Canada markets closed

Edited Transcript of ESS earnings conference call or presentation 7-May-20 5:00pm GMT

Q1 2020 Essex Property Trust Inc Earnings Call

PALO ALTO May 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Essex Property Trust Inc earnings conference call or presentation Thursday, May 7, 2020 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adam W. Berry

Essex Property Trust, Inc. - Senior VP & CIO

* Angela L. Kleiman

Essex Property Trust, Inc. - Executive VP & CFO

* John F. Burkart

Essex Property Trust, Inc. - Senior EVP & COO

* Michael J. Schall

Essex Property Trust, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Alexander David Goldfarb

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* Hardik Goel

Zelman & Associates LLC - VP of Research

* Jeffrey Alan Spector

BofA Merrill Lynch, Research Division - MD and Head of United States REITs

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Neil Lawrence Malkin

Capital One Securities, Inc., Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS

* Wesley Keith Golladay

RBC Capital Markets, Research Division - VP & Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Essex Property Trust First Quarter 2020 Earnings Conference Call. As a reminder, today's conference call is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found in the company's filings with the SEC.

It is now my pleasure to introduce your host, Mr. Michael Schall, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you for joining our call today. John Burkart and Angela Kleiman will follow me with comments, and Adam Berry is here for Q&A.

These are challenging times as we manage through unprecedented events in our nation's history. We would like to offer our best wishes to all those impacted by COVID-19, their caregivers and those participating on the call today.

We reported a strong first quarter results last night, exceeding the midpoint of our FFO per share guidance by $0.07, with the results for the quarter mostly unaffected by the COVID-19 pandemic. As noted in the press release, we withdrew our 2020 FFO guidance ranges. Generally, we believe providing FFO guidance and related assumptions is an important aspect of investor communications. However, in the current environment, we believe that the range of probable outcomes for Essex is too wide to be useful to investors.

Since the initial shelter-in-place order in the Bay Area was announced on March 17, the nation has experienced over 30 million unemployment claims, and economic uncertainty is as great as I have ever seen. Key variables in the government's policy response are impossible to model such as the duration of the shutdown, the possibility that a second wave of infection could occur and the effectiveness of social distancing during a phased reopening of the economy. After a prolonged debate, we made the difficult decision to withdraw our core FFO guidance.

In my prepared remarks today, I will cover 3 topics: a recap of actions taken in the past 2 months in response to the pandemic, a review of our updated estimates for rent growth in our markets as can be found on Page S-16 of the supplemental and insights into what we're seeing in the West Coast property transaction markets.

Turning to our response to the pandemic. We have been very impressed with how the Essex team has responded and adapted to the dynamic and unprecedented conditions created by COVID-19. As the scope of the pandemic became more clear in early March, we created a COVID response team comprised of senior leadership to gather information and act decisively. To maintain essential property operations, we implemented a variety of social distancing practices at each property; provided incentives and tools to push nearly all transactions online, over the phone or through the mail. We acquired and distributed PPE to our on-site staff and expanded training for safety protocols. We transitioned 5 corporate offices to work from home and implemented a virtual management process with daily contact via teleconference. In addition, we conducted weekly live video conferences that were available to all Essex employees to ensure consistent messaging and unity in a chaotic time. Communication is important during periods of uncertainty. And on March 23, we issued a press release to outline for investors, employees and residents how the company is going to assist those that are financially impacted by COVID-19, including protection from eviction and late fees, creation of payment plans and dissemination of information about governmental and community resources.

The past 2 months have required urgent responses to many complex issues, including many unknowables related to the pandemic itself, a plethora of well-intentioned but imprecise government regulations and properly balancing our obligations to stakeholders in the spirit of corporate responsibility. With that backdrop, it's essential to recognize the tireless efforts of the Essex team amid great concern for their health and safety of their families to rapidly and thoughtfully react to the crisis. Well done, team Essex.

Turning to the West Coast rental markets. We have prepared a scenario for our 2020 rent growth expectations on Slide S-16 of the supplemental that incorporate macro U.S. forecasts for GDP and job growth that are prepared by a broad spectrum of industry and Wall Street economists. While the span of forecasted outcomes is wide to an unprecedented extent, there is a common expectation that the U.S. will experience double-digit declines in second quarter GDP growth and an overall contraction in the economy in 2020, with job losses for the year estimated at around 7%.

In summary, we expect approximately 900,000 job losses or 6.6% in our West Coast metros in 2020 compared to the net addition of 207,000 jobs from our estimate last quarter. An approximate 14% reduction in estimated total housing deliveries from last quarter is not sufficient to offset the impact of negative job growth, leading to our belief that market rents overall will decline an average of 2.8% in 2020 versus last quarter's estimated 3% increase in market rents.

The extraordinary fiscal and monetary stimulus programs that have been implemented by the federal government have already helped stabilize capital markets and should limit the risk of financial contagion. If you consider by contrast the major stimulus programs from the Great Recession, they occurred roughly a year after the recession started. But in today's case, they were just days and weeks into the crisis and have been much larger in scope.

On Page S-16.1 of our supplemental, we highlight the impact of the $600 per week federal supplement to unemployment insurance that was part of the CARES Act. While the effectiveness of the program has been muted by processing delays at state unemployment offices, the weekly checks have started to arrive and will substantially offset the income loss for a large segment of the population that has suffered from job losses and furloughs. We highlight this program because it hasn't received much attention. Given these benefits, the income shortfalls for lower- to middle-income workers are much less severe than they would have been otherwise. And in some cases, again, at lower- and middle-income levels, some workers will receive more in unemployment benefit as compared to their compensation.

Finally, I'll turn to the apartment transaction market. Yields or cap rates for apartment transactions generally exceed interest rates on related debt, and the resulting positive leverage is a powerful force in the market. Unlike the great financial crisis, large banks have maintained relatively conservative lending standards and strong liquidity and capital positions, and interest rates have declined further since the crisis began. As an example, we recently received a quote for a 7-year Fannie Mae loan on a joint venture property with a fixed interest rate of 2.75%. We believe these factors will be sufficient to avoid widespread distress in the apartment space.

Unlike REIT stocks, private market values in terms of cap rates are generally sticky, meaning that they don't change immediately in reaction to events but rather seek to reflect the longer-term financial performance of a property. Generally speaking, many potential buyers are seeking a higher cap rate as a result of the pandemic. However, apartment owners generally have no distress, and exceptionally low interest rates provide the opportunity to improve cash flow through refinance to take advantage of record-low positive leverage. As a result of these factors, the spread between buyer and seller expectations has widened and the gap separating them is probably around 30 to 60 basis points, likely resulting in fewer apartment transactions in the near term. If our stock price was higher, we would be an aggressive buyer in this environment. Historically, periods of disruption have resulted in great opportunity for Essex. I am confident that we have the team, resources and strategy to thoughtfully act on these opportunities, consistent with our long-term track record of outperformance.

And now I'll turn the call over to John Burkart.

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [3]

--------------------------------------------------------------------------------

Thank you, Mike. I would like to start by echoing Mike's sentiment and recognize our associates who are working hard to provide our customers the best service in this essential business of providing housing.

