Essex Property Trust Inc (ESS) — Q1 2023 Earnings Call Transcript

Good morning. Thank you for joining Essex's first quarter earnings call. Barb Pak and Jessica Anderson will follow me with prepared remarks, and Adam Berry is here for Q&A. We are pleased to report a solid first quarter that exceeded our initial expectations, and that we are raising the midpoint of our FFO per share guidance for the full year. Barb and Jessica will provide more details on the quarter, while my comments will focus on our economic outlook, the opportunities within our platform, and some perspectives on the apartment transaction market. Beginning with our outlook for the remainder of the year, we continue to anticipate modest economic growth in 2023 resulting from a more restrictive monetary policy tempering job growth nationally. Our assumptions are detailed on Page 17 of our supplemental package. As we all know, the West Coast is home to some of the largest companies that announced layoffs over the past six months. Even so, the West Coast economies have proven resilient, producing solid job growth of 2.7% on a trailing three-month basis through March. We believe there are two key factors contributing to the durability of the underlying West Coast fundamentals. First, many of the laid-off workers have quickly found new jobs. And second, the vast majority of the laid-off affected individuals do not reside on the West Coast. For example, we continue to monitor WARN notices, and of the largest companies to announce layoffs, only 16% of their reductions have occurred in our markets. With the exception of a few specific submarkets, the overall labor market and demand for housing on the West Coast had a healthy start to the year. On the supply side, the outlook remains favorable with only about 60 basis points of total housing stock forecasted to deliver in 2023; thus, supply risk in our markets remains low. We expect that continued housing production challenges, such as a diminished labor force and high construction costs, should lead to relatively light apartment deliveries for the next several years in our markets. Thus, we do not need meaningful job growth to generate modest rent growth in 2023. Since none of us have control over the Fed or the economy, our team will remain focused on what we can control, which is the continued enhancement of our operating platform. We have been thoughtfully transforming our operating model for several years, resulting in one of the most efficient operating platforms in the industry. Relative to our peers, Essex has the highest controllable operating margins and one of the lowest average controllable expenses per unit. While the rollout of our property collections model has contributed to this efficiency, we are only midway through implementation. Our next phase of expanding this operating model to the maintenance function will maximize the workflow of our associates, including reducing task time and vendor costs. These advancements will enable incremental revenue growth to flow more efficiently to the bottom-line, ultimately generating additional FFO per share and dividend growth throughout all economic cycles. Lastly, turning to investment activities, we are still seeing institutional quality transactions occur from the mid to high 4% market cap rate, with a deeper buyer pool towards the high end of this range. Keep in mind that the transaction market is still digesting higher interest rates, as evidenced by a significant reduction in volume of approximately 70% nationally and 60% on the West Coast in the first quarter compared to last year. In addition to the reduced volume, our cost of capital remains unattractive from an acquisitions perspective. But keep in mind that Essex has a long track record of creating value for our shareholders by arbitraging discrepancies between the stock price and the underlying asset value. Once again, we demonstrated this strategy in the first quarter, locking in significant FFO and NAV per share accretion for shareholders, which is the primary driver of raising our FFO guidance mentioned earlier. We continue to actively evaluate potential deals and are ready to act swiftly and thoughtfully when opportunities emerge. With that, I'll turn the call over to Barb Pak.

