Essex Property Trust Inc (ESS) — Q1 2021 Earnings Call Transcript

Thank you for joining us today, and welcome to our first quarter earnings conference call. Angela Kleiman and Barb Pak will follow me with prepared remarks; and Adam Berry, our Chief Investment Officer, is here for Q&A. I'll start today with our first quarter results and expectations for the remainder of the year, including factors that lead us to believe that 2021 will be a year of recovery from the pandemic and then conclude with an overview of the transaction market. I am pleased to note that Essex was founded 50 years ago in 1971 by our Chairman, George Marcus, and we are very proud of all the company has accomplished. George remains keenly focused on the company's mission, strategy and business plan execution. I also want to recognize the extraordinary effort of the Essex team, which has allowed us to emerge from the pandemic in a position of strength and ready to seek opportunity that often comes from associated uncertainty. The Board and senior leadership team greatly appreciate this collaborative effort. Finally, the company's commitment to the balance sheet strength and a growing dividend was reaffirmed with our recent announcement of our 27th consecutive annual dividend increase. Turning to our first quarter results. Severe lockdowns in California and Washington remained a headwind in the quarter after intensifying last November amid a surge in COVID cases and hospitalizations that has only recently abated. Our very strong results in the first quarter of 2020 and a plethora of pandemic-related regulations and associated job loss were significant impediments to the company's performance this past year, as reflected in this quarter's results, with same-property revenues and core FFO down 8.1% and 11.8%, respectively, compared to a year ago. On a sequential basis, same-property revenues improved by 10 basis points, driven by growth in several suburban areas and particularly in San Diego, Orange and Ventura counties of Southern California. As noted in our earnings release, we reaffirmed our full year 2021 guidance ranges, and we continue to expect improvements in same-property revenue growth, driven by job growth and easier year-over-year comparisons. Apartment demand continues to be strongest in properties farthest from the urban centers and weakest in the cities, both being a function of new apartment supply and pandemic-related job losses. On a trailing 3-month basis as of March 2021, year-over-year job losses were 9.2% and 5.4%, respectively, for the Essex markets and the nation, marking significant progress compared to the 14% decline we saw in the Essex market shortly after the onset of the pandemic and also suggesting that our markets remain early in the recovery process. Fortunately, the recovery of jobs appears to be accelerating as reflected in preliminary job losses for the month of March 2021, which were down 7.9% for the Essex markets and 4.4% for the nation. On a sequential basis, California and Washington outpaced the nation in March, gaining nearly 150,000 jobs, representing over 16% of U.S. job growth with less than 13% of the employment base. As we suggested several quarters ago, we expect rents to recover on the West Coast as we recapture pandemic-related job losses that were directly impacted by shelter-in-place orders, including hospitality and service sectors, entertainment and filming and video production and tech jobs that were displaced to remote locations. Hospitality and service jobs were disproportionately concentrated in the urban areas and wealthy suburbs. For the nation, jobs in hospitality and other services have recovered about two-thirds of their post-COVID job losses. By comparison, to date, Essex metros have recovered less than one-third of these losses. Given the widespread recent reopening of California cities, these service sectors are again growing and their potential upside represents a promising differentiator for Essex markets over the next several quarters. Film and video production was disrupted, once again by the COVID shutdowns over the winter months, followed more recently by a surge in film permit applications. Overall, production activity remains below normal for this time of year. However, data released last week from FilmLA highlighted a 45% month-over-month increase in film permit applications for March, as the industry benefited from the recent relaxation of stay-at-home measures in Los Angeles County. We expect the rebound in production to continue this year due to pent-up demand for content that has been disrupted due to COVID-19. This recovery should provide a positive tailwind for the industry and for rental demand in the LA market. We are also pleased that many of the top tech companies have announced return-to-office plans supporting our belief that the hybrid model for offices will prevail with most employees spending a significant amount of time in the office for team building, collaboration, career advancement, and related necessities. The largest tech employers in our markets had significantly reduced their hiring plans early in the pandemic while also allowing many of their employees to work from home. With the cities largely shut down, many tech workers moved to suburban or rural locations or back home with their parents. This trend began to reverse late last year, and we expect to see further momentum in the coming quarters as more tech employers reopen their offices. As before, we track the announcements of the largest tech companies, and we have provided a timeline of planned office reopenings based on public disclosures on Slide S-17.1 of our supplemental. We also provide a graph indicating the strong recovery in job postings for the top 10 tech companies with open positions in the Essex markets now above pre-COVID levels. We also track the job locations for open positions, noting that about 57% of their U.S. job postings were in California or Washington as the office location. As of last week, California and Washington have dispensed at least the first dose of the COVID-19 vaccine to approximately 47% and 45% of their adult populations, respectively. Overall, accelerating vaccine deployment and pent-up demand for services gives us confidence that we are now on a solid path to recovery. California's counties have begun to remove restrictions on commerce. And Governor Newsom recently announced that California is expected to effectively reopen on June 15, including key indoor and outdoor activities such as conventions and sporting events. These plans are subject to several protective measures tied to continued low hospitalization rates and sufficient vaccine supplies. On the supply outlook, total housing permits, both single and multifamily, in our West Coast markets have declined 9.2% on a trailing 12-month basis compared to the national average increase of 6.4%. The national increase in permits is being driven by a 13.9% increase in single-family housing permits, mostly in markets with low barriers to entry and rising home prices. In California, the median price of a single-family home increased 12.4% year-over-year as of February. Normally, one would assume that higher home values would lead to increased production. However, single-family permits in the Essex markets are down 7.7%, which we attribute to a challenging regulatory environment and limited land availability, ultimately leading to fewer deliveries in late '22 and 2023. With large increases in for-sale housing prices, down payments have increased and the transition from a renter to homeownership has become more challenging. At the same time, the combination of lower rents from the pandemic and higher average incomes in the Essex markets has improved apartment rental affordability. We have seen these forces in previous recoveries, and they often result in periods of higher-than-average rent growth. Turning to the transaction market. We successfully sold 3 apartment communities in the first quarter for $275 million at values that were similar to the pre-COVID period when our consensus NAV was almost $300 per share. As a result, we used property sales proceeds to fund preferred equity investments and repurchase common stock, both accretive to per-share core FFO and offsetting a portion of COVID-related NOI declines. The strong rebound in REIT valuations over the past six months makes stock buybacks less attractive today, and we are now looking for undervalued or mismanaged property in our core markets to grow externally. There were relatively few property sales during the pandemic, and most were completed by highly motivated buyers using 1031 exchange proceeds and other sources of attractively priced capital. Several of our suburban markets have rent levels that have increased on a year-over-year basis, and recent transactions have priced in the high 3% cap rate range. In the hard-hit cities, buyers appear to be looking beyond the COVID impacts with apartments selling near a 4% cap rate using pre-COVID rents and NOI, roughly equivalent to a cap rate in the low 3% range based on current rents. Strong apartment values have led to a greater level of redemptions in our preferred equity portfolio, the impact of which Barb will discuss in a moment. As conditions normalize, we are starting to see more properties being listed for sale. The unprecedented changes and uncertainty experienced during the pandemic will likely lead to a robust apartment transaction market as property owners adjust their strategies going forward. I will now turn the call over to our COO, Angela Kleiman.

