Good day, and welcome to the Essex Property Trust Fourth 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 on 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, Mr. Schall. You may begin.

Welcome to our fourth quarter earnings conference call. I am very pleased to acknowledge the promotions of Angela Kleiman and Barb Pak to their new roles at Essex and greatly appreciate their contributions over many years of dedicated service. Both Angela and Barb will follow me with prepared remarks; and Adam Berry, our Chief Investment Officer, is here for Q&A. At the end of last year, we announced John Burkart’s retirement and we thank John for his tireless efforts and numerous contributions to the company’s success over nearly three decades. As we reported last night, our fourth quarter and full-year 2020 results continue to be significantly impacted by the COVID-19 pandemic, resulting in lower same-property revenue and core FFO per share for both the quarter and the full-year. Similar to the last few quarters, pandemic-related regulations have had two primary consequences: first, shelter-in-place and related orders have resulted in unprecedented job losses; and second, anti-eviction and related laws prevent us from maximizing property performance. Government mandates are constantly changing and they intensified during the fourth quarter given the surge in COVID-19 cases. Navigating the pandemic involves extraordinary efforts, and I thank the Essex team for their tireless dedication amid these challenges. Overall, our fourth quarter results reflect stability and sequential net effective rents beginning in October and as discussed during our third quarter earnings call. Sequential revenues improved 30 basis points in the quarter, with market rents mostly flat in the cities and modestly positive in suburban locations. Therefore, we are cautiously optimistic that we have or will soon reach the bottom in market rent declines. As of December 2020, preliminary three-month trailing job losses in the Essex markets were 7.9% year-over-year, a 150 basis point improvement compared to minus 9.4% for September 2020 and outperforming the nation, which had a 100 basis point improvement from September to December. Even with the recovery of jobs in Q3 and Q4, the nation had 9.2 million fewer jobs year-over-year for the month of December, roughly equal to the number of jobs lost at the worst point of the financial crisis. Our data analytics team prepared S-17 to the supplemental, which is our base case scenario underlying our expectation that net effective rents will decline 1.9% in 2021. The range of potential outcomes is extraordinarily wide for 2021, given many unknowns that relate to the pandemic, including the pace of vaccine deployment and changes in regulation. Our modeling further assumes 4% GDP growth, which should lead to positive momentum in the second half of 2021. Apartment supply will continue to be a challenge, especially in the downtown locations of Los Angeles and Seattle. Our data and analytics team expects approximately 34,000 apartment deliveries in 2021, a modest increase compared to last year. Also similar to 2020, we don’t expect much for-sale housing production going forward. It’s our experience that affordable for-sale housing competes directly with rentals once rents rise to a level that approximates the monthly payment of an entry-level for-sale home, and there is little risk of that occurring in the Essex markets anytime soon. Page S-17.1 of the supplemental highlights 13 recent multibillion-dollar tech initial public offerings for companies headquartered in the Essex markets. Overall, 2020 was a great year for IPOs, with 147 tech sector offerings completed during the year. It’s our view that the IPO market is essential to recharge the tech ecosystem, providing growth capital to early-stage investors and to generate liquidity for reinvestment. Page S-17.1 also illustrates the reacceleration in job openings for the top 10 tech companies, which has increased 38% since the August trough. Our analysis indicates that nearly 60% of the total job postings are located in California or Washington, with the next largest state, Texas, accounting for just 7%. The Page S-17.2 of the supplemental package demonstrates that venture capital investments continued at a record pace in 2020 with approximately $130 billion invested in the U.S., with the Essex markets continuing to receive the dominant share of VC investment. Success in the knowledge-based economy requires a critical mass of highly skilled workers, creating a network effect that draws companies to the Bay Area and Seattle. While only a limited number of venture-backed companies