Thanks, Angela. I'll begin with a few comments on our first quarter results and full year guidance, followed by an update on investment activity and the balance sheet. I'm pleased to report our first quarter core FFO per share grew 8.3% year-over-year, exceeding the midpoint of our guidance range by $0.08. The better-than-expected results are largely attributable to two factors that drove an outperformance in same property revenue growth: first, occupancy trended higher than we expected for the quarter; and second, net delinquencies were better than forecasted as we received $1.3 million in emergency rental assistance. As you may recall, we did not assume any rental assistance funds in our 2023 forecast. Overall gross delinquency was 2.5% of scheduled rents for the quarter, in line with our expectations. Given the favorable first quarter results, we are currently running 30 basis points ahead of our full year midpoint for same property revenue growth. However, given the macroeconomic uncertainty and the timing of recapturing delinquent units, which remains uncertain, we are holding off on changing our same property guidance range until we get further into the peak leasing season. As for core FFO, we are raising our full year midpoint by $0.03 per share, primarily related to accretion from stock repurchases completed in the first quarter and higher other income. Turning to our stock repurchases and investments, during the quarter, we sold a 61-year-old student housing community located in a non-core market. The proceeds were used to buy back stock on a leverage neutral basis in order to arbitrage a significant disconnect between public and private market pricing. This is another example of how Essex seeks to create value in all environments while at the same time improving our portfolio. As it relates to our preferred equity book, we had little activity to report this quarter. However, for the full year, we still expect about $100 million of early redemption. Our sponsors are able to take advantage of the available financing via Fannie Mae and HUD to redeem us thoroughly. We believe the additional source of financing is one of the many benefits of being in the multifamily sector, which has, over time, helped keep cap rates low. Overall, we remain comfortable with our preferred equity portfolio, especially given how diversified it is both geographically on the West Coast in terms of average deal size. Finally, onto the balance sheet. We plan to pay off our upcoming 2023 unsecured bonds that mature May 1 with the proceeds from the $300 million delayed draw term loan, which closed last year. As such, we have no funding needs over the next 12 months. With $1.5 billion in liquidity, limited variable rate debt exposure, and access to a variety of capital sources, our balance sheet remains in a strong position. I will now turn the call to Jessica Anderson.

Thanks, Barb. I'll begin my comments today by providing color on our recent operating results and strategy, followed by regional commentary. I was pleased with our operating results from the first quarter, including a same property revenue increase of 7.6% year-over-year. As Barb mentioned, one core factor driving these results was the successful execution of our occupancy strategy that resulted in a solid 96.7% occupancy for the first quarter, up 70 basis points from the fourth quarter. This focus began in Q4 and was done proactively in anticipation of elevated turnover from eviction. During the first quarter, we made progress recapturing units from non-paying tenants and we experienced the highest volume of eviction-related move-outs to date. The number of long-term delinquent residents has declined by 65% from our peak over a year ago, excluding Los Angeles and Alameda County. Additionally, a notable milestone in the first quarter was the ending of the eviction moratoriums in the city and county of Los Angeles, where approximately half of our delinquency resides. Given the backlog in eviction courts, it will take many months to recapture these units, but steady progress throughout 2023 is expected. I am very proud of the team and appreciate the tremendous amount of work that has gone into recapturing, turning, and re-leasing units. Thank you, team, great job. Throughout the first quarter, we saw positive demand indicators for the portfolio; lead volume, which reflects the number of initial inquiries into leasing an apartment and serves as a leading indicator of demand, was consistent with and in some cases up over the same quarter last year. Additionally, concession usage has declined from approximately two weeks free in the fourth quarter to half a week free in the first quarter. We are experiencing a relatively normal ramp-up to the peak leasing season. Net effective blended rates accelerated through Q1, averaging 2.9% for the quarter and ended with March at 3.8%, although they moderated in April. This was due to a temporary increase in leasing incentives to offset a period of heavy eviction volume. While April averaged 96.4% occupied, we are at 96.9% today and are well-positioned to absorb additional turnover while still increasing rents as demand allows. Moving on to regional specific commentary. In the Pacific Northwest, our most seasonal market, blended net effective rents were up 30 basis points in the first quarter compared to one year ago. The elevated supply in the downtown submarket is weighing on our regional performance. The supply outlook for Seattle is comparable to 2022 and similarly a more challenging second half of the year is expected. In Northern California, blended net effective rents improved to 2.6% in the first quarter year-over-year. We're seeing strength in the San Jose submarket, offset by supply-driven weakness in Oakland. The supply outlook for Northern California remains relatively muted, which will benefit our ability to push rents, presuming job growth continues to outpace the recently announced layoffs. Finally, in Southern California, blended net effective rents were up 5% in the first quarter as demand remained solid. All regions have fared well to start the year, including Los Angeles. As I mentioned earlier, we're expecting elevated turnover in this region driven by eviction. In general, the supply outlook in Southern California is very manageable, and outside of pockets of supply in submarkets such as West LA, this market is expected to fare well. In summary, 2023 has started off slightly better than expected. Demand for apartments has been solid. We continue to make progress with evictions and our occupancy-focused strategy positions us well. We are cautiously optimistic as we head into the peak leasing season, but also acknowledge the macroeconomic uncertainty that could influence apartment demand through the balance of this year. I will now turn the call back to the operator for questions.

