Essex Property Trust Inc (ESS) — Q2 2021 Earnings Call Transcript

Thank you for joining us today, and welcome to our second quarter earnings conference call. Angela Kleiman and Barbara Pak will follow me with prepared remarks and Adam Berry is here for Q&A. On today’s call, I will start with our second quarter results which were driven by a strengthening economy and positive indicators underlying a robust recovery on the West Coast. I will also discuss the status of reopening the West Coast economies and related factors, concluding with an overview of the West Coast Department Transaction Markets and Investments. Our second quarter results were ahead of our initial expectations entering the year as the economic recovery from the pandemic occurred faster than we expected. With a strong economy and high vaccination rates, we are now confident that the worst of the pandemic-related impacts are behind us. As noted on previous calls, our strategy during the pandemic was to maintain high occupancy and scheduled rent, both necessary for rapid recovery. To that end, net effective rents surged during the second quarter, along with year-over-year improvement in occupancy, other income and delinquency. The recovery in net effective rents continued unabated in July, and we are now pleased to announce that the July net effective rents for the Essex portfolio have surpassed pre-pandemic levels, with our suburban markets leading the way while the downtowns are improving but still generally below pre-pandemic levels. Obviously, these higher rents will be converted into revenue as leases turn, and Angela will provide additional details in a moment. Having passed the midpoint of 2021 and looking forward, we made a second set of positive revisions to our West Coast market forecast which can be found on page S 17 of the supplemental. Driving the changes is an increase in 2021 GDP and job growth estimates to 7% and 5%, up from 4.3% and 3.2% respectively from our initial forecast. As a result, we now expect our average 2021 net effective rent growth to improve to minus 0.9% from minus 1.9% from the beginning of the year. To put this into perspective, consider that our net effective rents were down about 9% year-over-year in Q1 2021. Given our current expectation of minus 0.9% rent growth for the year, year-over-year net effective market rents are now forecasted to increase about 6% in the fourth quarter of 2021. Cash delinquencies were up modestly on a sequential basis at 2.6% of scheduled rent for the quarter and well above our 30-year average delinquency rate of 30 to 40 basis points. The American Rescue Plan of 2021 provides funding for emergency rental assistance, which was allocated to the states for distribution to renters for pandemic-related delinquencies. Through the second quarter collections of delinquent rents from the American Rescue Plan were negligible, as the pace of processing reimbursements has been slow since the program launched in March. We expect that to improve in the coming months. We expect delinquency rates to return to normal levels over time as more workers enter the workforce and eviction protections lapse on September 30 in both California and Washington. At this point, only about 7 million of the 55 million in delinquent rent shown on page S 16 of the supplemental has been recorded as revenue. Given uncertainty about the timing of collections, no additional revenues are contemplated in our financial guidance. Even with the approved job and economic outlook, the reopening process was gradual through the second quarter, with full reopening declared in mid and late June for California and Washington respectively. The unemployment rate was still 6.5% in the Essex markets as of May 2021, underperforming the nation. Through Q2, we have regained about half of the jobs lost in the early months of the pandemic. Employment in the Essex markets dropped over 15% in April 2020 and while job growth in our markets outpaced the nation in the second quarter, we're still 7.9% below pre-pandemic employment compared to 4.4% for the U.S. overall. We view the gap as an opportunity for growth to continue in the coming months as we benefit from the full reopening of the West Coast economies. We believe that many workers who exited the primary employment centers during pandemic-related shutdowns and work-from-home programs will return as businesses reopen and resume expansion that was placed on hold during the pandemic. As we proceed through the summer months, we edge closer to the targeted office reopening date set by most large tech employers in early September. As recent reports about Apple and Google suggest the COVID-19 Delta variant could lead to temporary delays in this reopening process, our survey of job openings in the Essex markets for the largest tech companies continues to be very strong as we report 33,000 job openings as of July, a 99% increase over last year's figures. New venture capital investment has set a record pace this year with Essex markets once again leading with respect to funds invested, providing growth capital that supports future jobs. Generally, economic sectors that fell the furthest during the pandemic are now positioned for the strongest recovery in the reopening process, led by restaurants, hotels, entertainment venues, and travel. Returned to office plans, which remain focused on hybrid approaches, will continue to draw employees closer to corporate offices. Given that many workers won't be required to be in the office on a full-time basis, we expect average commute distances to increase. As we highlight on page S 17.1 of our supplemental, this transition has already started in recent months, as our hardest-hit markets in the Bay Area once again experienced net positive migration from beyond the NorCal region. In particular, since the end of Q1, the submarkets surrounding San Francisco Bay have seen positive net migration that represents 18% of total move-outs over the trailing three months compared to minus 8% a year ago. These inflows are led by residents returning from adjacent metros such as Sacramento and the Monterey Peninsula, as well as a renewed flow of recent graduates arriving from college towns across the country, a notable positive turnaround from last year. In Seattle CBD, we've seen similar or even stronger recent inflows and are likewise experiencing a strong market rent recovery. On the supply side, we provided our semi-annual update to our 2021 forecasts on S 17 of the supplemental, with slight increases to 2021 supply as COVID-related construction delays shifted incremental units from late 2020 into 2021. We expect modestly fewer apartment deliveries in the second half of 2021, with more significant declines in Los Angeles and Oakland. While it is still too early to quantify, recent volatility in lumber prices and shortages for building materials may impact construction starts and the timing of deliveries in subsequent years. Multifamily permitting activity in Essex markets continues to trend favorably, declining 200 basis points on a trailing 12-month basis as of May 2021, compared to the national average, which grew by 230 basis points. Median single-family home prices in Essex markets continued upward in California and Seattle grew by 18% and 21% respectively on a trailing three-month basis. The escalating cost of homeownership combined with greater rental affordability from the pandemic have increased the financial incentive to rent. We suspect these trends will continue given muted single-family supply and limited permitting activity and believe these factors will be a key differentiator for our markets in the coming years compared to many U.S. markets with greater housing supply. Turning to apartment transactions, activity has steadily accelerated since the start of the year, with the majority of apartment trades occurring in the low to mid 3% cap rate range based on current rents. Generally, investors anticipate a robust rent recovery, especially in markets where current rents are substantially below pre-pandemic levels. With the recent improvement in our cost of capital, we have turned our focus once again to acquisitions and development while remaining disciplined with respect to FFO accretion targets. With respect to our preferred equity program, we continue to see new deals although the market is becoming more competitive. Lower cap rates from pre-pandemic levels have produced higher than anticipated market valuations, which in turn has resulted in higher levels of early redemption. That concludes my comments. It's now my pleasure to turn the call over to our COO, Angela Kleiman.

