came to a temporary standstill. Film L.A. reported that the number of shoot days during the second quarter declined 98% from the prior year across television film and commercials. Despite these challenges, the demand for content is unabated amid the pandemic, and there are reasons to be optimistic. In a joint report called a Safeway Forward, various organizations including the Screen Actors Guild have outlined the process for content production amid the pandemic, which is building production momentum. A key factor impacting all of our markets is the loss of leisure and hospitality and other services jobs, which represented from 12% to 17% of total jobs in June 2019 in the Essex metros. Compared to the total jobs lost in the Essex bucket this past year, these service jobs declined an average of about 30% year-over-year, with the greatest declines in Seattle and San Francisco. These job losses are throughout each metro area, although the downtown locations had the greatest concentrations of affected businesses. We see the recovery path ahead as reversing the pandemic-related declines we experienced this last quarter. In the near-term, progress will depend on the direction of COVID infection rates and the associated governmental limitations on business activity. Given the COVID-related shutdown of film and digital content industries and its potential for value creation, its recovery is essential in Los Angeles. Fortunately, that recovery is underway with the recent restart in the production of daily TV shows such as Jeopardy and Wheel of Fortune in Culver City and several soap operas produced by CBS and ABC. Necessarily crowded motion picture sets and safety mandates will probably make this a slow process. Wealthy areas create demand for restaurants, bars and other services and the related jobs contribute to housing demand, particularly in cities. That makes service jobs systematically important to housing, and we believe that they will recover. Finally, most of the technology industries are in great condition and should be expected to resume greater hiring and growth. Along with unspent wealth accumulated during the pandemic, we expect the recovery of jobs to be strong as the outlook for managing the pandemic improves. In light of the unpredictable nature of the pandemic and with the recent surge in COVID-19 cases and hospitalizations, the course of the pandemic and governmental responses have become intertwined with job growth and other economic outcomes. Thus, we've made the decision to withdraw our forecast on Page S-16 of the supplemental until we have better clarity on the direction of the pandemic. Finally, turning to the apartment transaction market, we sold two properties during the quarter, both of which were placed under contract in May. Pricing for both represented a small discount compared to the pre-COVID period. Both properties were in downtown San Jose, continuing the theme of the past few years of selling downtown locations that are more susceptible to added supply and a diminishing quality of life. Going forward, we expect to grow the portfolio near major employment centers that offer a better living experience. Generally, the transaction market had been slow to recover with very few closed apartment sales and even fewer properties being marketed. The industry is working through key issues in the selling process, such as travel restrictions and due diligence challenges. Given a dearth of transactions, it's too early to conclude how buyers will value apartment properties going forward. A few closed transactions since the onset of the pandemic traded at prices at or near pre-COVID levels, suggesting that highly motivated buyers have taken a longer view when valuing property by treating the COVID-19 specific impacts such as delinquency as a purchase price adjustment rather than long-term reductions in NOI or higher cap rates. At quarter end, we had two additional properties under contract for sale. Both are smaller properties and one of them closed in July. Going forward, our intent is to mostly fund our growth with disposition proceeds. We announced one new development deal in suburban San Diego and we have a robust preferred equity pipeline. As before, plenty of money is searching for distressed real estate which will be scarce with institutional-grade apartments, given extraordinarily low financing costs. As with prior recessions, the existence of Fannie Mae and Freddie Mac virtually assures a source of liquidity for apartments. Yields or cap rates for apartments generally substantially exceed long-term interest rates and related debt, and the resulting positive leverage remains a powerful force in the market. Unlike REIT stocks, private market values in terms of cap rates are generally sticky, meaning that they don't change immediately in reaction to events, but rather seek to reflect the longer-term financial performance of a property. At the end of the day, we believe that the transaction markets will likely recover because lower interest rates will provide sufficient incentive to offset greater perceived risk. Historically, we have found opportunities to add value as markets transition and in periods of disruption. I'm confident that we have the team, resources and strategy to thoughtfully act on these opportunities, consistent with our long-term track record of performance. And now, I'll turn the call over to John Burkart.