Over the past few weeks, we have seen countless demonstrations of the Essex spirit throughout our community. Our teams have shown grit and determination in the face of rapidly changing working conditions. But even more, they have shown compassion to each other and to our residents, from proactively reaching out to those in need, buying residents groceries and even obtaining and distributing personal protective equipment.

In addition, we have published resources on our website to assist residents in finding the financial assistance they may need during this time as well as created a library of resources for residents whose children are home from school or who are simply looking for productive ways to use their time during this crisis. Most residents and prospects have been understanding of the changes we needed to make at our communities and appreciative of the great efforts of our team to continue to provide exceptional service during this time. A big thank you to our E-team, our residents and the community. We are truly all in this together.

Turning to our first quarter 2020 results. We achieved 3.2% revenue growth over the prior year's quarter. The results were in line with our expectations. Although this is the Q1 call, I believe everyone is more interested in recent events post-COVID shelter-in-place orders, therefore I will be focusing on specific April metrics and recent market activity. I'll begin with general comments and move on to the markets.

As this situation is unprecedented, with numerous key variables impacting both supply and demand, my commentary on the future market expectations and conditions relies on numerous, generally positive assumptions such as the relaxation of the shelter-in-place orders in the near future, a reduction of new supply entering the market and a restart of the economy in an orderly way.

Currently, the rental market is disrupted. There is a gap between the bid/ask price for rental transactions at certain properties in the market. Rental transactions are disproportionately occurring at stabilized properties, offering 2 to 4 weeks free rent, while other properties are losing occupancy.

April 2020 year-over-year same-store economic rents were up approximately 1.5%, while financial occupancy declined 1.3% compared to the prior year's period. We are currently offering various leasing incentives, which includes 2 to 4 weeks free rent. I expect the market will move back to equilibrium in June as the shelter-in-place requirements are relaxed and we enter the summer leasing season.

Historically, during periods of reduced demand, our portfolio has benefited from people taking advantage of lower pricing and moving from the outlying areas to the core areas where our portfolio is located. I expect the same market dynamics to play out in the coming months.

Looking at operations post shelter-in-place, leasing applications in our portfolio bottomed the first week of April and have increased each week since that time. Our same-store financial occupancy decreased 1.3% in April from March. Roughly half of the decline in occupancy was due to COVID-19-related lease breaks. The remainder was related to reduced leasing velocity. This last week, we have seen activity increase dramatically. Our tours increased 47%, and our applications increased 62% over the prior 4-week period average. The initial shock appears to be over, and now the market is moving to equilibrium.

Now we will turn to April delinquencies. Delinquencies in our total portfolio on a cash basis was 5% in April compared to 33 basis points for the full first quarter of 2020. As the magnitude of this crisis became more apparent in March, we acted immediately to form a resident response team to engage with our residents in understanding their situations, identifying resources for them and partnering with them to get them back on to firm financial ground. As noted in S-15, approximately 4,600 tenants, representing 7.4% of our total portfolio, completed our online request form in April, confirming that they had been financially impacted by COVID-19 and requesting assistance. 36% of those residents paid their April rent in full. Another 36% made a partial payment averaging about 50% of their rent. And 28% were unable to pay their April rent. Residents representing 60 basis points of our portfolio requested to move out immediately, which we allowed, enabling the residents to move forward with their life and the company to potentially avoid future delinquency. Of the residents who stated they were financially impacted by COVID-19, 16% were in the food and beverage industry; 9% each in retail and personal services, which relates to fitness, massage or beautician services; and 7% each in health care, transportation, construction and professional and business services.

2.2% of our residents are delinquent, and we have been unable to contact them. However, some of them have made partial payments. Interestingly, the delinquency at the property level within a selected market had fairly large variations. Certain properties were substantially more impacted than others. I believe this disproportionate impact is the root cause of the market dislocation. I would compare it to randomly located new lease-ups aggressively attempting to increase occupancy. Owners at the highly impacted buildings with respect to occupancy and/or delinquency as well as those who are struggling to compete in this new virtual sales world are likely to be the ones aggressively offering concessions.

On to expenses. As Mike has mentioned, we have withdrawn our financial guidance. However, I want to note some expense considerations. Utility usage and related expenses will be higher due to the shelter-in-place mandates. In addition, we expect a significant ongoing increase in expenses related to personal protective equipment and cleaning supplies as well as related increased labor cost due to new cleaning protocols.

Finally, to protect our employees and residents, we have stopped performing nonemergency work orders in occupied units. We have provided residents with self-help videos and other resources to help them fix many of their own issues. However, we expect that there will be some level of pent-up work orders as conditions change.

Moving on to our operating strategy in this new environment. Our technology vision and related operating strategy that we have been executing positioned us well going into this rapid change. Our cloud-first strategy enabled a relatively smooth transition as the stay-at-home orders were implemented. We remained fully operational while rapidly transitioning to working from home. The new operating environment of social distancing requires a solid digital presence, including video tours, digital maps, self-help information and related videos as well as smartphones for FaceTime tours and other similar tours. We made the decision early on to rapidly accelerate our technology-enabled transformation, completing the implementation of our mobile maintenance app 2.0, our sales lead management system 2.0 and several other initiatives, shaving 4 to 12 months off the original rollout plans. As the restrictions are relaxed, we are positioned well for this new environment.

Our operating strategy going forward will balance occupancy and market rents, maximizing revenue. We will likely operate at a lower occupancy than we have over the past several years. We will continue to leverage our technology platform and operate consistent with the social distancing protocols by using a combination of virtual tours and live video tours, where our sales associate is either on site touring a prospect via phone, or the resident is on site and the sales associate is live answering questions and explaining various features and benefits of the particular unit and amenity. Our smart lock digital entry systems enable us to provide access to vacant units for self-tours, thus eliminating the need for agents to be on site to provide access. These were very challenging weeks for certain, but we are emerging from this challenge stronger and we are well prepared for the future.

Turning to our markets. In the Seattle market, April 2020 year-over-year same-store economic rents were up 6.1%, while financial occupancy declined 80 basis points compared to the prior year's period. Delinquency in the northern technology-driven markets were lower. In April, delinquency in our Seattle same-store portfolio was 1.8%, the lowest in our same-store portfolio.

Moving to Northern California. In the Bay Area, April 2020 year-over-year same-store economic rents were up 17 basis points, while financial occupancy declined 1.2%. Delinquencies for the same period in the Bay Area were 3.9%. Our Santa Clara County submarket had the lowest delinquency at 2%, while Alameda, San Mateo and Contra Costa County were 4.1%, 6.3% and 7.9%, respectively. Consistent with the rest of the market, our 4 Bay Area lease-ups, 500 Folsom, Station Park Green, Mylo and Patina at Midtown, had very little activity since late March, which was the result of both the construction challenges as well as reduced demand in the marketplace.

Continuing South. Southern California same-store economic rents were up 1.1% year-over-year in April 2020, while financial occupancy declined 1.6%. In the same period, our Southern California region had a higher delinquency overall in our same-store portfolio at 7.5%. Ventura and San Diego delinquency was at 4.4% and 4.5%, respectively. Orange County delinquency was 7.5%, and L.A. County delinquency was 9.4%. Our L.A. CBD and Woodland Hills submarkets were the hardest-hit at 12.1% and 13.8%, respectively. As of April 30, our same-store portfolio's physical occupancy was 94.4%, and our availability 30 days out is 6.5%.