Thanks, Mike. My comments today will focus on our second quarter results and current market dynamics. With the reopening of the West Coast economy, the recovery has generated improvements in demand and thus pricing power. Our operating strategy during COVID to favor occupancy while adjusting concessions to maintain scheduled rents enabled us to optimize rent growth concurrent with the increase in demand, resulting in same-store net effective rent growth of 8.3% since January 1, with most of this growth occurring in the second quarter. A key contributor to this accomplishment is the fantastic job by our operations team in responding quickly to this dynamic market environment. While market conditions have improved rapidly during our second quarter, driving our second quarter results to exceed expectations, I would like to provide some context for why sequential same-property revenues declined by 90 basis points compared to the first quarter. The two major factors that drove this decline were 50 basis points in delinquency and 50 basis points in concessions. Delinquency in the first quarter was temporarily lifted by the one-time unemployment disbursements from the stimulus funds. As expected, in the second quarter, delinquency reverted back to 2.6% of scheduled rents versus the 2.1% in the first quarter. On concessions, the nominal amount increased from a higher volume of leases in the second quarter relative to the first quarter of this year. To be clear, concessions in our markets have declined substantially and are virtually non-existent except for select CBD markets. Our average concession for the stabilized portfolio is under one week in the second quarter compared to over a week in the first quarter and over two weeks in the fourth quarter. Although concessions have generally improved in the second quarter, they remain elevated, ranging from two and a half to three weeks in certain CBDs, such as CBD LA, San Jose, and Oakland. Given the extraordinary pandemic-related volatility in rents and concessions over the past year and a half, I thought it would be insightful to provide an overview of the change in net effective rent compared to pre-COVID levels. As of June, our same-store average net effective rent compared to March of last year was down by 3.1%. Since then, we have seen continued strength and based on preliminary July results, our average net effective rents are now 1.5% above pre-COVID levels. It is notable that this 1.5% portfolio average diverged regionally, with both Seattle and Southern California up 5.8% and 9.3% respectively, while Northern California has yet to fully recover, with net effective rents currently at 8% below pre-COVID levels. On a sequential basis, net effective rents for new leases have improved rapidly throughout the second quarter and preliminary July rent increased 4.7% compared to June, led by CBD San Francisco and CBD Seattle, both up about 11%. Not surprisingly, these two markets were hit hardest during the pandemic and are now experiencing the most rapid growth. Moving on to office development activities, which we view as an indicator of future job growth and housing demand. In general, the areas along the West Coast with the greatest amount of office developments have been San Jose and Seattle. Currently, San Jose has 8.1% of total office stock under construction, and similarly, Seattle has 7% of office stock under construction. Notable activities include Apple leasing an additional 700,000 square feet, and LinkedIn announced recent plans to upgrade their existing office in Sunnyvale. In the Seattle region, Facebook expanded their Bellevue footprint by 330,000 square feet, and Amazon announced 1,400 new web service jobs in Redlands. We expect in the long term areas with higher office deliveries, such as San Jose and Seattle, will have capacity for greater apartment supply without impacting rental rates. While these normal relationships were disrupted during the pandemic, we anticipate conditions to normalize in the coming quarters. Lastly, as the economic recovery continues to gain momentum, we have restarted both our apartment renovation programs and technology initiatives, including actively enhancing the functionality of our mobile leasing platform and smart rent home automation. Thank you, and I will now turn the call over to Barbara Pak.