Thank you, Mike. Our priority during this period was our people, the safety of our residents and our employees. I'm incredibly proud of what our team accomplished and how they worked together to serve and support our residents through this challenging time. Thank you, E team. Looking at the second quarter of 2020, the occupancy challenges that we faced early on related to a reduction in demand when the initial stay-at-home orders were implemented as opposed to an exodus of existing residents. During May, traffic increased substantially and we took advantage of the relative strength in our market by lowering our rental rates and offering significant leasing incentives in certain markets of two to eight weeks on stabilized properties, leading to an increase in our same-store occupancy of 110 basis points in June. The relative strength in the market continued into July, enabling us to increase our asking rent, decrease our leasing incentives and add another 80 basis points in occupancy. Our availability 30 days out as of the end of July was 10 basis points lower than where it was last year at this time. As our customers adapt to the new COVID-19 environment, we are seeing some consumer behavioral changes that make intuitive sense. For example, with the current work-from-home practices, the value proposition of living in downtown San Francisco has temporarily changed since the restaurants, entertainment and sports venues have shut down. Additionally, the value of having more private indoor space for Zoom calls, high-speed internet and access to open space for outdoor activities have increased demand for suburban assets despite being a greater distance from corporate offices. We have also noted that work-from-home has turned into work-from-anywhere as we've seen several consultants moving back to their original homes and continuing to work for their West Coast employer. Regarding the work-from-anywhere theme, we believe this trend will reverse when conditions permit. We were all positively surprised by the ease in which we all adapted to Zoom and believe that this experience will have a lasting impact on future same-day business travel. However, the loss of a personal connection through frozen screens and barking dogs in the background, so that Zoom cannot replace the value that comes from in-person interaction. If I heard someone say recently, I am done with living at work. We see the changes in consumer behavior within our portfolio, our same-store portfolio in Contra Costa, Ventura, Orange and San Diego at higher occupancies today than in pre-COVID March. Turning to our Q2 ’20 results as presented on page two of our press release, year-over-year revenues declined by 3.8%. On delinquencies, various governmental bodies have enacted and continually extend resident protection along with prohibitions against late fees and eviction. These regulations have been a strong headwind for the industry and our markets compared to other metros. Thankfully, they are temporary in nature. Referring to the S-15, delinquency for our total portfolio on a cash basis was 4.3% in the second quarter of 2020 compared to 34 basis points in the second quarter of 2019. In the month of July on a cash basis, delinquency was 2.7%, which is down from the prior month. In July, 18% of our same-store assets had positive delinquency, meaning the delinquency line item contributed positively to revenues due to residents paying past due amounts. We appreciate that our residents continue to prioritize their rental obligations. Moving on to our operating strategy in this new environment, our operations objective continues to be focused on maximizing revenue. Given current conditions, our strategies will evolve as the market changes and will vary across our market. For example, we will likely run lower occupancy in urban markets such as downtown San Francisco while targeting higher occupancies in highly desirable suburban markets such as San Ramon. Overall, we believe that market occupancy has fallen about 150 basis points and our same-store portfolio is expected to run at a lower occupancy for the remainder of the year. As noted on S-15 of our supplemental and consistent with our expectations, our new lease rate, excluding leasing incentives, was down 5.8% in July compared to the prior year’s period. We expect that market rental rates will remain depressed in the fall due to the seasonal decline in demand. That said, some of the historical factors, such as contractors moving home in the fourth quarter, are not an issue since they've already moved out due to the work-from-home policies in place. On to tech initiatives, we continue to make considerable progress on the technology front as our employees learn how to optimize our new tools. For example, we currently have several leasing agents that are leveraging these tools that enable them to be two to three times more productive than the average leasing agent. We are seeing similar progress with our maintenance systems as well. Our emphasis will continue to be on people first, and we'll try to bring everyone up to speed. However, we expect that through increased productivity and natural attrition, we will both lower our headcount and increase our compensation to our top performers. Another advancement in our technology roadmap includes the development of our mobile leasing app that is on target for a pilot at the end of this year. The app is fully integrated with our other sales tools and will fundamentally change how we interact with our prospects, providing them with a simple, seamless 24/7 mobile experience. Finally, we are now offering ultrafast internet provided by market-leading fiber providers that 10% of our assets, and we expect to complete installation at another 50% of our assets by year end. The ultrafast service is in great demand in our current work-from-home environment and is expected to be a great value-add asset for our residents. Turning to our markets, in the Seattle market year-over-year revenues in Q2 were down 20 basis points and occupancy was down 1%. The greatest decline during this period was in the Seattle CBD, where revenues declined by 70 basis points followed by the East side with a 20 basis point decline while revenues in the South saw an increase of 10 basis points in the same period. In July, unemployment in Washington remained 90 basis points below the U.S. average of 10.7%. In the same period, Amazon's job openings remained at just over 8,000, a year-over-year decrease of about 25%. Moving to Northern California and the Bay Area market, year-over-year revenues in Q2 were down 3.4%, with revenues in San Francisco declining by 6.3% and 7.8% respectively, although San Jose revenues declined only 1.5% in the same period. Tennessee job growth declined the least of our markets in Q2 and was a hundred basis points below the US decline of 11.3. In Southern California, year-over-year revenues in the second quarter declined 5.7% while occupancy declined 2.1%. L.A. was our hardest-hit market with a year-over-year revenue decline of 8.6% in Q2. Our L.A. County sub-markets have declined between 8.4% and 9.7% in the same period with the greatest decline in L.A. CBD. The L.A. economy has been the most impacted out of all our markets with an unemployment rate of 19.5%, leading to a higher delinquency rate than our other markets. In Orange County, the South Orange submarket outperformed the North Orange submarket with a year-over-year revenue decline of 2.6% and 5.1% respectively in the second quarter. Finally, in San Diego, year-over-year revenue declined 2% in Q2, with the exception of the Oceanside submarket, which grew revenues by 2% in the same period, likely benefiting from the military stay-in-place order through the end of June. Currently, our same-store portfolio’s physical occupancy is 96%. Our availability 30 days out is at 5.5% and our third quarter renewals are being sent out with an average reduction in rate of 1.4%. Thank you. And then we'll now turn the call over to our CFO, Angela Kleiman.