Great. Thanks. Appreciate some of the commentary on the markets and tech job exposure. I guess if you were to quantify some of the impact to markets, whether it's parts of Oakland, Downtown Seattle, any other more difficult markets right now within the portfolio, how would you come up with that as a percentage of a total company?

Yeah. Hey, Nick. It's Angela here. Good question. On our portfolio composition, big picture, we have about 20% exposure in Seattle and 40% in Northern California and 40% in Southern California. So, when we look at the overall portfolio composition, we're actually pretty comfortable with where everything is sitting, and our results have delivered, especially in Q1, in line with our expectations. Now, there are pockets of softness. For example, I think you heard about Downtown Seattle and certain pockets in Downtown LA, and Downtown LA, for example, is about 2% of our portfolio. So, in aggregate, it's not so meaningful that it gives us pause. And as you can see by our Q1 results, we're generally trending well here.

That's helpful. I have a second question regarding the tracking of same-store revenue growth guidance. Can you elaborate on the potential offsets that might prevent an increase in guidance for the second quarter? I'm curious if the return of delinquent units to the market and their leasing process could play a role. Additionally, regarding the economic outlook, it seems that job losses have been better than anticipated year-to-date, particularly with large tech companies making their announcements. Could you provide more insight into the decision to maintain certain economic forecasts? Thank you.

Yeah, it's Angela here again. Good question. It's something we debated because, as you know, in Q1, jobs did track better than what we expected. Having said that, I do think that visibility this year is just more limited than past years because of the Fed's position, right? The next Fed meeting isn't until May 1. We are anticipating a mild recession, and that is a factor, and that's nationwide, of course, not just Essex. And you're right, with the tech layoffs, especially looking at the WARN notices, we saw that peak in January and appears to be trending down, but it's just too early to really have clear visibility on where the economy is headed. And Barb will talk about guidance.

Hi, Nick. Yeah, I would say on the guidance piece, delinquency is obviously something that's still a little bit uncertain to predict in terms of getting units back. As Jessica mentioned, LA, Alameda, just are coming out of their eviction moratoriums. The timing on when we're going to get those units back is uncertain. And so that's a factor. We also want to get a little further into the peak leasing season given the uncertainty that Angela just mentioned. Then we'll do a full reforecast for the second quarter. But the first quarter was very strong for us, and we feel pretty good going into the second quarter.

Thanks. I guess with respect to the stock repurchases, is there an internal limit sort of in the short term or long term, or just as long as you're able to sell assets and then buy back your stock at a reasonable discount, you'll just keep going?

Hi. This is Barb. We're going to match fund asset sales with stock repurchases, so we know what we're locking in in terms of value. We do have an internal NAV, and we know the value of our assets. We're going to be cognizant of it. We're going to be mindful of the balance sheet, liquidity, and maintain our strong balance sheet structure. So, it's not that we're just going to do it to do it. We want to make sure that we're thoughtful about it. What we did in the first quarter is we sold an asset that's non-core. It actually doesn't fit with our new operating model. We got a very attractive price for it, and then we're able to take it and redeploy and buy back the stock and create a lot of value that way. So, we're going to be very thoughtful going forward.