Thanks, Mike. First, a special recognition to the Essex operating team for their continued focus on delivering solid results under these extraordinary conditions. Thank you for your efforts. As for my comments, I will focus the discussion on our first quarter results and current market dynamics. In general, our markets continue to improve as the economy gradually reopens with the vaccine rollouts, easing of COVID restrictions, and the recent announcements for a phased or partial office reopening by the major employers, which has contributed to job growth. Our goal amidst the pandemic was to focus on maintaining occupancy and managing scheduled rent, which will position us favorably for revenue growth in the future. Accordingly, we adjusted our concession strategy to match the improvements in demand, which has enabled our same-property revenues to perform slightly better than our expectations. We have been successful with this strategy. And as a result, we maintained occupancy with scheduled rents declining, representing only 3.2% of the 8.1% total revenue decline for the quarter. You may recall the underlying fundamentals in the first quarter of last year consisted of a strong economic backdrop prior to the COVID pandemic. In fact, our first quarter year-over-year same-property revenue growth back then was 3.2%, with revenue levels at historical highs throughout the entire portfolio. The strength of the first quarter last year created a more difficult year-over-year comparable, which is also the reason why our new lease rates declined by 9.7% in the first quarter, as shown on the S-16, compared to the fourth quarter where the new lease rate declined by 8.9%. Consistent with the discussion on our last earnings call, the year-over-year decline in our major markets was primarily attributed to a combination of job losses from the pandemic, particularly impacting urban CBDs, which also had a greater concentration of supply deliveries. Here are a few key highlights of the first quarter year-over-year performance by markets. In Seattle, the 7% revenue decline was primarily driven by Seattle CBD, down 15.7%, whereas the remaining submarkets averaged a 5.2% decline. In Northern California, the 10.9% revenue decline was led by CBD, San Francisco, and Oakland and San Mateo, averaging a 15.9% decline, contrasted with a 5% decline in Contra Costa County. In Southern California, the 5.8% revenue decline continues to be primarily driven by L.A. CBD and West L.A., which were down by an average of 13%, while our suburban Southern California submarkets of Ventura, Orange County, and San Diego averaged a 2.1% decline. As you can see, our suburban portfolio continues to significantly outperform the urban markets. On the other hand, there are signs of improvement in our tech-centric urban markets. For example, first quarter sequential financial occupancies in San Francisco and Seattle CBD increased by 2.7% and 4.2%, respectively. In addition, the sequential quarterly turnover rates declined at an average of 5.4% in these markets. We continue to anticipate that the urban CBD markets, particularly in downtown Seattle, Oakland, and L.A., will remain impacted by greater concentration of supply deliveries, resulting in elevated levels of concessions, which will moderate the recovery. Although we typically do not place significant focus on sequential performance, because of the seasonality embedded in our business under normal market conditions, as we emerge from the pandemic, we view the sequential cost trend as a better indicator of our recovery progress. From this perspective, we have delivered 2 consecutive quarters of modest total same-property revenue growth, supported by comparable periods of job growth in our markets, which began in the fourth quarter of last year and has continued through the first quarter of this year. More notable is the 110 basis points in sequential improvement of our average net effective market rent per unit, with Southern California continuing to lead our portfolio growth. On average, new lease concessions improved from a low of over 2 weeks in the fourth quarter to about 1.5 weeks in the first quarter. While the magnitude may vary, this trend is in line with our forecast, where we had expected that market rents in our portfolio, on average, would trough between the fourth quarter and the first quarter. Lastly, although the office rental market has softened, major tech employers are continuing to expand in our markets. Google recently procured the rights to build an additional 1.3 million square feet of space in Mountain View and Amazon in Bellevue began construction on a brand-new office tower as well as signing new leases and a development for an additional 600,000 square feet. With our economy approaching 50% reopening, we remain mindful of the market and legislative uncertainties as we continue on the path to recovery. In conclusion, our portfolio is stable with current same-store portfolio occupancy at 96.7%. Our availability 30 days out is at 4.4%. Thank you, and I will now turn the call over to Barb Pak.