Thank you, John. I'll start with a few comments about the quarter followed by an update on our funding plan for investments and the balance sheet. As noted in our earnings release and earlier comments, this will be a challenging quarter with declines in both same property revenue growth and core FFO per share. The 3.8% decline in same property revenue growth is primarily driven by two key factors. First, we took a conservative approach and reserved against approximately 75% of our delinquencies, which negatively impacted our same property revenue growth by 2.9%. This information is available in a new table at the bottom of Page 2 of our press release, along with other additional details. Second, we report concessions on a cash basis in our same property results, which reduced our growth rate by approximately 1% compared to using the straight line method. The combined negative impact to same property revenue growth from both of these accounting treatments is 3.9%. As for our core FFO per share growth, the total negative impact of delinquencies in the second quarter is 20%, without this, our core FFO per share growth would have been positive 1.5%. More details are available in a new reconciliation table on Page S-15 of the supplemental, along with additional disclosures on operations. On to operating expenses, same-store expenses increased by 6%, primarily driven by Washington property taxes, which have increased approximately 15% compared to the prior year. As you may recall, taxes in Seattle decreased by 5% in 2019, resulting in a difficult year-over-year comparison. Our controllable expenses have remained generally in line with the plan for the rest of the year. Turning to the funding plan for investments and stock buybacks, we are expecting to spend approximately $205 million in 2020 between our development pipeline and structured finance commitments. In addition, we have bought back $223 million of stock year-to-date, bringing total funding needs to $428 million. As for funding sources, we expect $150 million of structured finance redemptions and we closed on the sale of three assets for $284 million. In total, we have $434 million of funds available which covers all new funding obligations this year on a leverage-neutral basis. Moving onto capital markets, the finance team was very productive in the second quarter, securing a $200 million term loan, which was used to pay down all remaining 2020 debt maturities. In June, we opportunistically issued $150 million in bonds, achieving a 2.09% effective rate for a 12-year CAGR and used the proceeds to pay down our line of credit. Lastly on the balance sheet, our reported net debt to EBITDA was 6.4 times, an increase from the prior quarter primarily related to how we account for delinquency reserve. Adjusting for the impact of delinquencies, our net debt to EBITDA would have been six times. With nothing drawn on our line of credit, and approximately $1.4 billion in total liquidity, our balance sheet remains strong as we continue to maintain our disciplined approach to capital allocation. Thank you and I will now turn the call back to the operator for questions.