What I was trying to understand is if you're able to sell $200 million and $300 million successfully, would you be open to repurchasing that amount in stock? Or is there a point where, from a general and administrative perspective and considering other factors, it becomes less efficient to continue selling assets and buying back stock? Additionally, for your internal net asset value, are you using the capitalization rates currently seen in your markets, or are you adjusting them based on what they should be in relation to the cost of debt? It seems that the transaction market is quite thin right now, so the cap rates we're observing may not accurately reflect where transactions would occur if they had to.

Our NAV is determined through discussions between Adam and me about current transaction activity and our potential asset sales, taking into account ongoing negotiations. We have a solid understanding of the market, having sold assets in recent years which have demonstrated the portfolio's value. This is how we approach the NAV. We are confident in our ability to transact, sell, and repurchase shares.

Hi, thanks. Good morning. I guess maybe for Jessica, I was hoping you could speak a little bit to the blended rates that you talked about. I think in April you said maybe there were some impacts from the eviction. So I'm just hoping to see if you could quantify that, because I think among your peers, you might be the only one that showed a decline in April. So just trying to get a sense of the magnitude of that and maybe what your expectations are for May and June.

Hi, Steve. Yeah. The overall those blended numbers we're looking at, those are net effective trade-out numbers. It's important to point out, as I mentioned in my prepared remarks, that through March, those numbers grew sequentially throughout the quarter. So April really reflected a point-in-time pricing strategy rather than underlying market fundamentals. We've expected with the evictions, we're working through quite a few. They do come to us in a steady stream, but we anticipate that there might be some concentrations from time to time. That's what's really driven our occupancy-focused strategy. You saw that play out with our April occupancy number, which had floated down after seeing a concentration in March to 96.4%. Ultimately, when we think about as far as the market and how they're progressing through the seasonal ramp up and the strength there, we look at our market rent, which is essentially our gross recently achieved leases. Since the beginning of the year, we have seen our market rates grow sequentially through April in all our markets. Those net effective trade-outs incorporate concessions and reflect a point in time. We saw great activity in April, and we were roughly one-week free as far as concessions go. We’ve since pulled back to only a couple of days today on average. Breakdown by market, we're actually sitting at 97% in Seattle, 97% in Northern California, and then 96.8% today. We're pulling back on the concessions; there might be a little spillover into May, but we expect the trade-out rates to re-accelerate and market rents to continue to grow.

Thanks. As a follow-up, just to get a little more color on Seattle. Some of your peers had maybe a bit more weakness and spoke to the weakness specifically in Downtown Seattle. I know that you probably have more East Side exposure, but just any thoughts around Seattle in particular? Does Amazon's May 1st return to office policy have any influence, or have you seen any influence from that? Or do you think people were sort of already back in the Seattle market? Or do you think there's a wave of people to come back to the market in the near term?

Overall, we have a conservative outlook for Seattle this year. I anticipate it will become more challenging in the second half as we face increased supply, which has been apparent over the last six months. Interestingly, in April, we did observe a noticeable increase in leasing activity. I believe the return to the office policy by Amazon on May 1st, requiring employees to be in the office three days a week, may have influenced this. Regarding strength, anytime we introduce leasing incentives or adjust rates, the resultant leasing activity is significant. Although we weren't reaching 97% occupancy in Seattle, this indicates some underlying strength. Amazon's actions seem to have an effect; we maintain a conservative outlook and are noticing the impacts of demand as hiring from Amazon and Microsoft continues to decline. Previously, around 30,000 open positions vanished quickly in a month or two. Supply factors are posing challenges for us. While we remain encouraged, Seattle is aligning with our expectations for the year.

Great. Thank you. Going back to the stock buyback conversation, in terms of the sources and uses or match funding any future repurchases, are you guys currently marketing any additional non-core assets today?