Thanks, Angela. I'll start with a few comments on our second quarter results, discuss changes to our full-year guidance, followed by an update on our investments and the balance sheet. I'm pleased to report core FFO for the second quarter exceeded the midpoint of the revised range we provided during the NAREIT conference by $0.08 per share. The favorable results are primarily attributable to stronger same-property revenues, higher commercial income, and lower operating expenses. Of the $0.08, $0.03 relates to the timing of operating expenses and G&A spend, which is now forecasted to occur in the second half of the year. As Angela discussed, we are seeing stronger rent growth in our markets than we expected just a few months ago. As such, we are raising the full-year midpoint of our same-property revenue growth by 50 basis points to minus 1.4%. It should be noted this was the high end of the revised range we provided in June. In addition, we have lowered our operating expense growth by 25 basis points at the midpoint due to lower taxes in the Seattle portfolio. All of this results in an improvement in same-property NOI growth by 80 basis points at the midpoint to minus 3%. Year-to-date, we have revived the same-property revenue growth at the midpoint up 110 basis points and NOI by 160 basis points. As it relates to full-year core FFO, we are raising our midpoint by $0.09 per share to $12.33. This reflects the stronger operating results partially offset by the impact of the early redemptions of preferred equity investments, which I will discuss in a minute. Year-to-date, we have raised core FFO by $0.17 or 1.4%. Turning to the investment market, as we discussed on previous calls, strong demand for West Coast apartments and inexpensive debt financing has led to sales and recapitalization of several properties underlying our preferred equity and subordinated loan investments, resulting in several early redemptions. During the quarter, we received $36 million from an early redemption of a subordinated loan, which included $4.7 million in prepayment fees, which have been excluded from core FFO. Year-to-date, we have been redeemed on approximately $150 million of investment and expect that number could grow to approximately $250 million by year-end. This is significantly above the high end of the range provided at the start of the year. However, this speaks to the high valuation apartment properties are commanding today, which is good for Essex and the net asset value of the company. As for new preferred equity investments, we have a healthy pipeline of accretive deals, and we are still on track to achieve our original guidance of $100 million to $150 million in the second half of the year. As a reminder, our original guidance assumes new investments would match redemptions during the year. However, the timing mismatch between the higher level of early redemptions, coupled with funding of new investments expected later this year, has led to an approximate $0.10 per share drag on our FFO for the year. Moving to the balance sheet, we remain in a strong financial position due to refinancing over one-third of our debt over the past year and a half, taking advantage of the low interest rate environment to reduce our weighted average rate by 70 basis points to 3.1% and lengthening our maturity profile by an additional two years. We currently have only 7% of our debt maturing through the end of 2023. Given our manageable maturity schedule, limited near-term funding needs and ample liquidity, we are in a strong position to take advantage of opportunities as they arise. This concludes my prepared remarks. I will now turn the call back to the operator for questions.

Maybe you started Barbara on the comments you just made on the preferred equity in the mez loan. In terms of the pipeline today, are you seeing any compression on yields or expected returns, already changes to the competition there?