Just looking at some of my notes from the remarks between Mike and John, on your thoughts on periodic contact at the office, first work-from-home and some of the initiatives that John laid out, I guess, just big picture. Can you clarify at least today, how you think your portfolio is positioned for what you think may be? I'm sorry I was a little confused between the different comments.

Yes, why don't I go ahead and start with that. This is John. I think we're actually positioned very well and what we're seeing is people wanting different value propositions. So, they're looking for our assets, of which we have many that have a little bit lower price point or dollars per square foot, a little bit more space. They're in great locations as it relates to outdoor recreational opportunities, and then of course, access to high-speed and going forward, gig-speed Internet. So, I think we're positioned very well for that. What we're seeing is, at this point in time, many of the tech companies have decided that they're going to defer occupying the buildings, a range of dates really starting from October through one of them throughout July of 2021. But in no cases do we see that becoming permanent. And then again, it gets back to this reality of people are now realizing that as much as we all kind of accept it and we’re impressed with Zoom and really worked hard to make things work, which is fantastic, something is being lost. And with the competitive juices flowing, we strongly believe that companies will want to bring people back together and they see the value like they've always seen the value in having that. And there's also another piece to it, which is, I can speak anecdotally. I was talking to someone over the weekend and they mentioned the idea of moving into the extended commute zone and their employers said, that's fine, but you're going to get a 20% to 25% pay cut, obviously completely negating their perceived value of lower real estate prices. So, no doubt, they're not moving and we think we're positioned very well for the long run with our portfolio. Does that answer it? Mike, do you have anything?

Yes, Jeff. Let me just add a little bit more of an American point of view, because I totally agree with what John says. And I think that things are ultimately in pretty good order considering the fact that we've had a 10% loss of jobs in June. So, that's an extraordinary number of jobs being lost, more than during the financial crisis, and as a result, that's going to impact our performance and our economy. And there are a couple of pieces that are just so fundamental and these are the things I tried to bring out in my script. Basically, tourism is shut down and obviously, West Coast tourism is a pretty big deal. A lot of people like to go to San Francisco and to various L.A. places. But with restaurants and bars shut down, those services are not available and you probably can't get there. It is difficult to get there given all the various shutdown orders, etc. And the other key parts to our economy are certainly the film and content production in L.A., which we realize exactly how big a problem that was with respect to COVID-19 and prevention of COVID-19, and producing content. And then finally, the tech flow down that I commented on in my script. So, all these things are actually things that are demanded in the marketplace and they will recover. And yes, it'll take time and we're certainly disappointed about the second wave and the renewed shutdown orders. In many cases, restaurants and bars were open for a couple of days and then shut down again in California. And so this has been incredibly disruptive in California and has made it difficult to get traction on things that really matter. Generally speaking, we have areas with pretty substantial amounts of wealth. Wealthy people like to consume services and including restaurants and bars, also people that have a choice between living in the hinterlands where you can make $15 an hour versus working in the city in a restaurant-type job, making $50 an hour. That's why they go to the city. So basically, most of these relationships and activities have been shut down, again on a temporary basis, and I think California has been incredibly vigilant with respect to these shutdown orders. They've been very extensive throughout the marketplaces and continue to have an impact. So, with the easing of that and with better COVID news, I think you're going to see things open up relatively quickly.

It’s Michael Bilerman here with Nick and Mike. In the press release, you talked about the Cares fund that Essex started with donations from executive officers, and it says you intend to distribute up to $3 million. Was it all donations? And do you expect to use corporate cash as part of it? Or is it all led by executives?

No, Michael, it's a combination of both. At the beginning of the crisis, we established a resident response team that identified significant needs in the community, including individuals struggling to afford food and other essential items. In response, our executive team contributed funds to provide meals for those in need. As we assessed the broader situation, we recognized that many people had lost their jobs with little hope of finding new ones. We aimed to create a support system that would offer relocation assistance and similar services, which led us to establish the Essex Cares entity. In cases where individuals need to move on to improve their circumstances, providing relocation benefits can help them achieve a better situation. Additionally, given regulatory constraints, we have the authority to evict individuals if necessary, making it beneficial for everyone involved. This initiative exemplifies our commitment to serving the common good by enabling people to move forward and enhance their lives.