Hey, Austin. This is Adam. Apologies. At the moment, we are not actively marketing anything. We're always opportunistically looking at potential for disposing of assets that are either non-core or in non-core markets, which is how we sold that last quarter, but currently no, not marketing anything right now.

Got it. And then just going back to guidance a little bit. You mentioned a couple of components driving the same store revenue outperformance in the first quarter. First, which is obviously a non-recurring item in the ERA payments. Have you received any additional ERA payments in the second quarter? And then, with the dip in April, I guess how is April trending relative to plan? Is it offsetting some of the benefit you had in Q1? Or is April occupancy and rents also trending ahead of plan? Thank you.

Yeah. This is Barb. On the Emergency Rental Assistance payments in April, we had $100,000 in our same store portfolio, so nothing material. That is disclosed in our supplemental. In terms of factors in the April guidance, delinquency is assumed to be in the mid 2% range, around 2.5%. The back half, we expect it to trend down to close to 1.5% and 2% for the full year. So we're on plan with delinquency in April, and then occupancy at 96.4% is generally in line with plan as well.

Great, thank you. I was hoping to shift gears to the expense side. Can you talk about just the key line items in expenses? There's been a lot of volatility for insurance for people and taxes. Just kind of what gives you conviction on your current outlook for the different expense lines? And where do you think maybe there might be some risk either the upside or downside of the growth rates?

Yes, this is Barb again. On the expense side, the biggest variability we're seeing is really maintenance and repairs, because we have more turnover. We had some more flood damage this quarter. That’s kind of a one-time item we don't expect to recur, but we do expect the turnover to be a recurring item given evictions. Insurance, we've already done our renewal for the year, so that line is pretty baked, and we don't expect any surprises from here on out. It is up 20%, but that's going to be the number for the year. On the tax side, we do have the benefit of Prop 13, which is 80% of our tax base. That is known. We'll know Seattle taxes here in the second quarter and will have that drilled in. For us, the variability on expenses is mostly tied to R&M. Utilities can be variable; we've put in place some gas hedges that have helped keep us at a more moderate level, all else being equal.

Okay, thanks, Barb. And then, Orange County seems to have come through this quarter pretty well across most portfolios, including yours. Can you just talk more about what's going on in that submarket specifically?

As far as Orange County goes, it has performed well. For the last couple of years, we were seeing good trade-out numbers and good leasing velocity. It's stable as far as the supply outlook. There's nothing noteworthy there as well. So, overall, Orange County is pretty stable, similar to much of our Southern California markets, including San Diego.

Thank you. Barb, can you elaborate a little bit more on the real estate taxes? You had the rare decline in taxes. I think you mentioned last quarter you were budgeting a 4.25% increase. Given real estate taxes are the largest components of OpEx, and insurance came in pretty much where you expected, is there a likelihood of your expense guidance going down during the year?

John, on the tax line, it really deals with the comp issue from the first quarter of last year. In Seattle, we had a favorable surprise last year where our real estate taxes went down 4%. We didn't know that until the second quarter. The first quarter of last year was our budget, and what we assumed taxes would be, so it was way too high. So we're comping off of a really easy comp, and that's why you see a negative 1.6 on the tax line. We'll know where Seattle taxes come in in the second quarter. We're assuming 4.25% overall for the tax line this year; it's really a comp issue in the first quarter.

Okay. I mean I saw last year's first quarter wasn't that high; that was like 3%. But anyway, my second question is on your mezz opportunities. It seems like with regional banks having issues that could be a part of the capital stack where you could see more opportunities at higher yields. I'm wondering if that's the case and how you would stack that up versus buybacks.

Hi, John. This is Adam. Over the last couple of months, we've seen, I would say, a slight uptick in possible opportunities in the mezz and preferred equity space. As you said, some of the lending sources have either tightened or disappeared entirely. It remains to be seen if this new wave will translate into deals. There are legacy development deals that have been out there a while, and there are some new existing deals. This process takes a long time and several months. We're assessing a number of new opportunities, but it's too early to tell how many of them will translate into actual deals. We'll continue to look at potential options when we have liquidity, whether through dispositions or redemptions, regarding the best use of that capital.