Thanks, Angela. I'll start with a few comments on our first quarter results, followed by an update on our recent capital markets activities and the balance sheet. I'm pleased to report core FFO for the first quarter exceeded the midpoint of our guidance range by $0.04 per share, of which $0.02 is from consolidated operations and the other $0.02 relates to the joint venture portfolio and lower interest expense. Of the $0.02 beat on operations, $0.01 relates to higher same-property revenues and the other $0.01 is from lower operating expenses, which is timing related. For the second quarter, we expect core FFO to be $2.92 at the midpoint, a $0.15 per share decline sequentially. Half of the decline is attributable to the loss of income on the early redemption of a $110 million preferred equity investment, which occurred at the end of March and the $276 million of dispositions that closed at the end of February. There is a temporary mismatch on the timing of the use of a portion of the proceeds, and as such, this is causing a $0.07 decline sequentially. In addition, we expect commercial income to be $0.02 lower as we had one-time benefits related to better delinquency collections in the first quarter that we do not expect to repeat in the second quarter. The remaining decline relates to lower same-property NOI due to higher expected operating expenses, delinquency, and higher G&A. For the full year, we are reaffirming our guidance ranges for same-property revenue, expense and NOI growth and core FFO per share. Turning to investments. During the quarter, we received $120 million for the redemption of 2 preferred equity investments. One of the investments totaling $110 million was redeemed early as the developer was able to sell the property for a price that exceeded our pre-COVID valuation. We estimate the cap rate at 3.6% on pre-COVID rents and 3.25% on current net effective rents. As a result of the early redemption, the company received $3.5 million in prepayment penalties or $0.05 per share, which compensates us for the lost income on the portion of the investment that was made in the fourth quarter of 2020. However, for FFO purposes, we book this income as a non-core item. Given the strong demand to invest in apartments and cheap financing alternatives currently available, we may experience additional early redemptions of preferred equity investments in 2021. Moving to the balance sheet. During the quarter, we issued $450 million of unsecured bonds with a 7-year term at an effective yield of 1.8%. The proceeds were used to refinance most of our unsecured term loans that matured over the next 2 years, allowing us to extend our maturity profile with no impact on interest expense. We now have less than $200 million of debt maturing between now and the end of 2022. Since the beginning of 2020, we have refinanced nearly 30% of our debt, taking advantage of the low-interest rate environment and reducing our weighted average interest rate by 60 basis points to 3.2%. This is leading to a significant reduction in interest expense in 2021 and can be seen in the first quarter results via the $4 million reduction in interest expense compared to the prior year. During the quarter, we raised our common dividend by 60 basis points to $8.36 per share on an annual basis, our 27th consecutive dividend increase. This is a sign of our strong balance sheet and cash flow coverage despite the effects of the pandemic. With approximately $1.4 billion of liquidity and minimum near-term funding needs, our balance sheet remains strong, and we will remain disciplined as we look for ways to invest accretively to create shareholder value. With that, I'll turn the call back to the operator for questions.