Thank you, and I will now turn the call over to our CFO, Angela Kleiman.

--------------------------------------------------------------------------------

Angela L. Kleiman, Essex Property Trust, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, John. I'll briefly comment on our first quarter results then provide an update on our funding plans and the balance sheet.

We had a strong start to the year with first quarter same-property NOI growth of 3.9% and core FFO per share exceeding the midpoint of our guidance by $0.07 and achieving a 7.7% growth compared to the same period last year. As noted in our earnings release, we have withdrawn our 2020 guidance as a result of the unprecedented uncertainty caused by the COVID pandemic. Subsequently, we have enhanced our disclosure by providing additional data on April operations and more liquidity details on Page S-15.

Turning to our funding plan for investments, stock buybacks and dividends. During the first quarter, we committed $106 million of capital towards structure finance investments at an average yield of 11.2%. The funding for these investments is expected to start around September and occur over a period of 6 to 12 months thereafter, which means our funding needs for 2020 is only about $40 million. Similarly, our development funding needs for 2020 is also de minimis at about $75 million. This represents 50% of our total development commitment shown on Page S-11. In fact, approximately 90% of the current development pipeline is expected to complete lease-up within the next year. We have begun reducing our exposure to direct development several years ago because the rate of construction costs increased at a greater pace than rent growth, ultimately compressing yields. Hence, this is consistent with the plan we have discussed on previous calls.

Moving on to funding sources. We expect to receive a total of $215 million from structured finance repayments, of which $115 million can be allocated to our investment needs noted earlier and $100 million can be allocated to fund our stock buyback. Since we have repurchased $176 million of stock, the remaining $76 million will be match-funded with cash flow from operations.

As for our dividends, during the first quarter, we raised the annual dividends by 6.5%, which represents the 26th consecutive dividend increase. We are proud of this track record, which few companies have achieved. Even though cash flow from operations may be lower than the original plan for this year, the dividend remains very secure and covered by free cash flow. With over $1 billion in liquidity, no debt maturities in 2020 and our funding commitments well covered, Essex remains in a strong financial position.

Thank you, and I will now turn the call back to the operator.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Nicholas Joseph with Citi.

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

--------------------------------------------------------------------------------

Mike, you mentioned the transaction market and that your cost of equity isn't where you would like it to be. But if you see good external growth opportunities, either repurchasing your shares or on the acquisition market, would you execute an increased near-term leverage?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Hi, Nick. Thanks for the question. I appreciate it. I think at this point in time, given this incredible uncertainty, we would like to stay more leverage-neutral in terms of how we approach our different investment types. Not to say that we won't sell property in order to pursue other types of opportunities, but at this point in time, until we see greater clarity because I would say at this point in time, there are more unknowns than knowns out there given the unprecedented nature of the pandemic itself. And so we're going to remain fairly conservative when it comes to leverage for the foreseeable future.

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

--------------------------------------------------------------------------------

And then just maybe on operations. You mentioned the concessions that you're seeing on some stabilized properties. What sort of concessions are you seeing on lease-up properties today in the different markets?

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [5]

--------------------------------------------------------------------------------

Sure. This is John. The lease-up properties, just going back to the stabilized just for a second, what we're seeing is we're seeing 2- to 4-week pretty common is where we're seeing rental transactions. And I mentioned the comment as far as dislocation because simply looking at asking rents and assuming that asking reflects the actual rent, that's what I'm getting at. It doesn't necessarily reflect that. Where the transactions are occurring is where there are some level of concessions that are going on out there. As we move from the stabilized market, and that, again, back a step, that really relates to what I see as a dislocation that's caused by the impact of some of the delinquencies hitting certain properties and not others, kind of creating many lease-ups out there. I think that will abate in the near future.

As we move to the lease-ups, the lease-up concessions are closer to 2 months, and there are some other specials that are going on. Again, the whole market just kind of expanded out from shorter concessions on lease-ups and no concessions on stabilized, to 2 to 4 weeks stabilized and basically 8 weeks on a new product across the board. Does that answer your question?

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [6]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [8]

--------------------------------------------------------------------------------

Curious what your thoughts are on the collections across your markets, married with the comment you said regarding the slow rollout of unemployment benefits, and then also balancing that with some of the tenant activism that's made headlines of late.

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [9]

--------------------------------------------------------------------------------

Yes, I'll take that. What we're seeing, I'm going to start with an amazing event, and we're really seeing some good people that were impacted by situations outside their control, really all trying to figure it out and do the right thing. I don't want to focus on the potential of a few bad actors. The reality is we have a lot of great people that are working hard. Our resident response team is engaged with them, and we're seeing good behavior by really the majority of those people. I acknowledge there are some people we haven't connected with. But even those people, some of them have actually paid some levels of rent. They might just be a little bit shellshocked from this whole situation.

My expectation is that as the government assistance rolls out, that people will probably make as much rent payments as they can. And then again, as I mentioned, we do expect the relaxation of some of the shelter-in-place requirements and a somewhat orderly challenged, but orderly economic improvement. And so we expect to see people starting to go back to work, being able to pay rent. And for those that can't pay rent, they may end up moving out. But again, our markets that we're in benefit from this chronic undersupply. And so what we've always seen in the past is whenever there is some level of a shock, it takes some time, 1 to 3, 4 months, and we start to have people from the outside areas moving into our markets and supporting occupancy and therefore, rents. So I see -- I have a somewhat optimistic view as to how this goes, but again, I want to be very candid that where we are today, there's a little bit of dislocation going on right now.

--------------------------------------------------------------------------------

Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [10]

--------------------------------------------------------------------------------

That's helpful. What do you think the likelihood that you collect some of that unpaid or delinquent rent is over time as some of those benefits roll in?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

Hi. This is Mike, Austin. We don't know. Honestly, that falls in the bucket of we actually have more unknowns than knowns, which is why we didn't give guidance. I think this is one of the key issues out there. And historically, as John said, we have somewhere around 30 to 40 basis points of delinquency. And it does not present an accounting issue. We just assume. Effectively, we treat it on a cash basis. And so it's a little bit different now. And fortunately, because of the timing of when all this happened, we have pretty much 3 months to work through those issues and have better information.

We know, historically, that the further you get away from the move-out date, the more difficult it is to collect. And that's just our experience over time. And so we are motivated to move pretty quickly and -- which, of course, many of these eviction prohibitions and other governmental actions prevent us from doing that. And so as John said in his prepared remarks, which I think is important here, that if someone comes to us and says, hey, I'll move out, we're going to likely let them out of their lease, which means that we're going to have a little bit more turnover, but we're going to control the unit at a time when, again, because of these eviction prohibitions, we don't have a lot of choices. So we're working through all that. It's, I think, one of the more complicated issues that we have to deal with, with respect to this whole challenging scenario.