Yeah. Hi, everybody. Thanks. So, the big tech layoffs have already been touched on, but I'm wondering what effect, if any, do you think the SVB failure and the associated impact on tech company funding has on your residents? I know you typically talk about a relatively small exposure to big tech in the resident base, but I'm curious if you think that applies to start-ups as well.

Yeah. Hey, Brad, it's Angela here. With the SVB failure that occurred recently, we did not see any impact on our portfolio. Looking forward, we don't know what can happen. We know that the parent has filed for bankruptcy, but its subsidiary is sold off due to the Fed's intervention, so we don't expect further disruption from that. We looked at 30-plus companies in real estate technology ventures, and there's no impact there either. Regarding the broad banking sector, it could influence a broader economic conversation. That’s one reason we are forecasting a mild recession in our current expectations.

Okay, got it. Thanks for that. And then maybe for Barb, another question on the guide. The increase to the guide was smaller than the beat versus the first quarter midpoint guide. I know you mentioned that most things are outperforming and then you had the repurchase as well, but it seems like there was some sort of offset for the rest of the year, second quarter to fourth quarter. So, can you talk about what that is?

Yes. The vast majority of the beat in the first quarter was tied to same-store revenue growth, and we didn't change our revenue outlook. That is not carried forward in the guidance. So, that was $0.07 of the $0.08 beat. The reason we changed our guidance was the stock repurchase, which will carry forward; that's $0.03. We also have higher other income, mostly tied to better rates on our cash management platform and how we manage our cash and marketable securities. It’s partially offset by lower co-investment tied to preferred equity redemptions and the timing of those redemptions. That's what was updated in the guidance. Same-store will be revisited here in the second quarter.

Thank you for the question. I wanted to inquire about severance packages. I recall we discussed technology and SVB previously. My question is, regarding the severance packages from some of the earlier layoffs last year, which had longer durations, have you observed any changes in resident behavior now that some of those packages are nearing expiration?

Yes. It's Angela here. The severance packages can range up to three months. Given the bulk of the layoff announcements that occurred back in January and tenants' behavior, they tend to make decisions around 45 to 60 days in advance of major life events. We believe we've already digested it in our portfolio. I want to point to job growth numbers as good indicators. Another good indicator is the initial unemployment claims in California and Washington; today, they still remain below the 15-year average.

That's great. That's all super helpful. Maybe a follow-up. I think you have done a really good job of sharing your insights on managing occupancy versus increasing rents, both on this call and in previous calls. Could you explain that trade-off? I know you mentioned that concessions are lower now than they were in early April. Please share your current thoughts on managing occupancy versus increasing rents.

Hey, Adam, this is Jessica. Yes, we're progressing through the peak leasing season. We’ll always be opportunistic, with a focus on maximizing revenue. I think overall with our outlook for the year, we'll spend most of the year focused on occupancy because we know we need to continue to work through evictions. Rent growth is moderating. When you think about rate growth, anytime you're turning an apartment, you're experiencing turn costs and the costs of vacancy. You really need strong trade-out numbers to make it worthwhile to focus on rate versus occupancy. We'll monitor the markets closely. Just like we pulled back concessions at the end of April, leaving us well positioned for the peak growth period that occurs typically in Q2, we will look for opportunities to maximize revenue overall.

Hey, good morning out there. Two questions. First, going back to Silicon Valley, are you saying that what's going on in banking and where we see lenders pulling back from real estate loans isn't having any impact on your debt and preferred equity portfolio? Or is it just the $100 million slated that you're fine, but the broader banking troubles are affecting the debt and preferred equity space in general?