Maybe just starting on guidance. We saw two of your peers increase guidance today. And I guess everyone sets guidance differently initially. So some could be more conservative than others. But just curious, as you thought about revisiting guidance this quarter, in light of the 1Q beat, how things are trending the rest of the year versus your original expectations? Or are you trying to be a little more conservative and just wait for more operating results to come through?

Nick, it's Barb. Yes, we did have a good first quarter, and we did see some favorable outcome on our same-store growth. However, it is early in the year, and there is some uncertainty related to delinquency and eviction moratorium. So that plays a factor into it. And then on the preferred equity redemptions, we do have some uncertainty there. We're likely going to exceed the high end of our guidance range on the redemption side. So we're just working through some of the timing on that, and we'll revisit it in the second quarter.

Nick, this is Adam. We currently have several deals in our preferred pipeline that we are actively managing. The main challenge with preferred deals is the timing and the unpredictable nature of cash flow. Therefore, we are navigating through that pipeline. Additionally, as more deals become available on the investment and acquisition fronts, we are evaluating those opportunities as well. So, we continue to work through it.

Just first off on renewals, wanted to touch on that. We saw some softness greater than what we saw earlier in the year. And just wondering, when you think with concessions coming down, occupancy holding stable and as we start to lap easier comps, when do you think we can start to see renewal lease rates begin to improve?

Yes, that's a good question. Regarding the renewals, I believe that year-over-year comparisons will improve as we move past the pandemic. We are actually witnessing sequential improvements in our market rents. As concessions continue to decrease and we maintain a strong level of occupancy, I expect our performance to continue to improve. However, as Barb mentioned earlier, there are still some uncertainties, such as delinquency rates and potential legislative impacts, that we need to consider.

So your comments, Angela, just as a quick follow-up on the occupancy levels. I mean, are you looking to push occupancy higher before starting to push harder on lease rates? Or is it at a level where maybe as we get into the peak leasing season, you'd feel more comfortable beginning to push a little bit harder on the lease rate front?

At this occupancy level, we're very comfortable holding it. We see that as a sign of strength that allows us to start increasing rents. However, we need to be cautious about our concessions as that depends on the concentration of supply. There are various factors to consider, but given the current occupancy levels, we feel ready to begin increasing rents as we enter the peak leasing season.

Okay. Got it. And then could you just provide an update on what percent of leases are receiving a concession today and sort of what the average concession is? And then maybe compare that to what it's been over the last several months?

I can provide you with the quarterly trends. In the third quarter of last year, our concessions were around 3.5 weeks, which represented about 75% of our portfolio. In the fourth quarter, this improved to about 60% of the portfolio at just over 2 weeks. Now in the first quarter, we see further improvement, with concessions slightly below 50% of our portfolio at just over 1.5 weeks. That's the direction things are moving in.

Do you have any update for April by chance?

I do. April is looking a little bit better, although keep in mind, this is the first 28 days. But April is now down to about 1 week and at about 45% of our portfolio on average. So things are moving in the right direction.

So first question is on the accelerated timeline of the California reopening of June 15. Just curious. If you spoke about it in the early part of the call, my apologies. I was still on another multifamily call. Are you seeing an acceleration down in Southern Cal with all the service jobs reopening? Or is the tech hiring, growth in tech still outpacing the demand for apartments versus the recovery of service-based jobs that are trying to quickly reopen as we head to that June 15 timelines?

That's a good question. We all look at it a little bit differently. One way we're evaluating this now is by dividing our portfolio into three categories: large cities, midsize cities, and suburban markets. Clearly, the suburban markets have outperformed the cities both year-over-year and sequentially. For instance, our best suburban market is Torrance, which is up 4.3% sequentially. In the midsized cities, we are seeing improvement, and it's evident that the recovery is starting in the suburbs and gradually moving towards the cities, which unfortunately have not benefited significantly at this point. The best performers are all the suburban markets, regardless of whether they are in suburban Seattle or suburban Los Angeles. The midsized cities are the second best in terms of recovery trajectory, while large cities are lagging considerably. Large cities are facing challenges due to higher supply and job levers that improved but were still negative; the three-month trailing average job growth was minus 9.2%, and March stood at minus 7.9%. Although there was notable improvement this quarter, we need that trend to continue. It seems California got a late start in this reopening process, and from that perspective, we might be a step behind expectations, but we are making progress and things are looking better. I hope that makes sense.

I think what you're saying is that it doesn't matter what industry we're looking at; the primary factor affecting apartment performance is the property's location. It's more about suburban areas, then midsized cities, and lastly urban areas. Is that correct?

Yes, that's fair. The loss of service jobs is primarily in urban areas, which are more densely populated and have greater supply. This combination of factors is driving the current situation. As we transition from large cities to midsized cities and then to suburban markets, we see that suburban areas have limited supply. There is no competition from new properties next door offering incentives like two months free rent or additional perks. This competitive dynamic is mainly present in urban areas, which is why our pricing power has not significantly improved in those locations.