--------------------------------------------------------------------------------

Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [12]

--------------------------------------------------------------------------------

That's helpful. And I know there's still a lot of uncertainty, but you guys, kind of leading into this, had preferred equity over ground-up development. I'm curious, as you think about coming out of this and how you want to be opportunistic, how are you weighing those types of investments.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

Yes. This is Mike. And Adam is here too so he may want to add something. But yes, we still like the preferred equity investment. We're not in the first loss piece. Again, we come in to those transactions at the point in time that they are beginning construction. So costs are known, financing's in place, et cetera. So we're not taking a great deal of risk upfront. And typically, those deals underwrite to somewhere in the high 4 to low 5 cap rate. And they were, of course, at the -- around the 85% loan-to-value ratio, which means our effective cap rate is somewhere in the mid-5s. So the chances of having distress at that level, I think, is incredibly unlikely. And in terms of investment policy going over -- going forward, direct versus preferred equity, I'll let Adam handle that.

--------------------------------------------------------------------------------

Adam W. Berry, Essex Property Trust, Inc. - Senior VP & CIO [14]

--------------------------------------------------------------------------------

Yes. To echo what Mike has said, we continue to aggressively pursue on the pref equity side throughout this crisis. We've underwritten deals a little more conservatively, increased interest rates commensurately with our additional cost of capital that's happened over the last month or so. And we've continued to identify deals, and we're in the process of due diligence on a number of pref equity deals.

Going forward, there are definitely development deals out there, and we'll continue to track and monitor. We -- there's some expectation that costs will come back toward us with decreased construction. We haven't seen any of it so far, and we have our finger on the pulse with a number of pref equity deals out there right now. So haven't seen a decrease in pricing, and sellers are very, very hesitant to decrease their pricing expectations. So I think the development world will take a little pause, but we continue to, like I said, aggressively pursue on the -- that side.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question comes from Nick Yulico with Scotiabank.

--------------------------------------------------------------------------------

Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

--------------------------------------------------------------------------------

I just want to first ask on the market rent forecast you gave, which is for market rents being down about 3% this year. Can you just give us a feel for how fast that could manifest in your portfolio in terms of a decline in new lease rates? And I guess I'm also wondering if the impact could be bigger than that on a short-run basis and you assume some sort of recovery in rates in the back half of the year. Any perspective there will be helpful.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes, Nick. This is Mike, and I'm sure Mr. Burkart has an opinion on this one as well. So I think what you have here is a shock to the system. So -- and anecdotally, lots of people that can't afford their apartment, potentially moving to different places and other things. So that will be the shock to the system. And then there's a recovery. The recovery is almost always people backfilling from further-out locations into areas that are closer to the jobs, and then we benefit from that over time. But this takes time to play out.

So this presumes, since we were up 3% in Q1, on S-16, last quarter and now we're at minus 2.8%, it assumes a pretty dramatic drop-off in market rents. Of course, we don't turn units. We turn units ratably throughout the year. I think part of that, because we enter what's traditionally a more seasonal period, so the fourth quarter is a little bit more challenging for us on the demand side anyway, we still have the deliveries of apartments into the markets. And so we think it will be pretty choppy going into the fourth quarter, and then we think it recovers from that point on.

So the other point I would make is John's comment about stabilized concessions. I think that stabilized concessions are assumed to continue in our economic growth forecast on Page S-16. And again, just to remind everyone what this is. This is a scenario based on macro factors, effectively supply/demand factors. When you throw them into our model for what happens with various supply/demand factors, what happens to rents, this is what we get. There's still a whole bunch of unknowns on top of this. Again, the policy issues, will there be more regulation in these markets, which we don't see. We think there's been plenty of regulation, actually, but we don't know what's going to happen with that. The cadence of move-ins and move-outs, we can't predict that. And the collection of the delinquency is another challenging subject. So that's why we decided to give this data on S-16 without giving guidance because there's a whole another level of assumptions. And we think that there's enough very large assumptions embedded in S-16 that it just didn't make sense to push it further.

--------------------------------------------------------------------------------

Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. That's helpful, Mike. And then just in terms of supply, if we look, Oakland and San Jose are 2 markets that are facing some of the biggest supply deliveries in the second quarter, third quarter of this year. Is your sense that any of those projects have now been delayed in terms of timing? And then also, if you could just maybe tell us in a real-time basis what you're seeing for projects that are delivering and lease-up, I mean is it -- you mentioned 2 months earlier. Is that the norm in these markets? Is it worse than that?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

Yes. It's -- it can be worse than that. But I would focus you on the percent of supply, total supply to total stock, which is at 0.6% for the portfolio. And Northern California is a little bit higher at 0.7%. But then, again, Northern California also has more momentum. I think we believe that tech markets are the winner here. And because their business models are pretty COVID-19-resistant for the most part, not that venture capital hasn't been affected, it has a little bit and jobs haven't been affected, they have. Although when we look at, for example, the top 10 technology companies, job openings are down a little bit, but they're still very strong.

So our view is that the tech markets do better here, and we'll continue on the path of leading the West Coast markets. And obviously, that's been a key part of our investment. So I guess what I'm saying is I would be less concerned about supply in Northern California, given the strength, the overall strength of the job markets and the companies here. Probably, if we have a concern, even though it appears to be the least amount of supply, it's Southern California because it doesn't have the job drivers that Northern California and Seattle have.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question comes from Neil Malkin with Capital One Securities.

--------------------------------------------------------------------------------

Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [21]

--------------------------------------------------------------------------------

I wanted to go back to -- I just wanted to kind of go back to the question that Austin brought up. I believe in your supplement, you've called out 2% of the delinquency is -- or 2% of the total rent is people who are not affected by COVID but haven't paid. So that's basically the moral hazard. I guess I would be interested in, if you can at all, Mike, just maybe walk through what markets you're the most concerned about. Obviously, people are talking about rent strikes. It seems like the legislature and judges have no interest of pushing through evictions anytime soon. I guess any more color on how you see that kind of playing out, when you see the eviction, I guess, the market normalizing? And how much worse could that moral hazard get as we continue to have an elevated unemployment environment for a longer period of time?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [22]

--------------------------------------------------------------------------------

Yes. It's a good question. And I believe you're talking about, on S-15, the 2.2% which is the percentage of units delinquent in April not requesting assistance. So I guess most of that category is people that we haven't heard from. And I think that there are really 2 components. There is the moral hazard component, those that just want to take advantage of the situation, the various laws and the reluctance of the courts to process evictions, et cetera. But I think there's another piece of that, which is people that are just overwhelmed and/or, for whatever reason, ignore their notices. So I think it's still a little bit early to tell exactly how that breaks down.

I guess, from my perspective, that's not a huge number in the scheme of things because I know when we were talking to our Board, we gave them a much larger range of delinquents. And so I think our actual experience is better than what we thought. And I was concerned that, to your point, that if you're going to give people, there's no hammer as it relates to evictions, maybe in late fees for some period of time as part of our overall program to try to help residents through this difficult period, et cetera, that there might be more of those people that just say, oh, I'm just not going to pay rent. Keep in mind that they still have a credit issue, and so there is a reason to pay rent. They still owe the money. And we still fully intend to pursue the collection effort. And we will have to approach it a bit differently, given the magnitude of it. And so -- but we're going to still push hard to collect it where we can. So this falls within one of the unknowns, and we're not sure exactly what's going to happen with that category. Fortunately, it's only 2.2%.