Right. So how much of that $3 million was corporate cash? How much was donations? And how much capital do you foresee Essex contributing going forward to these initiatives?

Well, I don't think we've decided exactly. I think the portion that came from the employee pool is somewhere around $500,000 and the rest came from FX, but that's not a perfect number, but a rough number, that's what we did.

And then, the 2.5 is prospective? Or was there an expense in the quarter for the corporate cash then?

Michael, I can address that. There were expenses during the quarter, but we established the entity towards the end of the quarter. The spending that took place during that time had already occurred. Essentially, we created the entity to meet the needs we observed on the ground while interacting with the people. Our resident response team comprises about 50 to 60 Essex employees who typically engage with our residents a couple of times. They are focused on addressing a range of needs, particularly for those in challenging situations. This initiative is designed to respond to those needs more proactively.

Okay, this last one on the topic. Is the 2.5 million that's going to be Essex corporate cash? How are you going to treat that? Are you going to treat that as a cost of revenue? Are you even included in same-store? Or are you going to treat it completely separate from the financials?

Michael, that’s a good question. I think it depends on what it's being used for. So, for example, if it's for groceries or to relocate our tenants, it'll be a G&A item. But if it's for something that’s revenue related, impacting, say, delinquencies, it would be a contra revenue item. And so, at this point, it’s too early to see where that geography lands. But the intention is really more of a G&A item, and we'll see what that means anything.

Hey, good morning guys. I apologize if my phone dies in the middle of this call. We're in the midst of getting a pretty bad storm. I think a lot of people on the phone might be as well. So, I want to come back and talk about a topic that you've spent some time on the past, which is valuing occupancy versus rent growth. And if I'm looking at sort of your metrics, I think you're at 94.9 in 2Q, you've gone up to 95.8 as of July. But new renewal spreads are obviously negative and maybe even a little bit lower than where they were in the quarter. So, I'm just wondering, if you can give us an update about how you're thinking about occupancy versus rent growth at this point? And when you think that you might be in a position to push occupancy and renewal and new leases be less bad than they are right now?

Well, this is John. That's a great question. Well, again, as Mike had mentioned, we started in a hole in April really related to the shelter-in-place and just the demand stopped for a period of time. So, as we moved in, as traffic increased pretty dramatically in May and then we took advantage of that and decided to fill up the portfolio. A big picture is something that we like, which is, let's not be proud and vacant. And vacant units really obviously earned nothing, so we made the decision to get aggressive and offer some leasing discounts or leasing incentives to enable us to gain occupancy, and we ultimately gained about 200 basis points of occupancy between June and July, and that's positioned us well. We subsequently pulled back on concessions and we're still offering them in certainly market-by-market, it depends. But taking some of our suburban markets like San Diego, Orange County, Ventura, Contra Costa, in many of those cases, we've pulled back quite a bit on concessions and those occupancies are riding higher. And in actuality, they're actually higher, as I mentioned in my remarks than they were in March. So, we look at it and say, the best thing is to position ourselves so that we're leading the market and not allow ourselves to be sitting vacant. And so, that's why we took that action. Right now, we're in a pretty good spot and we're just watching the market on literally a daily basis, understanding what's going on. There are some areas that are more distressed. Certainly, San Francisco, we only have less than a thousand units there, but San Francisco is definitely under stress. And I'll also note San Francisco, about 30% of our units are studios, and studios are clearly a challenged unit type in this market. The process has moved out so that's also putting a little bit of excessive pressure on the San Francisco market in our numbers. Does that answer your question?

Yes, it does. I wanted to revisit the topic of concessions, which you may have mentioned earlier. From my perspective, new leases are averaging one to two months of concessions. I'm considering how to interpret the net effective rents. Could you clarify the effective portion of this? It appears that it might be significantly lower than what the headline indicates, and I want to ensure I'm understanding this correctly.