Hi, Alex, it's Barb. What I was speaking to is there is still capital available in the multifamily space. I know in other sectors it's pulled back significantly; the banks have pulled back. But government financing is available. Life insurance companies are stepping in. We haven't seen any real issues within our own portfolio. It doesn't mean issues aren't happening elsewhere, but in terms of distress in the whole market, we haven't seen that on the West Coast.

Okay. The second question is going back to supply. It sounded like the only market that was an issue was Seattle, specifically Downtown Seattle. But as you look at your portfolio into next year and the year after, do you see supply coming down everywhere, like Northern California has pulled back? Do you see any areas where there will be a deluge of supply next year? Or do you think supply across your markets will be similar or somewhat muted?

Hey, Alex, it's Angela here. It’s a good question when looking ahead. In terms of our portfolio, starting this year compared to last year, overall supply is slightly down. The vast majority, as you pointed out, is Northern California, down over 20%. Southern California is up slightly by about 14%, and it’s primarily in Downtown LA. Overall, supply numbers are quite muted. As we look forward to 2024, the preliminary landscape shows no significant drop-off, but at similar levels. We’re operating at a low level, about 60 basis points as a percent of total stock. We foresee this continuing, especially given the challenging labor force and higher construction costs. Rents in the northern region haven't moved significantly past pre-COVID, so Northern California remains slightly below pre-COVID levels. That didn’t surprise us for Southern California supply picking up slightly this year. You see that through the country—significant rent growth will attract supply, so that’s the outlook for our regions for this year and next year.

So, just to clarify, Downtown Seattle is where the issue exists, right?

Seattle overall is slightly down, but Downtown is up.

Hi, good morning. Going back to the share buybacks, do you have a number of assets or a dollar number in terms of non-core that you would sell? If you were to get offers on core assets at those 4% to high 4% cap rates, would you opportunistically sell those to buy back stock accretively?

Hi, Anthony, this is Adam. Regarding your first question about whether we have a list of non-core assets, the answer is yes. We are continuously reviewing them to identify potential sales and how we can utilize the proceeds. When it comes to stock buybacks, we face challenges such as dispositional impacts, tax gains, and Prop 13. All these elements are evaluated when determining what we can do with the funds. Additionally, we can use 1031 exchanges to transition from non-core assets into markets that benefit the overall portfolio.

Okay, thanks. More broadly, it sounds like you're more optimistic on the West Coast markets recovering this year despite the layoff activity. Does this reinforce your view on the West Coast as the best use of capital, the best place to invest? Or would you still consider diversifying into the East Coast or Sunbelt?

Yeah, hi. It's Angela here. The diversification question on expanding outside of the West Coast is something we've been disciplined about evaluating. That basic discipline has not changed; we'll monitor those markets and look for opportunities. Back to your original point, you hit the nail on the head, especially regarding Northern California; a couple of things favoring our markets is the lowest supply deliveries. Northern California supply is down 22%, and we're just starting to rebound in job growth getting back to pre-COVID levels, with market rents still below pre-COVID but gradually improving. We're in the best affordability position from a rent-to-income perspective in the northern region, below the long-term average. So those factors indicate that where we want to deploy capital has the best growth prospects. Speaking broadly on migration, we experienced net migration during COVID, and while the migration landscape has gradually been improving, those pieces support where we see the most upside.

Hey, everyone. I want to get your view on possibly starting developments with the hopes of delivering in a better part of the cycle.

Hi, Wes. This is Adam. The development landscape today is challenging for a number of reasons. Angela has pointed to a few: with a challenging labor market, construction costs remain elevated. Solving for premiums over market cap rates leads to lower land pricing than landowners are willing to consider. We would love to be delivering into a lesser supply market, but right now, development deals just don't pencil out.

Got it. Can you remind us, don't you have a few covered land plays? Or did you get rid of those?

We do, yes. Those are still generating active revenue. We're pursuing entitlements in the meantime, so we're processing some longer-term lease commitments.