will go public, some will experience extraordinary growth similar to Snowflake, DoorDash, Airbnb and resulting in thousands of high-paying jobs. The environment today has many similarities to the previous recessionary periods, including the financial crisis and the bursting of the dot-com bubble. In both cases, migration out of California was often front-page news. In 2020, we experienced higher out-migration than normal, especially in our West Coast urban centers. In our experience, people make different housing choices during recessions and it’s not surprising to see many in the large baby boomer cohort monetizing the value of an expensive California home to move to less expensive areas as part of the retirement plan. This recession is unique with respect to the extraordinary loss of jobs that involve lower-paid service workers, jobs that are concentrated in city centers, and effective employees often had only two choices: move immediately to find work or stay in their home shielded by eviction forbearance laws. As with previous recessions, we expect most of these trends to reverse. We expect that the demand for restaurants, services, and travel will recover swiftly as vaccines are administered, bringing back related service jobs. Workers in the Essex markets earn more than in most parts of the country and the draw of higher-paying jobs, combined with lower recent rent levels makes rental housing down the West Coast the most affordable it has been since 2013. Our recent McKinsey study estimates that only 22% of the American workforce can work from home without any productivity loss. We have been tracking many companies that have adopted work-from-home models during the pandemic, and we remain confident that the vast majority of companies will ask employees to return to the office when it is safe to do so, likely with increased work-from-home flexibility going forward. Google, Netflix, and Apple are among the largest companies that have expressed their desire to return to the office; many others will follow. Turning to the regulatory environment, a third wave of COVID-19 cases beginning in November and related concerns about hospital availability led to the imposition of severe stay-at-home orders in all of our California markets. Some of these restrictions were eased last week, but all of the Essex markets remain in California’s most restrictive category. Recently, with the passage of SB 91 last week, the state of California has extended COVID-19 related eviction protection from January 31 to June 30, 2021, including pushing back the requirement to pay at least 25% of pandemic-related rent. In addition, the law established a state rental assistance program to allocate $2.6 billion in Federal Stimulus Funds using income levels to prioritize payments and accepting related applications in March. As with similar laws, there are many related requirements and complexities, which we are evaluating. Turning to the apartment investment markets, during 2020, we sold 4 properties with a total of 670 apartment homes for $343 million, all of which were placed under contract subsequent to the implementation of shelter-in-place orders in March. Given the wide discount in valuation for public REITs compared to the private real estate markets, property sales remain our preferred source of funds for investment. Since the onset of the pandemic, a relatively small number of apartment sales support our belief that property values have not changed materially since the onset of the pandemic. However, extraordinary changes in rent increasing in the case of both suburban markets and decreasing sharply in some urban locations make it difficult to draw conclusions about cap rates. In the suburbs, where rents are generally at or above pre-pandemic levels, property values have modestly increased and cap rates are somewhat lower compared to the pre-pandemic period. Given lower rents and significant concessions in hard hit cities, recent price talk around possible sales indicates about a 5% reduction in value versus the pre-COVID period, resulting in cap rates for high-quality properties below 4%. As with previous recessions, Fannie Mae and Freddie Mac have continued to provide very attractive financing with 7-year fixed rate financing in the mid-2% range, potentially supporting lower cap rates. Vaccine distribution should remove uncertainty with respect to apartment operations and property values. As a result, we believe transaction volumes will begin to accelerate. As we have indicated before, improved cash flow from positive leverage in apartments has historically led to a robust transaction market. With that, I will turn the call over to Angela.