Yes. So concession, I mean, think of it in this particular market, I would think of it very similar to a development lease-up, where you offer concessions to incent someone to move. And obviously, there's certain real costs of moving and then there's just the pure motivation of moving. And so, when we desire to fill up our portfolio, we offered concessions. It's not really reflective of necessarily market rents being lower. Offering the concessions enabled us to gain a significant amount of occupancy. So, I would look at it that way. I don't want to answer around, though. There are clear concessions in the marketplace. We were more aggressive because we wanted to fill up our portfolio and we've now backed away quite a bit from that. Our average concessions, I know in the supplemental, you're looking at saying four to eight weeks, and that was pretty common. But the average concession during June was closer to four weeks or a little bit less than that we used to, which enabled us to fill out. So, there was a range. We clearly got assets of then serial concessions and some that were at eight weeks, and sort of tendency to footnote in the financials.

Got it. Got it. And so, just to be clear, and I'm sorry for belaboring this point. But it's hard to compare across names and that's what I'm trying to understand at this point.

The new and renewals are headline without the concession, right? That is correct. And I'll ask you to throw in one more comment on the renewals to get a little clarity. The renewals go out typically 60 days plus into the marketplace, both we're trying to give our customers time to make a decision. And then, there's certain laws that prevent us from sending them out, say less than 30 days. And so, what can happen is, the market can move between the time you send the renewal out, which is what happened in the second quarter and when it actually becomes effective. So, we would have had renewals that were effective in June that may have been signed in March, if that makes sense, always get a leg of the market rent, which are happening at that point in time.

Thanks guys. And just building a little bit, maybe even more, you know, John it sound like you said that into July incentives have improved even more. So, I mean, relative to that four weeks or last in June, have you virtually eliminated concessions at this point across most of your markets given where occupancy is today? Or is it the two weeks? Can you give us, help us quantify that? And then what the impact is from an effective rent perspective?

Sure. So, it moves around daily literally, but I can tell you that for a period of time, we completely eliminated them out of San Diego, Orange, Ventura and parts of Contra Costa. Subsequently, we've moved back in week to two weeks here and there, other markets, and it's certainly Seattle falls in that bucket as well. Other markets like San Francisco, we continue to offer concessions somewhere in the range of four to eight weeks. it depends on San Mateo, pretty high with concessions and a similar number of weeks. And Silicon Valley is a mixed bag, but there are concessions in Silicon Valley, especially near the lease-ups. There is both Downtown Oakland and Silicon Valley, and then some in San Francisco, where there's lease-up that obviously is a concessionary market. But we are pulling them back, and we're going back and forth. And part of it is, we run the Company as a portfolio and not asset by asset. So where we see opportunity where the markets are stronger, like Orange County and San Diego, Ventura, we're going to allow that to increase the occupancy a little bit more and offset some of the areas that are a little bit weaker like San Francisco.

No, that's helpful. And then how frequently are you using concessions on renewal leases to retain tenants? And could you quantify what that net effect of spread is in July versus last year?

Yes, so with renewals much less, it's probably about 10% of what we're doing with the new leases and the renewals go out without any concessions. They can get negotiated in depending upon the situation. But our renewals, really, I expected the renewals going forward. That'll really dry up because the market is changing right now. And so, where we were in June and what we negotiated in June, we negotiated less in July and probably less again in August. So, maybe a week or something or less than that, I mean, because again, most of them don't even have concessions for the renewals. So we’re not really trying to extend some of the move that's where we’re trying to intent some of the move that’s because they come into play because it really is a matter of they have moving costs. And so there's kind of this exchange that goes on.

A few questions here, John in hearing your response to everyone's questions, it sounds like things improved in July. And then since then they have improved. So, where I think Mike who talked about or you talking about rent pressure in the back half. It sounds like that's more like you're not pushing rents positively, but you're seeing good demand. Most of your markets, we're seeing occupancy and that you're really not concerned about the back half for a repeat of the softening that occurred in early in 2Q. Is that a fair assessment?

I'll start. I'm sure Mike might have some comments. But there's a lot of risk factors out there, Alex. So certainly factually, today, the market is better today than it was yesterday, the day before, etc. And this is all a good thing. And we feel good about that our portfolio is positioned very well, all things considered. But there are obviously things that are happening related to COVID that throw risk factors. There are some unusual, there are some positives, as I mentioned earlier consultants, they usually move out in the fourth quarter, well, that's not going to happen because they already moved out. We didn't have insurance come in, and therefore they won't move out. So, those are positives that may enable us to have a longer leasing period. And then there are some interesting things going around some of the colleges, for example, many of them are doing partially online. And that requires you to be very tethered to the university because you may be online for a class and then a half an hour later, you have a lab on site, but you still need to live right at that university and they cut down the occupancy. My family just went through this and my daughter got bumped out of her spot, so she's now in an apartment. And so, there are things like that that are positive, but there are obviously risk factors out there. And I'll flip it over to Mike if you have more to add there.