Okay. Can you talk about the demand from people that currently have H1B visas? Do you view it as maybe a potential positive with more people getting visas or with tech layoffs possibly causing some losses?

We've observed the international part to be a tailwind for us just starting. Historically, California has had a net out-migration if you only look at domestic numbers; 17 out of the last 20 years recorded net out-migration. Even during those periods, we saw meaningful rent growth acceleration. So the international component drives migration to become positive for California, which virtually disappeared during COVID and is just starting to come back. We are hopeful it will be additive to the demographic piece.

Good afternoon. Thanks for taking my question. I'd like to ask about migration. How has demand from customers currently living outside Essex's market compared to normal? Have you seen increased or decreased move-outs to non-Essex markets?

Yes, that's a good question. Demand from outside Essex markets is generally back to pre-COVID levels, which is positive. With international migration, we see the tailwind being where the positive component is located. For out-migration, we look at it on a net basis. We're continuing to see gradual improvements.

Sorry, I was on mute. Could you give us any thoughts around the RealPage issue? Any changes you're making to your operating platform considering those dynamics? How are you thinking about the rolled-up class action suit?

Hey, Chandni, it's Angela here. We've been reducing our usage of RealPage as we develop our new revenue management system over the past several years. We started this before the RealPage lawsuit for reasons Jessica mentioned earlier. We believe that their claim is without merit, and we are confident about our defense prospects.

Great. Sorry if I missed this, but what was gross delinquency in the first quarter? I believe net was 2.1%. As we think about delinquencies improving faster with eviction moratoriums going away, could there be upside to that 2% growth delinquency numbers that you laid out earlier?

Hi, Chandni, it's Barb. In the first quarter, gross delinquencies were 2.5% versus the reported number of 2.1%, reflecting a 40 basis point improvement tied to Emergency Rental Assistance. For the outlook for the year, we're still holding our 2% target. The timing of court actions for evictions can vary; it currently takes about six-plus months. The speed at which people navigate through the eviction process will be a variable; this could be uncertain.

Great, thank you for the detail.

Thanks. Maybe just a follow-up on that bad debt topic. Barb, just one question on the long-term bad debt profile of your markets. Based on the current trajectory of gross delinquencies and payment behavior you’re seeing among tenants, do you think that when the dust settles, bad debt settles out at a structurally higher level versus pre-pandemic behavior? If not, when do you think bad debt gets back to pre-pandemic levels?

Yes, John, it’s a great question, something we talk a lot about internally. We were historically at 35 basis points pre-COVID. We believe we’ll ultimately return there because there won’t be any loss protection for tenants as there was during COVID, resulting in tenant behavior changes. Now that we're coming out of all moratoriums, we think we’ll get back there, but it will take until 2024 to do so. It won't happen for the entire year but into the year because of the time eviction processes will take. We don’t believe the long-term trends will shift in delinquency due to COVID.

Okay, in your unregulated submarkets within the portfolio, has bad debt reverted to pre-COVID levels?

No, I don't think we’ve fully returned to pre-COVID levels in our other markets. As Jessica said in her remarks, we’ve gotten over 60% of our long-term delinquent residents out since the start of 2022. We've made good progress but aren't fully back to where we want to be at this point.

Okay. Last question for me is more of a regional question for Angela or Jessica. If you start the clock today, which region do you think would generate the highest and lowest revenue growth for the next two or three years—Seattle, Northern California, or Southern California?

It's Angela here. I'll start, and Jessica you can add. For the most upside, we see Northern California as ranking first, followed by Seattle, then Southern California. Northern California will likely have top revenue growth because of improving job growth and market rents gradually. Seattle has a higher supply that adds volatility and seasonality into the mix. Southern California is doing well, not because we do not like it—it's outstanding having recorded 15%, 20%, and even 30% rent growth above pre-COVID. Supply pressures are starting to arise, but they're still manageable compared to the rest of the U.S.

Nothing to add.

Okay, good. Glad you agree.