Thank you, Mike. First, I would like to express my appreciation to the Essex operations team for their diligent efforts to serve our customers amidst a challenging environment caused by the COVID pandemic. Thank you for all your hard work. As for my comments, I will begin by discussing our 2020 results, followed by our outlook for 2021. Overall, our market performed as we expected, despite the headwinds of new cohort-related closures and seasonal decline in demand. Currently, the urban core, particularly in tech-centric markets, continues to remain more impacted by COVID-19 related job losses and office closures. In addition, the change in quality of life, resulting from the closures of restaurants and public amenities has driven a temporary shift in consumer preferences. High-rise buildings or communities located in areas with high walk scores have been the most impacted by this shift in demand. Conversely, communities with private outdoor space or more affordable residences outside the urban core continue to experience greater demand, which benefited many of our properties in Ventura, San Diego, Orange County and the East Bay in Northern California. This temporary shift in demand continued in the fourth quarter, where we experienced a 7.6% and 9.9% year-over-year increase in quarterly turnover in CBD, Seattle and San Francisco compared to the portfolio average turnover of only 1.3%. Furthermore, our CBD locations also had a greater concentration of apartment supply deliveries typically accompanied by very high concession levels. During the fourth quarter, we continued our leasing strategy of leveraging concessions on stabilized communities and building occupancy. There have been encouraging indicators from a sequential perspective in that more than half of our same-property portfolio grew revenues sequentially, driven in part by increases in occupancy and decreases in concessions. We have provided year-over-year net effective rent changes for our portfolio on Page S-16 of our supplemental. New lease rates were down 8.9% in the fourth quarter, stable in January, an improvement from the negative 12.2% achieved in the third quarter. Concessions on same-property approval improved from approximately $18 million in the third quarter to $13 million in the fourth quarter. This reduction in concessions is noteworthy, considering the fourth quarter has seasonally lower demand and historically, concessions increased during this period rather than decrease. Key highlights of the same-property performance of our major markets in the fourth quarter are as follows: in Seattle, 4.9% year-over-year revenue decline was primarily driven by Seattle CBD, which declined by 13%, while the remaining submarkets averaged a 3.2% decline, year-over-year job growth in Seattle declined by 7.3% in the fourth quarter. In Northern California, the 10.4% year-over-year revenue decline was led by CBD, San Francisco and Oakland, averaging an 18% decline, contrasted with a 4.2% decline in Contra Costa County, while Santa Clara County performed in line with the regional average of a 10% decline. Year-over-year job growth in Northern California declined by 8% with San Jose far better at a 6.4% decline. In Southern California, the 7.2% year-over-year decline was primarily driven by LACBD and West LA submarkets, averaging a 17% decline, offset by an average decline of 2.4% in our suburban markets of Ventura, Orange County and San Diego. Fourth quarter year-over-year job growth in Southern California declined by 8%. Moving on to our 2021 outlook, as indicated on S-17 of the supplemental, multifamily supply as a percentage of stock remained low at 0.9% for our portfolio. While we expect a percentage of the year-over-year growth to remain flat, new completions will once again be concentrated in the CBDs and urban submarkets where supply is projected to increase by 2.1% compared to just 0.7% across the rest of the portfolio. The confluence of minimal supply and extraordinary job losses remain a significant headwind in our urban markets. In Seattle, we expect multifamily supply as a percentage of stock to increase in 2021 by 1.6%, driven by 2.9% in the CBD, offset by a 1% increase in the suburbs, where we have the majority of our units. We have also seen positive office activity by major tech companies as they continue to push forward on expansion projects. In Seattle, Amazon received approval for a 1.1 million square foot project in Bellevue, Microsoft has continued with their campus expansion, and Google acquired a 10-acre site for a large campus. In Northern California, we project overall multifamily supply as a percentage of stock in 2021 to decrease by 10 basis points, although Oakland and San Jose CBD are expected to increase by 1.8% and 3%, respectively. Despite the impact of COVID, tech expansion plans have continued in the area. Amazon purchased a 6-acre site near downtown San Francisco. Facebook last month submitted an updated plan for its 1.25 million square foot campus expansion in Menlo Park, and Google continued to work with the city of San Jose for its major new campus at Diridon Station. In addition, the biotech sector continued to be a strong source of office demand highlighted by the recently approved expansion of Genentech’s headquarters in South San Francisco, which would add up to 4.3 million square foot of new office space. In Southern California, we project overall multifamily supply as a percentage of stock to remain flat. The most notable increase is 4% LA CBD and deliveries in West LA will remain elevated once again this year. While many uncertainties remain as to legislation and the timing of the vaccine, based on current market conditions, we assume our scheduled rent for the same-property portfolio will trough in the second quarter this year. Because leases are typically 1 year in duration, our year-over-year revenue growth will be negative in the first half and positive in the second half, leading to our same-store full-year guidance of a 2.5% revenue decline at the midpoint. Lastly, our current same-store physical occupancy is 96.4%. Our availability 30 days out is 4.7%. Thank you. And I will now turn the call to Barb Pak.