Hey, Nic. This is Adam. To answer your question, yes. We're seeing compression on cap rates. It's a much more competitive market now with proceeds going well above where we're typically comfortable and rates going significantly below where we've been in the market. So to sum, yes, we are seeing absolute compression on valuations.

Thanks. So then in terms of the early redemption that you've seen? I mean, is there a risk of further early redemptions that could at least create an air pocket on the earnings side?

Hi, Nic. This is Barbara. At this point, I think we factored that all in based on what we know today. And already almost in August, so I think we factor that into the current guidance. So I'm not expecting any more redemptions at this point for the rest of the year.

I wanted to just come back to sort of trends that you're seeing in your markets. And I appreciate all the color and commentary you gave us. But I'm hoping you can compare and contrast what you're seeing in your market specifically, versus maybe what someone typically thinks about in San Francisco, Los Angeles, the broader West Coast urban markets. So specifically, are you seeing people still continue to migrate in? Are you seeing people migrate out? What are those trends in your markets that give you confidence relative to maybe some of the urban markets?

Hi, Rich. It’s Michael. I think I'll handle that one. And others may want to comment as well. But I think we feel really good about what's happening here. Noted in my comments that we’re fully recovered with respect to market rents, versus pre-pandemic levels, while only recovered about half the jobs so far, so that I think that's a powerful place to start. If we look around the West Coast, we feel great about what's happening. We expect good times to continue as consumers are very optimistic. They've saved money during COVID by not traveling and a variety of other things. So millennials are forming households. There's a lot of hiring here on the West Coast. That's why we talk about the top 10 tech companies and how many open positions they have. They've come a long way in the past year after what we perceived as them pulling back amid COVID on their expansion plans. I think that they're now turning the corner or have turned that corner, hiring more people and pursuing things that they had on hold a year ago. Everything feels like it's in good order at this point in time. As you go to the cities, the main driver of job growth at this point in time has been the recovery of all the industries that were so dramatically affected a year ago, including leisure, hospitality, restaurants, filming in Southern California, etc. As we look at the world, we believe these industries are poised for future growth and we think absolutely they are. We're in fluid areas where demand for services is returning, and you are starting to see those services come back in terms of restaurants and a variety of other areas, which is a positive turnaround from last year.

Yes, that makes perfect sense. I was just waiting to see if anyone would follow up. That's great, Mike. Looking ahead, and without asking you to guide, we experienced a significant low point late last year and early this year. Is it reasonable to think that 2022 will reflect a reversal of that? And could we potentially see rents continuing to rise above typical trends in the medium term?

It's a good question. And Barbara, look at me very strangely if we start talking about 22 at this point in time. We tend to be pretty careful in terms of guidance, so we don't want to go too far out there. But I would say that I would expect certainly the return to office to be a good thing for the downtown locations because most of the top 10 tech companies or most tech companies in general have announced hybrid approaches, which means that people will have to be closer to the offices to show up let's say plus or minus three times per week. As a result of that, the people that moved to the Hinterlands, the most suburban parts of our portfolio probably are going to need to come back. I don't think people will want to do that commute three times a week from places like Ventura into where the jobs are in LA. So I think that frames the dynamics. Those who had a year, given the pandemic to make a different choice about where to live, will likely make a different choice going forward, now that there's more clarity about what the company is going to do with their work-from-home or return-to-office programs.

The only other thing I would add is, this year will have half an impact on the rent roll, and that will carry forward into next year as well. I mean, look at Angela mentioned, we had a strong July, and that will only affect part of this year's numbers.

I got it. Thank you, guys. I'm not sure that's entirely what I wanted, but I appreciate the response. Thank you.

Hey, guys, hope you're all doing well. I'm just curious what your mark-to-market is in your portfolio? And maybe if you have it by region, like Seattle, Northern California, Southern California.

Are we talking about lost lease?

That's right. In terms of the lost lease, we are actually in a much better position at a level even better than pre-COVID. If we look at July lost lease for the Essex portfolio, it's now at 7.4%. This varies by region, with Seattle at the highest at about 12%, Southern California in the middle at about 8%, and Northern California at the lowest at 3.5%.

Okay, awesome. And in your guidance range, what are you assuming as far as a recovery for the rest of the year and rate for the Northern California market?