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [23]

--------------------------------------------------------------------------------

Yes. Mike, let me just add. In my comments, I mentioned that those are the people that we haven't spoken with. But I also said some of them have actually paid partial payments. So to be clear, you can't look at that group and say that they're a moral hazard. I'll give you an example. One of the things we did at Essex is we -- early on, realizing the challenge that this was for so many people, we identified residents that have been challenged with us in the past. They may have had reviews that they wrote that they were upset with for whatever reason, and we reached out to them just to check and see how they were doing. The feedback we got was amazing, but what we found is many people were somewhat shellshocked. They really just weren't interacting with the public. And so we had people that were saying, wow, call me back next week. And so I think how this impacted a lot of people were some people just kind of went back into their units and just disconnected from everything, and then others were just trying to work through it. And maybe they were working, and they're connecting with other people.

So I don't associate the 2.2% as being reflective of moral hazard. I recognize there may be some of that out there. But I think people will come along, and we're seeing good behavior overall. We're hearing amazing stories. So I wouldn't associate that with moral hazard.

--------------------------------------------------------------------------------

Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [24]

--------------------------------------------------------------------------------

All right. I appreciate the detail. Yes. Another one I have is, in terms of the H-1B visa program, I know a lot of that goes to tech. I know a lot of that goes into your markets. And so I'm just wondering if you have any sense as to what that looks like going into the summer. Is that sort of demand or occupancy that you assume now will be lost? And then the venture capital side as well, I guess, sort of like the 2 specific to the West Coast had these demand drivers. I just had questions on that.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes. Yes, this is Mike again. We haven't spent a lot of time on the H-1Bs, given all the other things that we're working on. Anecdotally, we have not heard -- in terms of what they're actually doing, we know that they don't qualify generally for unemployment. And therefore, to the extent they're displaced, then maybe there's a possibility that they will go home. And so that's out there. But it's just -- it's too hard to tell at this point in time. And I'm sorry, I missed the second part of your question.

--------------------------------------------------------------------------------

Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [26]

--------------------------------------------------------------------------------

Yes. Sure. Sorry. I was just asking about venture capital. You had alluded to it.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [27]

--------------------------------------------------------------------------------

Yes, yes. Yes, venture capital. So yes. No, I did. I did. Yes, venture capital, I mean, it still remains strong in our markets, still above the dot-com era. The last funding by quarter last quarter was -- first quarter 2020 was $12 billion versus about $10 billion in the dot-com period, so still strong. Again, anecdotally, we're hearing that venture capital valuations are dropping pretty substantially by a big number. We also -- when we go through the WARN notices or the notices of layoffs, there are a lot of venture capital-funded companies that are on that list. So trying to figure out how to kind of continue operations at a time when valuations are not really attractive. So I would put this in the bucket of still a lot more unknowns than knowns as the venture capital world is trying to figure out what to do.

I know, in our case, we have our technology fund consortium of -- that the REITs and other multifamily owners put together. And we're seeing some pretty attractive deal flow as a result of that and lower valuations overall. And so we think it's actually a very good time to be an investor in technology at this point in time compared to the recent past.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from Jeff Spector with Bank of America.

--------------------------------------------------------------------------------

Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [29]

--------------------------------------------------------------------------------

If I missed this, I apologize. Can you discuss May collection so far, what you're seeing?

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [30]

--------------------------------------------------------------------------------

Yes, you didn't miss it. This is John. They're materially consistent with April. One thing I would say is, because of when the fifth falls, things can move around a little bit, but we're right on path with April.

--------------------------------------------------------------------------------

Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [31]

--------------------------------------------------------------------------------

Okay. Great. And then I believe, Mike, in his opening remarks, talked about an expectation for a decline in market rents in 2020. I believe I heard negative 2.8%. Just given what's going on, it just -- it doesn't seem so bad to me. Again, I know it's down, and you were expecting up 3%-plus. But is that correct? And can you put that in perspective, let's say, versus what you saw during the tech crash or Great Recession, that minus -- was it minus 2.8%?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

Yes, Jeff. Yes, keep in mind, this is actually published in S-16 of the supplement, where we try to give you an idea of what we think market rents are going to do on average for 2020. And so we come to 2.8%. However, keep in mind, we have 3% rent growth, market rent growth in the first quarter. So to average 2.8% for the year, we expect rents to decline pretty substantially between now and year-end.

And again, I go back to John's comments about stabilized concessions because if you give away a month free, that's actually a pretty significant reduction in market rents. And I think it's somewhere in that magnitude where we expect, again, as we're working through all the delinquents and some of them are moving out, and we've created more units than we would ordinarily have to rent and now we have to draw people into those units that we think we're going to have to provide more incentive to do that. And so that will be probably mostly in the form of a concession. But I think that's the environment for the rest of the year, and then I think John points this out too, then we probably hit equilibrium at some point in time, we would say, toward the end of the year. And then I think things can recover from that point. Does that make sense?

--------------------------------------------------------------------------------

Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [33]

--------------------------------------------------------------------------------

Yes. And can you compare that -- the minus 2.8% for the year to, let's say, what happened during the tech crash or Great Recession?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [34]

--------------------------------------------------------------------------------

Yes. Well, overall, market rents declined in the financial crisis about 15% over a couple of years. In terms of -- but keep in mind, we don't actually realize that or realize it over time because we have leases in place. And I actually have these numbers. So in 2009, the reported revenue drop was 2.8%, and 2010 was 3.3%. So we had 2.8% -- same-property revenue dropped 2.8% in 2009, 3.3% in 2010, on an overall, about 15% reduction in market rents. And so as you can tell, I mean the reported numbers are pretty dramatically less than given leases in place compared to the market rent numbers. Does that help?

--------------------------------------------------------------------------------

Jeffrey Alan Spector, BofA Merrill Lynch, Research Division - MD and Head of United States REITs [35]

--------------------------------------------------------------------------------

Yes. It's very helpful.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from John Kim with BMO Capital Markets.

--------------------------------------------------------------------------------

Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [37]

--------------------------------------------------------------------------------

I was interested in the commentary about the increased tours and applications in the past 4 weeks and trying to compare that with the 140 basis points of occupancy that was lost during April. Do you think that with the increased activity, that occupancy has basically troughed already? And how do those metrics compare year-over-year?

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [38]

--------------------------------------------------------------------------------

Yes. So the -- I definitely believe that activity troughed. It troughed in the first week of April. And the commentary that I gave related to the last week versus the April average, and it was up substantially. Our applications were up over 60%. So we saw a lot of market activity. So very good outlook going forward. What we're seeing is the market is moving toward equilibrium. We're offering some level of concessions. People are renting units. Things are going in the right direction. That's a good thing.

As it relates to year-over-year activity, we're definitely lower. It's a little harder to compare because when you look at, say, tours, we're up an infinite amount on virtual tours right now. We had no virtual tours a year ago. And so when you're trying to compare those numbers, it's a little challenging. That's why I gave away the trough, which was the first week of April and then this last week, where we are in comparison. We're continuing to see this with good leasing traffic, good activity. But overall, definitely, the market for April was, and we call it shellshocked, it was less than what it was a year ago in April, but given exact comparisons, it would be misleading.