Thank you, Angela. I will start with a few comments on our fourth quarter results, followed by key assumptions in our 2021 guidance and finally, an update on our recent capital markets activities and the balance sheet. As expected, the fourth quarter was a challenging period with core FFO declining 12.5% compared to 1 year ago. This was primarily driven by an 8% decline in same-property revenues as a result of higher concessions and delinquencies. As we noted last quarter, we report concessions on a cash basis in our same-property results because we believe this is more indicative of true market conditions. However, we are required by GAAP to treat concessions on a straight-line basis in calculating consolidated revenue and FFO. As Angela mentioned, during the fourth quarter, we provided $5 million fewer concessions than the third quarter, which helped improve same-property revenue sequentially. However, core FFO declined by 4% or $0.13 per share compared to the third quarter, of which, $0.16 is attributable to lower straight-line rent concessions. We expect this line item to continue to be a headwind to core FFO growth in 2021, which I will discuss in a minute. Please note on Page S-8 of the supplemental, we have detailed the quarterly impact of non-cash straight-line rents. Turning to delinquencies, we continue to take a conservative approach to reserving against uncollected rents, especially given the surge in COVID-19 cases in the fourth quarter, which resulted in extended lockdowns in our markets throughout much of the quarter. As such, we reserved against the entire net delinquency balance during this quarter. Our receivable balance currently stands at approximately $7 million, including joint ventures at pro-rata share. Based on past collections, we feel this receivable balance is consistent with our ongoing conservative approach. We will continue to assess our delinquency reserve and our net receivable balance each quarter based on collection history and market conditions. Turning to our 2021 guidance, key assumptions are available on Page 5 of the earnings release and S-14 of the supplemental. We have provided a wider than normal range for same-property revenues and core FFO given the significant uncertainties surrounding COVID and the recovery ahead, including vaccine distribution and eviction moratoriums that are outside our control but could swing guidance in a variety of ways. That said, we felt it was important to outline our key assumptions based on the information we have today. For the full year, we expect core FFO per diluted share to decline by 5.1% at the midpoint. The key drivers of the decrease are primarily related to the following 2 items. First, we expect same-property revenues and NOI to decline by 2.5% and 4.6%, respectively, at the midpoint. While current operating fundamentals remain steady in our markets compared to several months ago, we will continue to feel the negative effects of the 2020 rent declines throughout most of 2021. In addition, due to the eviction moratoriums and regulations that remain outside our control, we expect delinquencies will remain elevated in 2021 and will be a drag on core FFO by an estimated $0.45 per share at the midpoint. The company has a long history of excellent rent collections, and we expect this temporary delinquency headwind to become a tailwind to FFO growth once the various COVID-related restrictions are lifted. Second, we also faced significant headwinds from straight-line concessions. We expect this non-cash item to result in a $0.41 to $0.56 per share decline in core FFO, representing about a 4% reduction in growth on a year-over-year basis. As it relates to concessions, we expect they will remain high in the first half of the year before moderating in the second half of the year as the economic recovery takes hold. As such, we expect the impact from straight-line rent concessions to be minimal in the first half of the year, with most of the negative impact we forecasted to fall in the last 2 quarters of 2021. Lastly, on the capital markets activities and the balance sheet, during the fourth quarter, we closed $206 million of new preferred equity investments and bought back $46 million of common stock at a significant discount to NAV. These investments are being funded with 3 asset sales totaling approximately $275 million that are under contract and expected to close in the first quarter. This is consistent with our guiding principles of matching funding investments on a leverage-neutral basis. For the year, we were able to arbitrage the difference between public and private market pricing by selling $343 million of assets at prices generally consistent with pre-COVID levels and buying back $269 million of stock at an average price of $225 per share, all while maintaining our balance sheet strength and creating value for our shareholders. Our balance sheet remains strong with minimal near-term funding needs and sound financial metrics. While our net debt-to-EBITDA has increased this year, this is primarily the result of the significant decline in EBITDA caused by the pandemic. As the economic recovery takes hold and the West Coast economies continue to reopen, we expect our net debt-to-EBITDA ratio will improve. With ample liquidity and a well-covered dividend, our balance sheet remains a source of strength. With that, I will turn the call back to the operator for questions.