I'll start. The second half of the year, we have to turn leases in order to impact our same-store revenue. If you get toward the end of the year, it becomes less relevant and more relevant, obviously, next year. A transaction in October only affects three months of the new lease in 2021. The rest of this is going to be in 2022. So there's an inherent lag concept with respect to what's going on with market rents. We started the year with a rate in the minus 9% to minus 10% range. To achieve minus 0.9% on page S 17 implies that the fourth quarter would be plus 6%. That does not anticipate a lot of rent growth between now and then, which is pretty typical; we usually hit the peak of market rents in July at the end of the peak leasing season before flattening out for the rest of the year. That's what's assumed in those numbers.

Great, thanks, guys. It seems possible that your markets could experience an extended leasing season, it certainly come up on other calls, and some seem pretty optimistic about the prospects. But clearly, as you identify, there are some risks to take into consideration. So I was wondering how you went about your back half guidance. And did you assume typical seasonality or sort of that another leg up in demand in the late summer, early fall timeframe?

Yes, this is Mike. I agree with you; we anticipated a typical trend regarding market rents, with a peak in July and minimal growth for the remainder of the year. However, there are some variables to consider. We are uncertain if tech companies will keep hiring at elevated levels given the impact of COVID. If they do, that could influence leasing activity. On the other hand, more individuals are relocating back to urban areas due to the hybrid work model, which could lead to an increase in rents during the latter half of the year. We expected our analysis to reflect what's typical, but the situation might turn out to be better than anticipated.

Sure thing. Normally pre-COVID, our run rate was about 4,000 units a year. We scaled back significantly last year. In the second half of last year, we only renovated about over 600 units, 650 units. The target for the restart in the second half of this year is to double that, close to 1,300 units. We are looking at a couple of large developments for the future and for next year that will have more opportunities. In terms of return on investments, we're actually looking at ranges pretty consistent with pre-COVID levels. While costs have gone up, rents have also increased concurrently, so we believe we're in a good spot.

I know line up on some of your comments on ramping up your development spending. Can you provide an update on areas you're targeting for those potential projects, as well as the underwritten yields you think you could achieve?

Hey, Amanda. This is Adam. Were you referring to redevelopment or development?

I had thought you mentioned ramping up development along with acquisitions earlier in the call, but I could be mistaken?

Okay, yes. I'm happy to take that one. So on development, yes, given where our stock is trading and given some opportunities that we're seeing out there now where we can find accretive transactions. Our main areas of focus would be primarily Northern California and Seattle. Those I see as probably the two best markets in that respect. But we're looking throughout our portfolio and throughout our footprint for deals.

And then, any change in terms of underwritten yield do you think you could achieve on most projects versus pre-COVID levels?

So yes, good question. We've underwritten several dozen deals over the last few months. The deals that we see going down primarily cap rates have definitely compressed. On the development side, we're seeing underwritten returns on cost at about 4 to 4.25. We're going to look at numbers higher than that. We've not transacted at that level, but we'd be looking at those 4.5 to high 4s.

I'm interested in this 17 supplemental or S 17(1) I should say, the migration trends that you referenced in your prepared remarks. Is that everything? Or is it predominantly, kind of close-in like Monterey, Sacramento type of net migration or in migration? And does it net out people that are leaving California entirely this? Is this the full number? And number two, what do you think about this 18%? Is this like a sort of a knee-jerk response to working remotely but closer to the office? And does it start to come back down? What's the ceiling on this graph do you think?

Hi, Rich. This is Barbara. Yes, S 17.1, the 18% is a net number. If you look back a year ago, we had out-migration, and that's what's showing in the negative 8%. Now we have people moving back. They're coming from Sacramento and some of the outer line areas within California, but also recent college grads are coming here for jobs. It's geographically dispersed, with no discernible pattern. We think this speaks to the strength of our markets, with people returning after services have reopened. We think it's a good sign and a good leading indicator. Seattle, in our portfolio, looks similar as well.

Rich, can I add a broader comment? Most of the migration that occurred was not voluntary, it was caused by the shutting down of businesses. We feel comfortable with the businesses that are here and with job growth going forward. The hotels are now mostly open on the West Coast, the restaurants are opening up. We have only fully opened in mid-June, and I think that process has been relatively slow. Most of the migration out of California is driven by the businesses being shut down. COVID is mostly behind us. The demand for services and restaurants is in demand will come back. So we have confidence.