Okay. For my second question, I believe you, UDR, and Mid-America are involved with SmartRent. You had some news last week covered by The Journal. What impact does this have on your operations? It’s fantastic to see a return on your investment, but beyond the financial gains, how does this affect your operations or your interactions with SmartRent?

Thank you for the question. SmartRent was one of the earliest investments made by a consortium that includes three REITs, which are equal partners, alongside other apartment owners covering about 1 million units initially. Now, with Fund II, that number has grown to around 2 million units, indicating significant ownership. The goal was to drive technological advancements within the industry and leverage these improvements across the portfolio of apartments managed by the ownership group. This strategy has proven successful. It's noteworthy that SmartRent, which was one of our first investments, has recently announced a merger agreement with a SPAC valued at $2.2 billion, adjusted for around $500 million in working capital, giving it a net value of approximately $1.65 billion, though there are still several steps to finalize this process. SPACs have experienced volatility lately, so there’s no guarantee it will proceed, but the sponsors appear committed and motivated, which gives me confidence. This could yield financial advantages for us, as RET Ventures has been a significant investor from the seed stage through later funding rounds, making us a major stakeholder. While I won’t go into specifics, the potential gains could be substantial. More importantly, this aligns with RET Ventures' vision of integrating better technology into our operations to enhance efficiency and improve customer interactions. SmartRent is just one example, and we have made 12 other investments through Fund I and are currently utilizing several from Fund II. For instance, we are piloting a customer relationship management tool that streamlines the entire lease process through smartphones and computers, and we've already executed several hundred leases using it. We are also continuing to roll out SmartRent, which we believe will be beneficial for both the company and the industry in the long run. We are very optimistic about the recent technological developments.

Great. Just listening to the comments on the call, and again, the sequential improvements you're seeing, Mike, it feels like from at least where I'm sitting compared to coming out of the tech crash, early 2000s, that there's a pretty good backdrop here. And I don't have the numbers in front of me, but I do remember, I don't know how long it took after the tech crash, but at a pretty nice boom. What are your thoughts? And if you disagree, I guess, what's the big negative regulatory issues today? I mean, what's the negative?

Yes, let me pause on that negative for a moment. Each crash and recovery period is unique. What was distinctive about the Internet boom and subsequent bust was that Northern California experienced approximately 40% growth in market rents prior to the downturn. This significant rise in rents was driven by small tech companies, many of which didn’t yet have a product or revenue, attracting people to the West Coast. We couldn't build apartments quickly enough to meet that demand, resulting in that spike. However, we lost all of that growth and more in the following years after the bust. I recall that time vividly; we began selling properties in Northern California and purchasing in Southern California, which had not benefited from the Internet boom, making assets there seem quite affordable compared to the expensive ones in Northern California. The recovery from that period took a long time due to the lack of real businesses going public, which was a significant setback. Now, 20 years later, the IPO market has only started to show signs of recovery in the last year or two. Fast forward to today, the pandemic prompted a different response. The government acted by injecting money and liquidity into the markets, preventing the pandemic from evolving into a credit or financial crisis, and I commend them for that. It feels like we have moved past the worst and are on the path to recovery, with investment capital eager to find opportunities and asset values on the rise. Overall, that’s positive. However, the question remains: what do we do with the insights gained during this time? Historically, we are shifting from our poorest growth markets over the last two decades to our strongest. Will this trend continue, and what does it imply for our portfolio? We dedicate considerable time to these questions, with Adam actively involved in negotiations related to it. For us, this means we plan to divest some of our weaker properties, those we believe will not perform well. Recently, we sold Hidden Valley, a property with 25% very low BMR units, which hindered its growth potential. While the location is excellent, the presence of these units limits growth rates. We will seek opportunities to reinvest those funds into properties with better long-term growth potential in more desirable areas. This process is underway. As Barb mentioned, there will be a slight dilution in FFO for Q2 due to these transactions happening before we can reinvest the proceeds, resulting in some temporary drag, which I see as a possible downside. Nonetheless, the long-term advantages will become clear.

Okay. And then I have one follow-up, and I apologize if I missed this. I know you discussed the increase in jobs and hybrid work and how that should benefit the portfolio. Did you talk about tech workers specifically and their return to your portfolio? Are you noticing tech employees coming back as renters or seeing any benefits from these IPOs? Where is the demand originating from?

Yes, Jeff. I believe we are beginning to witness some progress, but many of the reopenings mentioned in S-17.1 are still several months or even a couple of quarters away. Therefore, I don't think we are yet seeing the benefits. The recovery is evident, particularly in the Motion Picture industry, which is now reopening and bringing back some service jobs. While we are still below previous numbers, employment has improved. However, the return to office has been a gradual process, and I don't think it has occurred to any significant extent yet. I believe this is something we will see more of in the future.