Thank you. We will now start the question-and-answer session. Our first question comes from Nick Joseph with Citigroup. Please go ahead with your questions.

Thanks. I appreciate the commentary on the dynamic nature of your markets as well as the slides in the supplemental. But I’m just wondering, as you think about post-COVID, if we are in a more flexible work environment, putting aside any kind of migration trends outside of the state. But just if there is more flexibility and commuting times change, how does that change how you think about your exposure within your markets, either urban, suburban or even further out? And could there be opportunities that you’re exploring today?

Hi, Nick. Thanks for the question. It’s a good one, and this is Mike. We think that there will be more work-from-home flexibility, but at the same time, we think that employees will be tethered at some level to the office. As I think about the three other very capable people here today, knowing them and trusting them, these are great team efforts and teams are better when you know the people and can trust the people. So I’d say that is key factor. That being said, I would think the winners in this scenario will ultimately be high-quality cities that are near the jobs, but also offer maybe a little bit more affordable housing and good schools, low crime rates, etc. So I think that that will play itself out. And I think those areas we have a lot of cities that are among the major metros that qualify for that. Some of them have been pretty hard-hit. So, I guess I would add that some of the high-quality cities that their rents have been highly impacted by COVID. Certainly, when I think about Northern California and the tech markets, the Peninsula, San Mateo, and even suburban parts of San Jose would be major beneficiaries of that because we view technology as continuing to be a very strong economic driver. And the tech ecosystem in the Bay Area is incredibly unique. Therefore, we think it will do well.

Thanks.

Does that answer the question?

That did. That was very helpful. And then just one quick follow-up or one quick question, I guess, on the rent relief programs. Is that helping residents who are behind kind of fill out or navigate the ability to get rent relief? And is there any kind of rent relief from the government assumed in the guidance?

Yes. As noted on the call that last week, the state of California using federal stimulus dollars started a program or announced a program with $2.6 billion potentially of rent relief. The way it would work is the landlord would be required to forgive 20%. And so the reimbursement from these programs could be up to 80%. That will be predicated on percentages of median income and average median income, so it will provide the greatest benefit to those at lower income levels. It’s hard to tell exactly what that means. We just haven’t had enough time to evaluate that program. So I’m guessing that we will have a pretty significant positive impact from it. But again, it’s too early to evaluate.

Thank you.

Thanks, Nick.

Thank you. Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your questions.

Great. Thank you. First, I want to say congratulations to Angela and Barb. And we wish John a great retirement. Thanks for the time today. Mike, in your opening remarks, you commented that you have or soon will reach a bottom in market rents. And I know you’re fairly conservative. So I take that comment very seriously. I guess what gives you comfort to say that? Can you just talk about that a little bit more, please?