--------------------------------------------------------------------------------

Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [39]

--------------------------------------------------------------------------------

Okay. So the activity is a good leading indicator. I was wondering if you could also clarify the difference between financial and physical occupancy on S-15? That's basically 100 basis points and I'm...

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [40]

--------------------------------------------------------------------------------

Yes. Financial occupancy relates to whether or not someone's in our unit for the full month of the period, whatever the period is, compared to our scheduled rent, whereas physical occupancy is just simply looking at the units and whether or not they're occupied. So the -- at one point in time. So our -- we quoted our physical occupancy as of April 30, which was on that day, whereas our financial occupancy for April would have been the whole month. So a little bit different.

The reason we were doing that is we're trying to give out to people, again, full transparency, give a good understanding of where we ended up because we did end up lower than where we were for the month. I will say, though, that things have picked up and is what you would expect. It's consistent with what I'm saying. We do expect occupancy to continue to pick up. I think that was probably our low point. When you think about it with traffic being in the low at the first week, that's typically going to relate to occupancy being in the low several weeks later and then all of a sudden, it picks up. So this whole thing is working out as expected consistently. And I expect our occupancy will continue to pick up going forward, which it is right now.

--------------------------------------------------------------------------------

Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [41]

--------------------------------------------------------------------------------

So is it fair to say that the physical occupancy is a leading indicator for the financial, and then the tours and applications are, I mean, an indicator for both?

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [42]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Our next question comes from Alexander Goldfarb with Piper Sandler.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [44]

--------------------------------------------------------------------------------

And I apologize for the background noise. So a few questions. First of all, I think you guys are pretty bold to let tenants do their own home repairs. I can't wait to see the photos of the aftermath. But 2 questions. So first, Mike, can you just -- you talked about the different markets, and Seattle's strongest, the Northern L.A. suburb's the weakest as far as rent collection. Can you just -- maybe I missed it, but can you just give us some color on urban versus suburban? And especially that you guys have sold down, you've been selling down your urban exposure, so just sort of curious how you're seeing your portfolio rent collections, et cetera, play out between that dynamic?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [45]

--------------------------------------------------------------------------------

Sure, Alex. Good question. And yes, I don't want to see the drywall patch job that our residents do for sure. Let's see. The -- I think...

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [46]

--------------------------------------------------------------------------------

Yes. I mean I can talk about their delinquency. Yes, I'll talk to...

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Why don't you just start? Yes.

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [48]

--------------------------------------------------------------------------------

The delinquency, first off, Alex, we are a high-service shop, so some of the self-help might literally be replacing the lightbulb. But anyway, the -- as to the delinquency, as I mentioned, we aren't really seeing a high-rise versus low-rise of rent. We're not seeing correlations as it relates to that. When I look at the -- what occurred, certain assets were impacted more than others. And when I dug deep into that, you could see the logic, like an asset that perhaps is next to a mall or one that's highly impacted by a school, and you could understand what was going on. But then when I tried to apply that fact to other assets that had similar situations, next to a mall, 10 miles away, or highly impacted by a school, the results weren't the same. It was really interesting and unique.

And what I did find, though, is that there was a submarket distinction, and that's why I brought up the submarkets. And so Downtown L.A. was highly impacted. And that's why I brought that one up specifically as was the Woodland Hills, and Woodland Hills has exposure to the entertainment industry. So we did see those types of impacts. We also saw regional impacts, less in the Pacific Northwest. And of course, there, we have a lot of assets on the Eastside, many of them are garden-style and that type of thing, really low impact. And then in the middle was the Bay Area, and in more in the South, we had greater impact. Some of it was the Disneyland effect.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [49]

--------------------------------------------------------------------------------

Yes. And Alex, let me pick up on that. So yes, we have sold some buildings in the downtown. MaSo, as you'll recall, was sold in Q4 of last year and 8th & Hope the year before, one in Downtown San Francisco, one in Downtown L.A. And I would say, most of that motivated by some of the issues and the grittiness of the downtown and our expectation for some of the areas to be cleaned up more quickly and transition more quickly than they did.

So I think that, that continues to be a pretty significant issue here on the West Coast. And our performance has been -- it's been okay in the downtowns. It hasn't been great because of some of those factors. And so our -- we become more suburban over time. And again, with -- we want to own property in the, I would say, B- to A quality area, in areas near jobs and never too far from the major job nodes. And I would say that suburban generally has outperformed the urban here on the West Coast. I realize that, in other markets, you can have different outcomes.

--------------------------------------------------------------------------------

Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [50]

--------------------------------------------------------------------------------

Okay. And then the second question is sort of going to that geographically. Obviously, New York, here, we've been really hit hard. But speaking to folks in the rest of the country, including out even in the Bay Area, it seems like COVID has really been much less of an impact and that there's a sense of people who want to get back to their jobs much quicker than the politicians want. So in your view, do you sense that there's this pent-up demand where people are ready to get back to their jobs, and you guys may even rebound quicker than people think just because the level of COVID is less and the people are just far ready for it because they don't have to rely on mass transit? Or do you think that it will take longer to reopen in your markets?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [51]

--------------------------------------------------------------------------------

It is the million-dollar question. And certainly, I don't have an answer to it. I put this definitely in the unknown category. I think that we tend to have high-income levels out here, and the people that are earning high incomes want to consume services. And the services, for the most part, restaurants and a variety of things, those services are really not open at this point in time. So I think that there is a motivation to start opening things up again.

Having said that, there -- I think the governmental entities are incredibly, let's say, conservative and concerned about surge capacity and some of the other issues that go along with it. So we're going to take it one day at a time and can't exactly predict what's there. But I totally agree with you. I think that the demand for services is building and is pretty intense out there. And so hopefully, that motivates. We've seen various different things on the news about this in terms of closing the L.A. beaches. Boy, that's a tough one, but because people want to get out and go do things. So I can't exactly tell you what's going to happen, but I definitely can feel the pressure building.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question comes from Rich Hill with Morgan Stanley.

--------------------------------------------------------------------------------

Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [53]

--------------------------------------------------------------------------------

I just wanted to follow up on the negative 2.8% macro forecast. And by the way, thank you very much for that. I'm sure it's not easy to put together right now. But I think one of the things that I'm certainly trying to understand, and I think a lot of people are trying to understand, is the cadence of that. And I'm not looking for you to give a specific guide. But maybe if you could just walk us through if you think you're going to see a deeper 2Q '20 trough and then a quicker rebound. Or is it going to be more stable but down over the course of the year? And the reason I asked the question is I think about your -- I think it was a negative 7% job growth forecast for the year, which is a little bit more severe than Morgan Stanley was projecting, which maybe suggests that you're expecting it to be delayed out but maybe not as deep in 2Q. So any color you could provide on that, that would be really helpful.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [54]

--------------------------------------------------------------------------------

Yes, Rich. This is Mike. And I think I went through some of this previously. But the job forecast and the GDP forecast or estimates, again, we survey a wide range. We don't do any fundamental research as it relates to the macroeconomy. And as you know, there's wide dispersion of what people think is going to happen. And as we sort of triangulated all that, we got the minus 900,000, 6.6% job loss in our West Coast markets. So that's where that came from.