Yes, Alex, I want to connect this closely to what's happening in the job market. John mentioned that we've made improvements that may not have received enough attention. In my remarks, I mentioned that year-over-year job growth declines have narrowed by almost 400 basis points to 10.1%. From my viewpoint, the situation was quite dire in April, with a significant drop in occupancy and several other factors. We faced an additional hurdle with the anti-eviction ordinances, which made us more willing to allow tenants to exit their leases due to the circumstances. This contributed to the occupancy decline, but conditions improved afterward, and the job decline also moderated by 400 basis points, leading to better results. My main point is that we need this positive trend to continue, which is closely linked to our experience with COVID-19 moving forward. We are optimistic about the situation improving, especially with advances like vaccines or therapeutics on the horizon. There have been positive developments regarding shutdown orders, and it appears that we’re reaching a new peak in the second surge. There are discussions around reopening restaurants, and in places like Palo Alto, efforts are being made to enhance outdoor dining experiences. While this approach may not work in winter, it could be beneficial during summer. There’s certainly incremental improvement, and capable individuals can navigate through many of these challenges. I expect continued progress, although the timing for a significant breakthrough remains uncertain. We are making headway, and while we desire a faster pace, things are moving in a positive direction.

I hope everybody is well. Just to maybe steer the conversation in a different direction here. Mike, what's your updated take on the policy risk landscape Essex? And certainly, we could be having a very different conversation 90 days from now, the next time your reports. So just where do we stand on different bills and Prop 21 and so forth?

Yes, there's definitely a lot to talk about. So, Rich, if I miss them, you can just follow up and ask again. But obviously, the biggest one that we're most focused on is Prop 21 here in California, which would amend a law that was passed in the mid-nineties to promote housing construction called Costa Hawkins. And, so it would severely change that law and bring back potentially forms of rent control that really don't work, that really discourage housing production in all the cities that they adopted. And, it's interesting that we already have statewide rent control with respect to AB 1482, which passed last year, along with about 18 other bills that were intended to try to jumpstart and to increase the amount of housing that was available in California. But in fact, in the case of AB 1482, the apartment industry did not oppose that bill because we thought it was a reasonable finding the middle ground of the need for more housing and the need to protect tenants. So, we thought that the legislature did a very good job of that. But Prop 21 is brought by someone that is not involved in the housing industry. It's a special interest group. And so, they are continuing that campaign. In our case, we decided to keep our entity that we used to oppose Prop 10 in 2018 alive, and essentially the same group of people lead that entity and are the opposition team on with respect to Prop 21. And they've made a lot of progress. Polling continues to be fairly similar to what it was and as it relates to Prop 10 at this time, maybe a little bit better than that because AB 1482 was passed. The politics I think are somewhat different in that we already have statewide rent control. So, why do we need this other rent control proposal? And the campaign is proceeding well, there are something like over a hundred organizations and you can see them all representing seniors, labor, community groups, etc., that have joined Essex in opposing Prop 21. And there is a website if anyone's interested, which is noonprop21.vote. And I go to that website and see it. So, we're optimistic about it. We're fully 100% supportive of it and we’re raising money and we’re preparing for the final showdown. So that is the story on Prop 21. Rich, maybe before I go on, do you have any follow-ups on Prop 21?

Yes, that was a great summary Mike. You mentioned that polling Prop 10 maybe a little bit of things back. And is there anything other than the obvious, the COVID environment, that’s driving that or are there any takeaways from that element specifically?