Maybe, Adam, could you provide a follow-up on the preferred equity or mezzanine business? Have the increases in construction costs reached a level where they might start to dampen deal volume over the coming years? Additionally, are costs becoming significant enough that any developers in your current portfolio are having trouble covering their obligations?

John, yes. So to answer your question, we have definitely seen, as we're working through our preferred pipeline, most of the developments have been in the more suburban areas. So they've been lower density, more garden-style product. And so when you look at the increases specifically to lumber, but also to some of the other materials, it is absolutely having an effect on how these deals underwrite and whether or not they'll get built. So we're seeing it, and this is the beginning of it. And developers are trying to work their way through it, and we're working with them. But we definitely see this as an obvious headwind for new supply. And then, John, what was the second part of your question?

Yes. Just in terms of ongoing projects, any concerns about debt service coverage for in-process deals?

No. We don't have any of those concerns. Nothing that we see forthcoming.

Okay. Great. And then just final one for me. Angela, any early reads on how retention is faring on leases signed a year ago with generous concessions? Or are you expecting some occupancy slippage or they have to follow up with another round of concessions to keep people signed a year ago in their homes?

Yes. That's a good question. As we go through our renewals and releases and heading into the peak leasing season, what we're seeing is a more normalized behavior relative to pre-COVID. So when I look at numbers like our turns and applications and so that does not lead us to think that concessions itself will be significantly challenging. But keep in mind, concessions is really more of a function of the competitive supply and what the economy is doing. So it's not so much the lease duration itself. And so right now, our markets are only at approximately 50% of the open compared to the rest of the country that is mostly reopened. And so that's more of a factor. And of course, in certain CBD locations like the L.A. and Seattle, where there are still going to be continued supply pressure, we're going to see more because that will be in a more concessionary environment regardless of the lease term.

Just a follow-up on the return to work environment with tech companies. Office utilization is the lowest or among the lowest in some of your major markets, including San Francisco, San Jose and L.A. Is this something you track as far as the Castle weekly data? And is that something that you see having a high correlation to applications or interest level in your properties?

John, it's Mike. We don't have a precise method to track it. We attempt to gather information from across the company by monitoring jobs and the origins of our residents. We also keep an eye on migration trends. However, obtaining this information at a very detailed level is quite challenging. What we’ve focused on is monitoring major tech companies and their plans to return to the office, anticipating that we’ll notice an increase in traffic as they resume in-person work. At this moment, as I mentioned earlier, we haven’t observed a significant increase. We don’t believe this is a major factor in the current recovery.

What about students returning back to the classroom? Are you seeing it as a tailwind? And can you remind us what your typical student profile is pre-pandemic versus today?

That's another good question. I don't have that detailed information. We mainly track supply and demand through jobs and supply trends. We know there are some demographic advantages, and while we are aware that students are out there, they represent a relatively small portion of our occupancy. Therefore, they aren't significant enough to influence the larger picture. The key factors are jobs and demographics, such as people living longer and consuming homes for longer periods, in addition to the overall supply numbers. We don't analyze this at such a detailed level.

I wanted to revisit the guidance and break it down into its components a bit more. The first quarter was quite strong for you, and I believe you exceeded your FFO guidance by about $0.04. However, you maintained the guidance for the entire year, which suggests a potential reduction. The reason I mention this is that our channel checks indicate the second quarter is off to a strong start, certainly better than the first quarter, particularly in terms of effective rent growth. While I'm unsure about renewals, the effective rent growth for new leases appears robust. I'm trying to understand whether this is primarily influenced by one-time factors you've included in your adjustments that might make you more cautious, or if there's something else in the business we should be aware of. Given the economic context, our economists have raised their GDP growth projections. I understand you typically don’t adjust in the first quarter, but I hope you can clarify this. I realize this is complex, but I’m trying to grasp the dynamics of the first quarter, the current fundamentals in the second quarter versus one-time factors, and what this means for the full year.

Rich, this is Barb. Yes, the first quarter was strong. As we mentioned, we are seeing positive trends in same-store sales through the first quarter. Angela noted in her opening remarks that we have now reached 50% reopening in California. While we are optimistic about our current position, there have been many ups and downs in California over the past year, which leads us to adopt a more cautious approach, and we will reassess in the second quarter. We feel confident about our fundamentals, but the uncertainty surrounding delinquency, which we have discussed previously, remains a concern. Our numbers show that delinquency increased in April compared to Q1, and this impacted our guidance. However, we did have a favorable trend in the first quarter from a same-property perspective.