Wasn't implying that I just, you mentioned sort of nearing areas, just want to make sure I was looking at the same thing. So the second question, 15, 20 years ago, Mike Schall and Keith Guericke were the heroes with 10% plus growth. California was the place to be now. If you would, at that point, make some investments in this sunbelt? You'd be a hero, so the torch has passed, at least for now. I assume your reversion of the mean is in your mind, that sounds like what you're saying. Do you see now is a particularly interesting time to be investing in your markets, for all of those reasons you just described, particularly special because of what's happened outside of California and Washington and what you think might come back? That will be sort of a narrowing of the performance gap over the next several years.

Yes, it's a great question Rich. Our board is focused on this geographic diversity issue. We don't want to get too far from long-term patterns. We are seeing that vacancies are fairly high in places like Austin in comparison to San Jose. We believe it’s better to be in San Jose because the demand will continue to be there due to tech companies creating jobs and growing their workforce. Looking forward, investing in areas with high job growth will yield better results.

First, Mike, seems like in a lot of your prepared comments, the risks of COVID or the Delta variant throwing a wrench into the recovery seemed lower. Are you concerned about reimposed restrictions?

Yes, it's a good question. We must remain cautious about the COVID risks. The government has done a good job promoting vaccination rates in the Essex markets. We've seen vaccination rates of around 82% in California and Washington, which lowers our exposure to COVID. Areas with high population density have their own risks, and we are aware of those; we remain cautiously optimistic.

Okay. That's a really helpful stat. Thank you for that. Other ones for me is, your previous comment talked about not making rash decisions or thinking about things on a historic level? And I guess if you look at your peers, coastal players have recently announced significant capital plans in Raleigh, Charlotte, Atlanta, Dallas, Austin. So, given that, do you give credence to that at all? I mean, does that make you think a little more about that?

Yes, it's a good question and very valid. We keep our eye on those top tech companies. We monitor their hiring trends within California and outside. We remain focused on what drives the economy here. If the drivers are intact, then the demand for services will follow. Tech is not going away, it continues to invest in our markets. We need to understand what's driving this growth and adapt our strategies.

So, Mike, I have two questions. First, the data on S 17 is excellent. If we were in the Bay Area about a month ago and noticed San Francisco seemed empty, are you now observing that with this 18% increase, San Francisco is becoming more active? All the apartment REITs that reported this quarter indicated that San Francisco was a weak link, but you're suggesting that we will see significant changes in the coming quarters?

I would say the trend has reversed and move back to the Bay Area has begun. Most of that is the service businesses, restaurants, and leisure hospitality is the leader in terms of jobs coming back. We've only just started to open completely. So the recovery is still ongoing, but I think we're in a good position overall.

Okay. Just trying, I guess, Mike, if you look at New York City, the city came back a lot quicker than many expected. So I'm curious if your view is that within a few quarters, we will see the downtown of San Francisco and Seattle rebound strongly like we've seen in New York based on what you guys are showing in this attachment S 17.

Yes, it’s a good question. San Francisco and Seattle, we have seen lower job growth compared to New York. Our job growth in those cities is impacted by their reopening times and the opening of businesses, but we are optimistic this will improve as we see an influx of businesses returning.

Okay. And then, the second question, Barb, on the guidance, you said that because of the mismatch in accelerated debt and preferred equity redemptions versus what you guys can put out. There is about a $0.10 drag. So is that $0.10 only in NAREIT FFO, but not in company FFO, or is it in both?

It’s in both. The prepayment penalties or fees that we receive this year about $7.5 million are only in internal FFO, not in core FFO. What I'm referring to is just a timing issue. We've been redeemed gotten money back early, so we don't have any of the interest income from those investments, and we haven't put any money back to work, and so that's the $0.10 I’m referring to.

We need to advocate to classify that prepayment penalty as a core item because it’s part of our returns.

Thank you. Regarding Northern California and the recovery. I think Angela mentioned in the prepared remarks that July effective rents are still 8% below pre-COVID levels. I'm not sure if that was a market rent concept or for Essex. But I was wondering if you're going against easier comps, given you were more aggressive on concessions beginning in the third quarter last year. And if the recovery could be faster than we think.

The 8% figure was for Essex. Our strategy during the pandemic to maintain occupancy drove many people to locations with lower rents. As market rents recover, it'll be interesting to see if the flow in and out of higher-rent locations uncouples over the next several years.

And so was that 8% figure that Angela quoted for Essex or the market overall?

That was for Essex.

Okay. Mike, you mentioned cap rates in your markets are low to mid 3%, which sounds like it's compressed about 50 basis points at least from last quarter. Can you comment on the assumptions that you think the market is placing now that's changed whether it's rental growth or exit cap rate and whether or not you agree with those assumptions or rationale?