We don't -- again, we don't add -- we don't try to add value. We just try to report the facts as it relates to that. What this has intended to do is take those macro forces and consider what would happen with rents in a normal situation because we don't have a COVID-19 model because we've never been through this before. But in a normal situation, if you had minus 6.6% jobs -- job growth and you had about 0.9% apartment deliveries, what would happen with rents? And so that's where the 2.8% number came from in terms of our rent forecast, minus 2.8%. And again, that compares to plus 3% that we achieved in the first quarter. So in order to average minus 2.8% for the year, when you to start with 3 months of 3, yes, things get pretty ugly in the second half of the year.

We view this as more just part of the shock of -- to the system. There's been an extraordinary shock to the system. And I think John's equilibrium comment is the right one. We need to get back to equilibrium, and there will be short-term pain in order to get back to equilibrium. And best I can tell, it's going to be somewhere around 1 month free on stabilized communities, which is sort of embedded into the minus 2.8%. So that's where it comes from.

And -- but this is just our modeling. This is what happens in our rent forecasting model when you put these various pieces in. Again, it doesn't reflect a COVID-19 scenario and the extraordinary uniqueness of the situation. So it could be different. And again, this is why we didn't follow up with this and then push into guidance because there's a whole another set of assumptions that would go into that.

--------------------------------------------------------------------------------

Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [55]

--------------------------------------------------------------------------------

Yes. Yes. And I -- that's helpful, and I recognize I'm asking a tough question. It sounds like, given the 1-month free concessions right now, and hopefully, those will burn off towards the end of the year, maybe we could assume something more than severe than the negative 4.75 that the average for the next 3 quarters would assume in 2Q and then gradually getting better because I think you had noted that you begin to inflect in 1Q '21. So I was just trying to get my hands around what does that average look like. And it sounds like it might be a little bit deeper in 2Q but then start to get better as the year progresses.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [56]

--------------------------------------------------------------------------------

Yes. In our model, it gets progressively worse because, again, you have seasonality that comes into the equation. Although we would say Q3 is normally our best quarter, let's say, and we're not going to get the benefit of the positive seasonality, and so maybe the negative which typically comes in the fourth quarter will be more muted. But we just don't know. So we -- the way that our model runs is it gets progressively worse, and then we'll hit bottom sometime in Q4 and then rebound from there.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Our next question comes from Hardik Goel with Zelman & Associates.

--------------------------------------------------------------------------------

Hardik Goel, Zelman & Associates LLC - VP of Research [58]

--------------------------------------------------------------------------------

And Mike, congratulations on buying back stock. Second downturn in a row. That said, I really wanted to get your thoughts on -- you guys talked -- you guys track the labor market really well. We've gotten great commentary in the past about what job trends are like. What does your work there really tell you about not just start-up employment but employment from the big tech companies? And how would that compare to last year? Can you contextualize that?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [59]

--------------------------------------------------------------------------------

We can. Let's see, let me pull out a slide on the big tech companies, which I have here somewhere. But again, we -- there's a piece of it that we don't know, and that is to what extent do things open up as we -- as California and Washington open up, how many of those jobs will come back. Will it be half the restaurants that get -- that become filled given social distancing? And that's kind of our best guess, but that, of course, means that the other half don't come back immediately, and what happens with them. So this is part of the unknown with respect to that part of it. And again, I think the good thing about our markets is that we have high-income people. We generally are in the better areas. And people have the -- want to consume services, which are not there right now, but I think there's going to be a lot of pressure to bring them back. So I guess that's the first statement.

In terms of specifically, our process of tracking what's happening with the top 10 tech companies, all of which are headquartered in an Essex market, we have, let's see, total openings at 22,900 as of May 1, 2020. So that compares to last quarter of -- at March 27, it was about 28,000 or 29,000. So there's been about a 20% reduction there. But if you go back in time, you hit about the same level as Q4 '18 in terms of the number of open positions, so Q3, Q4 '18 in terms of the number of positions open. So I would put that in the still-strong category. And even though it's off, it's off the all-time high that we achieved last quarter. So I think still pretty compelling. Does that help?

--------------------------------------------------------------------------------

Hardik Goel, Zelman & Associates LLC - VP of Research [60]

--------------------------------------------------------------------------------

And just as a follow-up to that. I think John mentioned a few times -- and that is really helpful, by the way. John mentioned a few times equilibrium pricing. And I was just wondering what do you guys see as equilibrium maybe in 2021 once we're past some of this uncertainty. Is it the economic environment stronger than 4Q '19? Or is it something where we still have a 6% unemployment rate and pricing power inherently is not as strong as the late cycle?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [61]

--------------------------------------------------------------------------------

Yes. Again, I think this is -- goes within the category of, hey, there's been an extraordinary shock to the system and the markets are trying to find equilibrium, but they're changing as time goes on. Again, there are people that are on unemployment. Some of them will be brought back and -- to work. And some of them won't have a job, given you're probably going to chop the capacity of a restaurant in half, for example. And maybe that's made up with delivery or pickup-type services or whatever, but it's just going to be different. And I would say it's beyond our ability to really predict with any degree of certainty when it comes to what that scenario is going to look like, which -- but it will -- we will have equilibrium.

Historically, when you talk about the great financial crisis or 9/11 or the dot-com period, these periods go on for maybe 18 months and then kind of turn the corner. In this case, I think we've had all the negative part of that 18 months in 1 month. And so it's all been compressed, and then now we have the second part where we're hopefully hitting bottom and now we're recovering. So I would expect that whole process, therefore, to compress to maybe 9 months or something like that.

--------------------------------------------------------------------------------

Hardik Goel, Zelman & Associates LLC - VP of Research [62]

--------------------------------------------------------------------------------

Got it. That's really helpful. And just if you would oblige me one last one. Could you give us a range of the prices in which you bought back stock? I know the average was [2 27]. And I may be reaching here, but I have to try.

--------------------------------------------------------------------------------

Angela L. Kleiman, Essex Property Trust, Inc. - Executive VP & CFO [63]

--------------------------------------------------------------------------------

Hi. This is Angela. I think you're trying to be a troublemaker here. So let's just leave it as is. That's our average and that's what we report. Yes, I'll give you some credit for trying.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

Our next question comes from John Pawlowski with Green Street.

--------------------------------------------------------------------------------

John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [65]

--------------------------------------------------------------------------------

Just one for me. Mike, there's been a flurry of cities to enact their own type of rent freeze measure, and I realize most of them won't really impact your portfolio at all because they abide by Costa-Hawkins. There's a few examples of cities kind of violating Costa-Hawkins right now, but again, a de minimis impact, at least from [our lands] in your portfolio. When you step back and you evaluate the legislative landscape, is there anything on your radar that would prohibit your renewal pricing power beyond your own proactive 90-day window? Is there any issues with any cities later in the year where you won't be able to push renewals?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [66]

--------------------------------------------------------------------------------

Well, John, I know you guys tracked us pretty well, and we do, too. And there have been all kinds of proposals out there. Fortunately, most of them have not moved forward. And in California, obviously, we have AB 1482, which is statewide rent control, imposing a cap of CPI plus 5 with a cap of 10. So we're managing through that environment. Fortunately, the more aggressive proposals have not been adopted, thank goodness.