Barb, I would like to add a quick point regarding your comments. In the first quarter, we believe we gained from stimulus payments, as we noticed an improvement in delinquency around January and February. Now, with SB 91 regarding federal stimulus money, its impact remains uncertain as we haven't observed much of it yet. This uncertainty makes it difficult to predict its effects moving forward, as there is no historical precedent for us to draw upon. We have typically taken a cautious approach, preferring to wait and see how events unfold before adjusting our guidance. Regarding delinquencies, it is challenging to forecast what will occur; however, we don't anticipate negative outcomes. We believe SB 91 should ultimately have a positive impact, but we lack clarity on both the timing and the extent of its effects since it is unprecedented for us.

Okay. That's helpful. And the reason I ask because I think a lot of us, both on sell-side investors themselves, are just trying to understand if this is inherently you being conservative, which, as you noted, is in your DNA versus something that's maybe different on the West Coast. But it sounds like maybe just a little bit of a conservative approach recognizing that the operating metrics are trending in the right direction.

Mike, I think this one is for you. The job growth assumptions that you put in your supplement, is that from the government? Or is that an internal projection?

Are you referring to Page S-17, I'm guessing?

Yes, I think it's $396,000 for this year?

Yes, $396,000. Yes. That's from S-17. No, we do our own fundamental research on our markets. Yes, so definitely ours.

Okay, great. The reason I'm asking is that I'm trying to understand what the recovery path back to pre-COVID levels looks like. Looking at your markets, it appears that you are still down 1.2 million jobs from pre-COVID. If we consider a rate of 400,000 jobs, it would take about three years to return to pre-COVID employment levels. Does that calculation hold true, given the timing of when people return to their tech jobs? How do you view this situation, especially from an operational perspective in urban areas or larger coastal markets? What is your outlook on the potential to increase rents or the overall level of rents in the next 24 months?

Yes, connecting those dots is certainly insightful. Good question. I would say that when rents rise or fall, people make different choices. This relates back to our theories regarding rent in relation to income and other factors. When rents decrease significantly in cities, people are drawn to those units. Many of these individuals likely come from areas that are generally seen as less desirable. Now, with rents considerably lower than before, those who were previously priced out can move back into the cities. Our theory suggests that markets with good schools, safety, and quality of life will see the most interest, as people will relocate there if they can afford it. Those who cannot will likely move to the outskirts of these markets. This may seem contrary to our discussion about the success of suburban areas, but there are certainly high-quality suburban markets, like beach cities in Southern California or Northern California, that are performing well despite being farther from the urban core. We're focusing on cities that are less desirable, with individuals relocating to better locations. This raises the question of how we can be nearly 97% occupied despite significant job losses. The answer lies in people's movement toward better rental value and improved living situations in higher-quality assets. The crucial point is that we are nearing 97% occupancy, and with the few vacant units in our portfolio, it won’t take hundreds of thousands of jobs returning for us to eliminate concessions and gain more pricing power due to our strong base. In practical terms, it's not just about jobs but also about consumer choices in response to changes in revenue levels. Does that make sense?

Okay. Yes, yes. I see where you're going there. Other one for me is you guys have done a really good job in most of the REITs, have done a good job minimizing delinquency, kind of taking it to the chin early in terms of concessions and letting people leave or paying people to leave, et cetera. But you're also impacted by your surrounding properties and owners, et cetera. So there's obviously a big, I guess, you call it, storm coming in terms of the amount of people who have 6-plus months of back rent that "has to be paid back eventually." I have my doubts about that in California, but how do you guys see that playing out when that check needs to be written or the sort of the protection abate? And again, not really a big deal in your specific assets, but a lot of people, I'm sure, operators that you compete against have maybe a lot of that. I guess, do you guys think that's going to have a big impact on vacancy? Could that bring more people to the market for selling their assets? Any commentary there would be great.

That's a really important question, and it keeps us up at night because we don't have a clear answer. The eviction moratoriums ended on June 30, and we recognize that many renters have not paid even the minimum required rent for eviction protection under SB 91 over the past year. This is certainly going to create challenges. Additionally, the courts are likely unable to handle the volume of foreclosures effectively, so it's uncertain how this will unfold. We will have to navigate these issues carefully, as we have a responsibility to treat our residents with consideration. We will do our best, but I can't predict exactly what obstacles we may face as this situation develops. We are genuinely concerned and will approach it step by step.

Okay. And is that why you're a bit more cautious with your guidance? Is that one of the factors that might be causing you some difficulty?

Yes, it is. However, there are individuals who have received various benefits or payments but have not paid their rents. We will eventually be able to address those situations where some people are using the laws to avoid making payments. So, it isn't all negative; there is a positive aspect to it as well. Those who wish to maintain their eviction protection will need to pay us the 25% of rents that have accumulated from September 1 to June 30, unless they have already paid that amount. It's not entirely bleak; I would characterize this period leading up to June 30 as one for reconciliation. Again, it's challenging to predict exactly how that will unfold.