Last quarter what we mentioned was that in some of the hard-hit areas, buyers were assuming some rent recovery. However, it's not a whole 50 basis point reduction. They were using current net effective rents. Adam, could you provide more specifics?

Sure. The general assumption buyers are making is that there will be a full recovery with rents greater than pre-pandemic levels. Underwriting has definitely gotten more aggressive with cap rates in the low threes to mid-threes in Seattle’s CBD, likely due to current net effective rents.

Is there a big difference between your markets or urban versus suburban?

Yes, there is a marked difference. Seattle has seen a pickup in transactional volume and is among the most aggressive markets. Urban markets are seeing cap rates in the high-twos to low-threes, while suburban markets are generally in the 3.25 to 3.5 range.

On the federal funds, I think you mentioned in the prepared comments that there was a negligible amount received to date and that there really isn't much in the guide either. I was curious if you had any figures around maybe what you have applications out for some sort of risk assessment of what you might receive on that?

Yes, hi. Its Angela here. So out of, I think we reported that we have about $55 million of delinquencies out there and we've applied for about $18 million and to-date, we've received $4 million of it. So about 20-some percent recovery rate. California has a complicated reimbursement process. We didn't bake the $18 million into guidance for this year due to timing uncertainty.

Okay, got it. And that $4 million, I assume that's largely been this month just given you said there wasn't in the sort of negligible in the first half, is that right?

Yes, for the most part of this month.

Okay, got it. And then just one administrative sort of one if I could, in the press release, there was a 6.3% blended rate number for July. But then in the commentary, I heard a 4.7 number, I just wanted to verify what those two things, we're talking about?

Sure. The 4.7% is a sequential month-to-month figure. So what I was trying to do is provide a real-time picture of what's happening in our markets. The blended lease rate is a year-over-year comparison from July of this year to July of last year.

Considering the high occupancy rate in Southern California, we've received feedback this quarter indicating that delinquencies are concentrated in this region. I'm interested in understanding the potential impact on occupancy levels once the moratoriums end. How do you anticipate this will affect physical occupancy?

Yes, this is Mike. It's a good question. Yes, we agree with others that Los Angeles has a large part of delinquency, and therefore there is some question about what might happen, but it's not a huge percentage. We expect to work with our residents to the extent we can. I don't think it will significantly affect occupancy overall. But it remains to be seen, because we can't envision exactly what that scenario will look like.

Got it. Thank you very much. And just thinking about the regulations on your rent increases that are in place when you're sort of internally discussing the difference between holding occupancy or pushing rates. Is there any momentum to say you'd rather keep the base rates pretty high to then expand a little more there and maybe lose a little occupancy as a sacrifice or is still holding occupancy as a primary driver?

It's different in each region, and so there are many factors involved. Our strategy has been focused on residents’ needs, and we will continue to evaluate on a case-by-case basis.

Adam, I appreciate the cap rate commentary. I'm trying to square there are really low cap rates to the commentary about ramping or being more positive on external growth because from the cap rates quoted feels like you guys are trading at NAV discount. So can you maybe just help square the external growth appetite and the prevailing private market pricing?

Yes, you hit the nail on the head. It's the reason we haven't been super active on external growth side. Most transactions that have gone down have not been accretive. We're seeing more opportunities that could fit our strategy. While our stock price is reasonable, trading below NAV, we remain under disciplined analysis.

We're looking at a lot of deals. It's an evolving market, and we're continually working to ensure that we are meeting our NAV requirements while pursuing opportunities.

Okay. Understood things are moving quickly. Adam or Mike, if you had to double down on the market, where would you choose to exit the market, what are the kind of the top and bottom fixed?

Yes, I’d let Adam take that one.

Good question. I'm a big fan of Seattle in general. I would say the Eastside, especially given the jobs picture. Even though supply is slightly elevated, I think the job picture is significant. To exit, you’d name a specific geographic area, but we focus on our entire footprint for opportunities.

Yes, we're definitely interested in Ventura; while it has performed well, we constantly evaluate investments in every region.

Thank you, Doug. I want to thank everyone for joining us on the call today. I appreciate your time and we know we covered a lot of ground. If there are any follow-up questions, don't hesitate to reach out to us, and we look forward to seeing many of you hopefully at a conference in-person in the near future. Thanks for joining the call.