It's hard to predict how COVID will unfold in relation to this situation. Rents have certainly decreased, especially since the passage of AB 1482. Therefore, why not allow AB 1482 to work, as it appears to be effective? What is the need for another ballot proposition addressing the same issue that the legislature has already addressed? This legislative solution is beneficial for us, so why should we resort to the ballot box? Particularly when considering the sponsor, who has minimal connection to housing, it seems unnecessary. We will see more developments regarding Prop 21 in the upcoming weeks, and I am open to discussing this further if you wish to have a separate conversation. Additionally, I would like to point out the complexity of anti-eviction ordinances. I commend the ethics team for their efforts in navigating the multitude of city, county, state, and federal laws and ordinances that are constantly changing. Various eviction ordinances are being extended with different terms, and it's likely that some legal action will arise since these measures may overstep what is typically acceptable. For instance, San Francisco has instituted a permanent ban on evictions for COVID-19 delinquencies, which presents significant challenges in collecting rent. It often feels like there is little accountability for delinquencies, as there are no late fees or interest charges, creating a scenario where tenants lack incentive to pay their landlords. This becomes a continuous dilemma since, in many cases, we're not allowed to request proof of COVID-19 hardship, which is a standard expectation in typical circumstances.

Yes, we're here for very specific reasons. So, I think we're actually pretty diversified as it relates to the major metros on the west coast, which, again, is a big part of the globe, global economies while I think California and Washington are something like the fifth largest economies in the world. So, we're not talking about a small area and what we've done is tried to diversify with respect to product and in many, many cities up and down the West Coast. So, I think we're actually more diverse than that might seem. And having said that, why are we here? We're here because supply and demand for housing is very attractive and rents grow better over time. And so, if there were other places that had similar long-term rent growth as the West Coast, we would likely be there. But that doesn't exist. And so, we're trying to maximize the growth of the portfolio over time and do it in a thoughtful way and certainly a risk-averse way, and diversify the portfolio within the West Coast, which again, is a very large area. And so, we will look at and we constantly look at other geographies and other opportunities and we'll continue to do that. We certainly do that once a year in our strategic planning session with the Board, which comes up here in September. And so, we'll continue to do that and maybe this will change it a little bit, but I would say, the anecdote to maybe a little bit less diversity is a very strong balance sheet. So, you have to withstand the periods of time when there is more volatility and we've done that. And as a result, we believe that we have kind of the best of both worlds. We have a very strong balance sheet that can withstand significant shocks and on the other hand have among the highest long-term growth rates and rents.

Great. Thank you.

Thanks, and good morning, everyone. Maybe we should consider a new proposal to limit rent declines.

Hey, Rich. We'll vote for you for governor.

So, I'd like to get back to the concentration, West Coast concentration here. Point Mike I get it, the big economies, big area of the country, but still a lot of common knitting in the state of California, that's sort of a singular problem. One thing I've noticed about you guys over the years is, things have a tendency to change over a shorter period of time than your peers. I remember back that supply issue on quarter, you were kind of having trouble pinpointing at the next quarter things certainly were much better. And I have that a little bit wrong, but I know I'm close. And saying that things change in perhaps maybe in months for us that might be measured in quarters for your peers. And I'm wondering if the third quarter had a very different flavor, is there a real chance that we could have a conversation three months from now that could vastly alter actually different than the tone of the press release that you released last night?

It looks like it's starting to abate finally, but I think it might be a little bit longer term than that. Having said that, we fell off the cliff in terms of occupancy in April and again, because of these anti-eviction ordinances, we were probably more aggressive at letting people move on with their life if they lost their job and needed more affordable housing than some of the others. And that caused vacancy to decline more. And, but it also set us up to find a tenant that can be a good long-term tenant. And so there were some definite trade-offs during the quarter, and then playing catch-up with respect to using concessions to build occupancy as John alluded to definitely cost us something. And again, as in July, we're in a much better position and we don't have that. We don't have that overhang that we have to deal with. So I would say that's incrementally better, certainly unemployment going from improving by 400 basis points. That's going to help us in the quarter. So there is good news out there and but as I tried to allude to in my comments, we need the film production business to come back. That looks like a choppy road. And even restaurants, all the service jobs and restaurants and bars, etc., that looks like a somewhat choppy road. So cautiously optimistic and we'll see, but I do think the next quarter will be better than the last that's for sure. If you have any further questions, feel free to reach out. Thank you. Very good. Thank you operator. And thank you everyone for joining the call today. Certainly our best wishes to you and your families during these very challenging times. And we hope to see you all either in person or on Zoom someday soon. Have a good day.