You've talked a bit about some of the extremes as far as suburbs outperforming urban and some of the markets doing better than other markets geographically. Can you maybe just put some numbers behind it and maybe use the down 6% blended rent number from April? How wide are those extremes? And can you give a sense of which markets are most negative and which are most positive?

Yes, Dennis, that's a good question. I haven't broken it down in the way you're suggesting, but let me share what we're observing. In the suburban areas, the strongest sequential growth is in Torrance at 4.3% rent revenue growth, while Snohomish County in Seattle is experiencing a decline of 0.4% due to Boeing's impact. Year-over-year, Oceanside has increased by 2.7%, but San Ramon has declined by 4.2%. This gives a range of what’s happening in those suburban markets. In midsized cities, the best sequential growth is in Long Beach at 3.4%, while North City in San Diego is down 0.5%. Year-over-year, Long Beach shows the least decline at minus 2.3%, whereas San Jose has the most significant drop at minus 10.5%. Long Beach benefits from low supply and being a desirable place to live. In larger cities, the best sequential growth is in West L.A. at 3.5%, and the weakest is in Seattle at minus 2.5%. Year-over-year, West L.A. still leads with minus 11.9%, while San Francisco shows a decline of minus 20.7%. Does that clarify the situation for you?

Yes. I think that does. And those were revenue numbers or those were lease rate numbers?

Those are total revenue. Same-store revenue.

Perfect. And then a separate question, just as you look at the distribution of your renters. I'm not sure if you have this in front of you if you have a way to summarize it. But if you were to look at the distribution of your residents pre-COVID and segment them by age, is there any difference between that and what you're seeing on new move-ins today?

I don't think that we have that data. We have move-outs occurred and what categories, but we're not tracking it by age cohort.

Okay. What can you tell me about the tenant base composition, such as income or demographic factors, and whether there are any differences compared to what was typical before COVID?

There is some difference. I don't have any data in front of me. The cities have experienced a significant drop in rents, leading to a different type of renter moving in. There are definitely more tech workers who, due to remote work, are occupying housing in the suburbs. However, I don’t have that demographic data with me. We do have it; I just don’t have it available right now. I apologize for that. We can follow up with you if you would like to discuss this further.

Yes. I want to revisit the delinquencies and clarify the April figure. You reported 2.1% in the first quarter, and the April figure is 2.7%. I assume you'll collect more of that over time. Are you more worried about delinquency now than you were a couple of months ago, given that the incoming payments may be less than the boost you experienced in the first quarter? Also, how sure are you that the previous support was primarily due to stimulus, as it seems it wasn't enough to cover a month's rent? Will that be the first source of capital for individuals, considering the tenant protections in California?

Yes, that's a good question. It’s a complicated issue with several factors at play, including legislation, behavior, and people's perspectives on their jobs and future. In terms of delinquency, for the first quarter, we published data for January and February showing 2.6%. March improved significantly, reducing the average for the quarter to 2.1%. However, April saw a rise to 2.7%, which aligns more closely with the normal rate. While we don’t have a definitive reason for the improvement in Q1, we can attribute it to March, coinciding with the distribution of stimulus funds. We don't expect further deterioration, but before assessing the gross revenue from Q1 to Q2, it’s important to consider the delinquency rate adjusting from 2.1% back to 2.7%. Regarding delinquency, Mike mentioned SB 91, and we have a team working diligently with tenants to assist them in applying for relief. While we're effectively helping tenants determine their eligibility, the key issue remains the timing of reimbursement from the government, which varies by city in process and timing. Our perspective is less about whether it will happen and more about when. This brings us to our guidance, which is likely to be variable and uneven. Therefore, we believe it’s wise to wait a few months to see how the numbers develop. Does that make sense?

Appreciate the color. Yes, it does. And then I guess moving over to sort of the dispositions that you've had and the redemptions, it's about $400 million of capital or so there. I guess, do you have pretty good line of sight on what the deployment is going to be for that? Or I guess, more generally, what's your confidence in being able to redeploy that just given that obviously assets on the West Coast haven't become distressed or anything like that? And it seems like there are a lot of willing buyers out there. So I'm curious your confidence in being able to redeploy that accretively.

Brad, this is Adam. A couple of points to note. The three dispositions that took place earlier this quarter were actually mentioned in last quarter's call. Those were largely anticipated in the fourth quarter of last year. At that time, we utilized most of those proceeds for stock buybacks and to invest in new preferred equity. What has changed since then are the redemptions, resulting in an unexpected $120 million coming back sooner than anticipated. This gives me a high level of confidence in the ability to redeploy that capital. As I mentioned earlier, our pipeline for preferred equity deals is strong. While it takes time to navigate through them, we are very motivated to proceed. The funds will be redeployed; it's just a matter of timing and moving as quickly as possible.