I would say the one that was most concerning, really, maybe 2 of them, one is L.A. extending the rent payment program out a year. And then there's the judicial council that essentially is not going to hear eviction cases for some period after the state of emergency is raised. So we track it, but we think that, for the most part, we're working through it. And as John said, the good news is that most of our residents have chosen a higher path of working with us to work through their situation. And again, I look at that 2% bucket that hasn't communicated with us as being probably, ultimately, good news with respect to those that aren't trying to take the maximum advantage of these various laws.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

Our next question comes from Wes Golladay with RBC Capital Markets.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [68]

--------------------------------------------------------------------------------

Wes, you there?

--------------------------------------------------------------------------------

Wesley Keith Golladay, RBC Capital Markets, Research Division - VP & Equity Research Analyst [69]

--------------------------------------------------------------------------------

Well, sorry, I forgot this whole mute function. Sorry about that. Looking at S-16, the 2.8% rent decline, have you made any adjustments to the Essex model for the CARES Act neutralizing job loss?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [70]

--------------------------------------------------------------------------------

No. I don't -- no, we have not. Again, this is -- take the macro inputs, job growth, GDP growth, supply, and it's straight, this is what comes out of our model if we put those factors in and again, for the marketplace. So I think the CARES Act will definitely help. That's referring to S-16.1. And the pretty great unemployment benefits that are out there, I think that helps with respect to people hopefully being able to stay in our units longer and paying rent for a longer period of time and minimizing the damage. Even if they pay a half a month, that may be okay. At least they don't accrue a balance that becomes so large that they just can't -- we just finance it. So I think it will help. It will help more on the delinquency side probably than it will on the rent side.

--------------------------------------------------------------------------------

Wesley Keith Golladay, RBC Capital Markets, Research Division - VP & Equity Research Analyst [71]

--------------------------------------------------------------------------------

Okay. And then did you comment already about retail exposure?

--------------------------------------------------------------------------------

John F. Burkart, Essex Property Trust, Inc. - Senior EVP & COO [72]

--------------------------------------------------------------------------------

No. I'm glad to hit that. Retail is a really small part of our portfolio, like 1%, 1.5%. Our retail delinquency was basically about half of the retail tenants paid what they owed. So it was roughly in line with other things I've seen in the industry. That group of retail where they're located at multifamily sites typically are relatively handing out their service providers. So when the business shuts down, they struggle. We're working with really all of them and are pretty hopeful that they will be able to reopen back up. And we also will work with them on payment plans. So -- but that group was hit hard, and we've seen that really across the industry in everything I've seen.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

Our next question comes from Haendel St. Juste with Mizuho.

--------------------------------------------------------------------------------

Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [74]

--------------------------------------------------------------------------------

So Mike, I guess I was intrigued by your comments earlier on not being afraid to capitalize on the transaction markets should the right opportunities emerge. And I had flashbacks to the time around the great financial recession when you guys backed up the truck and acquired a sizable amount of newly completed or near-completion construction and lease-up type of assets. Those deals you're going to merge with BRE were instrumental in lowering your portfolio age and broadening your submarket and price point selections in your California market. So I guess I'm curious if you would be similarly interested in buying up busted condo projects or development lease-ups in size. And would you be more willing to cull from the bottom of your portfolio to fund it or perhaps use a fund structure to pursue these types of deals?

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [75]

--------------------------------------------------------------------------------

Yes. Haendel, those are great questions. I guess the difference between now and the great financial crisis, in the great financial crisis, you had mortgages being made to people that couldn't afford to pay them back. And the amount of distress within the housing sector was extraordinary, as you'll recall, which created this opportunity to buy vacant brand-new condo buildings at 50% of replacement. There is nothing even close to that out there at this time. And again, my comments in the script about record-high positive leverage. If you take a typical deal that might be a 6, let's say, 6.5 unlevered IRR with positive leverage, you're probably in the high 9s to low 10s, somewhere in that zone in terms of IRR -- levered IRR. So I think that, that is going to prevent any kind of significant distress within the markets. Of course, there are always some transactions that manage to find very aggressive lenders, and they manage to leverage our property up to 90% or more. And they're out there for sure, but they are few and far between, I would guess, at this point in time.

So in terms of our basic view of transactions, we view it as, okay, what can we do with our portfolio on a leverage-neutral basis? So what's the arbitrage ability within our portfolio? What can we sell and replace at a higher overall yield or growth rate or IRR, let's say? And how do we transact? So we're always thinking about it that way.

And so I would say that preferred equity is still pretty important to us. It's still sort of at the top of our list. And also, I would say, certainly, joint ventures, which take greater advantage than on our balance sheet, or a little bit higher leverage than the joint ventures at -- when we begin, and then, of course, that leverage drops over time but utilizes the leverage to a small extent or to some extent beyond that. So I would say those 2 things are transactions that we're looking at and are interested in. And I didn't mean to exclude Adam from this discussion because he's the expert at it. Adam, what did I miss?

--------------------------------------------------------------------------------

Adam W. Berry, Essex Property Trust, Inc. - Senior VP & CIO [76]

--------------------------------------------------------------------------------

You nailed it all, Mike.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [77]

--------------------------------------------------------------------------------

Did that help, Haendel?

--------------------------------------------------------------------------------

Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [78]

--------------------------------------------------------------------------------

It did. It did. I appreciate that. I want to go back to an earlier question, I guess, from a different angle. Just I'm curious if you're hearing anything in terms of rent forgiveness bills being contemplated in California and Washington beyond the tenant protection on -- for the temporary ban on evictions that we've been hearing here. As I'm sure you know, New York state is kind of contemplating such a forgiveness bill. I think it's NY S1825. So I'm curious if there's anything you're hearing. And it's -- just more broadly, as a concept, does that even work? Or how would that work? Just the idea of the government stepping in and telling landlords to forgive 1, 2, 3 months free rent. So curious on maybe what you're hearing and what you're thinking on that.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [79]

--------------------------------------------------------------------------------

Well, clearly, this is California, and so you're going to hear some of those things and there have been various proposals out there. And we don't think that they're constitutional, but that doesn't necessarily stop them from being circulated. There actually is a bill in Sacramento, AB 828, that would give the courts the right to force landlords under certain circumstances to reduce rents by 25%. We think it's unlikely. But it's out there. We think it's very unlikely. We don't think it will happen.

And again, from what we understand in all these discussions throughout the West Coast, which are mainly cities, there have been a lot of proposals, but the city attorneys have been pretty good at pointing out the legal peril with respect to that position. So they have -- those bills have not been passed. And I think at this point in time, it appears that we're beyond that period where we're getting what seems to be a new legal mandate a day. We're kind of beyond that period now, and I think we're more in the period of let's figure out how to get back to work and open up. So I think that, from a timing perspective, the time for those bills has come and gone.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

We have reached the end of the question-and-answer session. And now I would like to turn the call back over to Michael Schall for closing comments.

--------------------------------------------------------------------------------

Michael J. Schall, Essex Property Trust, Inc. - President, CEO & Director [81]

--------------------------------------------------------------------------------

Yes. Thank you, operator, and thanks, everyone, for joining the call today. Please call or e-mail us with any questions or comments. And our best wishes to you and your family during this challenging time. Thank you. Good day.

--------------------------------------------------------------------------------

Operator [82]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time. Goodbye.