Essex Property Trust, Inc. (ESS) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Second Quarter Performance: Essex Property Trust reported a strong second quarter, with core FFO per share exceeding guidance. Demand for West Coast multifamily housing, particularly in Northern California and Seattle, surpassed expectations.

• Positive Migration Trends: For the first time since pre-COVID, Northern California experienced positive net domestic migration, indicating a return of workers to coastal headquarters and generating additional housing demand.

• Solid Leasing Season: The company experienced a solid peak leasing season with blended rent growth of 3.4% for the quarter. Seattle and Northern California were highlighted as top-performing regions.

• Investment Market Activity: Essex has been active in the investment market, closing over $500 million in acquisitions with significant upside potential, driven by favorable market fundamentals and operational efficiencies.

• Guidance Increase: Based on strong performance and a healthy leasing season, Essex raised its full-year guidance, reflecting optimism in continued operational success.

Pessimistic Highlights

• Supply Dynamics and Delinquency Issues: Limited new housing supply and elevated delinquency-related turnover in certain areas like LA and Alameda County posed challenges, although these were partially offset by strong income growth and improved rental affordability.

• Occupancy Strategy Shifts: The company is prepared to shift to an occupancy strategy as needed, indicating a cautious approach to managing potential fluctuations in demand and market conditions.

Company Outlook

• Raised Full-Year Guidance: Essex raised its full-year core FFO guidance by $0.27 to $15.50 per share, indicating a positive outlook based on second-quarter results and an improved leasing season.

• Continued Investment Focus: With over $1 billion in available liquidity and no remaining consolidated maturities in 2024, Essex is well-positioned to capitalize on investment opportunities, maintaining a disciplined approach to growth and shareholder value enhancement.

Q & A Highlights

• Q: Can you discuss the shift to an occupancy strategy and the pullback in renewal rate growth? (Austin Wurschmidt, KeyBanc Capital Markets)

  A: The shift is part of our approach to address seasonality, aiming to maximize revenues by pushing on rents during peak demand and migrating toward occupancy during slower periods. The pullback in renewal rate growth is in line with normal business operations, not indicative of fundamental issues. (Angela Kleiman)

• Q: How has new lease growth trended across regions into July, and where is moderation most evident? (Austin Wurschmidt, KeyBanc Capital Markets)

  A: Southern California is holding steady with slight deceleration, Northern California is seeing more significant deceleration, and Seattle is experiencing moderate deceleration. This is in line with expectations and not alarming. (Angela Kleiman)

• Q: Regarding LA and Alameda, are you closer to pushing pricing, or is occupancy the focus? (Nick Joseph, Citi)

  A: We are not yet at a point where we can push pricing in LA and Alameda due to ongoing occupancy-focused strategies. Progress on delinquency has been made, but pricing power is unlikely until later in the year. (Angela Kleiman)

• Q: What is the expectation for bad debt trends in the second half of the year? (Nick Joseph, Citi)

  A: We expect bad debt to remain around 1% for the rest of the year, consistent with our guidance. Progress has been made, and any improvement would be upside to our guidance range. (Barb Pak)

• Q: Can you provide insights into the bad debt assumption and trends for the second half? (Steven Song, Bank of America)

  A: Bad debt is difficult to predict month-to-month but is budgeted at 1% for the back half of the year. We're working to make progress, but it depends on tenant departures and court processes. (Barb Pak)

• Q: How are concessions trending across different regions? (Steven Song, Bank of America)

  A: Concessions are heavier in LA and driven by elevated supply in Oakland. Southern California and Northern California are the primary areas with higher concessions, averaging closer to five days in those areas. (Angela Kleiman)

• Q: What are your expectations for pricing through the back half of the year, considering the normal seasonal pattern and later peak? (Daniel Tricarico, Scotiabank)

  A: We expect a moderate deceleration in blended rents, with a full-year expectation of about 2.7%. This is driven by tougher year-over-year comps and the normal convergence of renewals toward market rates. (Angela Kleiman)

• Q: Are you considering new on-balance sheet development given the supply and demand outlook? (Daniel Tricarico, Scotiabank)

  A: We are cautiously optimistic about development opportunities, looking for a significant premium to acquisitions due to the inherent risks. Hard costs have come down, making development more feasible. (Rylan Burns)

• Q: Can you discuss the impact of new supply on competition and your market position? (Adam Kramer, Morgan Stanley)

  A: Our concessionary activities indicate we are not seeing competition from new single-family supply. Our position remains strong with concessions improving over the past six months. (Angela Kleiman)

• Q: How do you underwrite potential long-term rent growth and handicap risks related to rent control and regulation? (James Feldman, Wells Fargo)

  A: Our economic research model drives our rent growth expectations, and we do not anticipate changes to statewide rent regulation in the near term. We factor in specific submarket regulations into our rent growth assumptions. (Rylan Burns)

• Q: Given the healthier urban market trends, are you considering more aggressive investments in urban areas? (James Feldman, Wells Fargo)

  A: We evaluate all opportunities, including urban markets, but our focus remains on high-quality suburban markets. We are open to urban investments if they meet our return expectations. (Rylan Burns)

• Q: How does the multifamily supply forecast change for 2024 and 2025, and what's the outlook for developer activity? (Unidentified Analyst)

  A: Supply for 2024 has been adjusted slightly, with some delays pushing units into next year. The outlook for 2025 is neutral to this year, with supply remaining muted. Fewer developers in the market could create opportunities for Essex. (Barb Pak, Rylan Burns)

• Q: Can you provide insights into the developer environment and potential for countercyclical development opportunities? (Wes Golladay, Baird)

  A: Fewer developers in the market could lead to less competitive product and more opportunities for Essex. We are cautiously optimistic about rebuilding our development pipeline, targeting a significant premium to acquisitions. (Rylan Burns)

• Q: How are you managing bad debt and move-out reasons in the current environment? (Ami Probandt, UBS)

  A: Bad debt trends are monitored closely, with no significant changes in reasons for move-outs. Our focus remains on job changes and household changes as the primary reasons. (Barb Pak, Angela Kleiman)