Of course, Jeff. I think it’s a good question, and it’s probably maybe the most important question out there. If we look at net effective rents, for the fourth quarter, sequentially, they were down less than 1%. So net debt, that’s all the markets. Now there is pretty significant variation between market to market. Part of that is even though we have high occupancy overall, there are parts of our portfolio that have lower occupancy. For example, San Francisco is still at 92.5%. Seattle Downtown is at about the same level. And so, there are areas that we are very highly occupied that are offsetting areas that don’t have the same occupancy and are actually below the average occupancy level. Most of that, as Angela alluded to, is related to the supply level. As you can imagine, if you’ve got negative job growth equivalent to right now, still as of December, equivalent to the worst part of the great financial crisis, it is not a great time to be delivering apartment units. Therefore, the cities are getting the bulk of the supply delivery. You have this confluence that Angela spoke about, which is negative demand growth and loss of supply in the cities that are understandably hit from that. Offsetting that is, we do have markets that are performing very well. For example, Ventura, where rents are up almost 10% year-over-year on a market basis. So we’re doing pretty well in a lot of these suburbs. Now that leads to this issue that I talked about many times, which is rent-to-income. It’s interesting that Ventura with its 8.5% to 10% rent increase is now about 17% above its long-term historical average of this ratio of rent-to-income, which is incredibly important to us. Whereas in Northern California we are 7% below the long-term average of rent-to-income. So everyone looks at this like, hey, the suburbs are going to do a lot better. When rents go up a long way, I would question that. Conversely, when the rents are hammered in the cities, it changes the consumer’s view of where the opportunity is. So our view is a little bit longer-term that you are going to see a very significant movement back towards high-quality cities where rents are pretty affordable. Whereas, I think it’s a tough question.

Thank you. That’s very helpful. Is that what ultimately led to Essex providing the full-year guidance, which is very much appreciated?

There is a number of things. I have a philosophy on guidance being an ex-CFO. If I weren’t here, I’m not sure that Barb and Angela wouldn’t have come to a different decision, to be perfectly candid. But yes, our preference is to always provide what we can and to be open with the market. Then you can disagree with us. Presumably, we have better information than you have, and therefore, it’s up to us to sort of lead the way. So that’s the philosophical position I took, and it prevailed.

Thank you. Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Hey, good morning guys. Thanks for all the transparency you provided in the release and in the prepared remarks. One of the things that struck us is that you guys did a really good job early on evaluating occupancy over rent. I think that’s one of the reasons that you are really starting to see some sequential growth. And you’ve alluded to this a little bit. But I do want to maybe drill down a little bit more on the leases that are coming due in what’s historically the peak leasing season and how you think you’re going to manage through that? I recognize that you said 1Q is going to be tough, 2Q is going to be challenging as well, but how do you think through that? How do you think your occupancy sets you up to manage through the leases coming due when demand is still not going to be back to where it is?

Yes, hey, it’s Angela here. That’s a good question, and it’s certainly something we actively debate internally with the tactical strategy, right? Well, I don’t think I want to go through our playbook in detail. I would just say that we focus on maximizing revenue, and we do so by optimizing occupancy whenever possible, and we meet the market. Given where we are, you’re right on point that we did in the third quarter focused on occupancy, which allowed us in the fourth quarter to pull back on concessions as we see the market stabilize. As we continue to see how the market performs, we will continue to use that strategy. And the goal at this point is really to try to pull back on concessions whenever possible. Of course, this is subject to the supply, which I mentioned in the CBDs will continue to be pretty heavy, assuming a recovery in the back half of the year. So all those come into play.

Okay. I have appreciation for you not wanting to give the playbook away. I would love for you to, but I appreciate why you might not want to. I wanted to, on the other side of the equation, just the job growth. One of the things that, believe it or not, I think is misunderstood about your portfolio, is your class AB mix in urban versus suburban? I’m not sure that’s always appreciated by the investor base. So when you think about job growth, can you maybe break down those job growth views relative to white collar, high class – high-paying jobs in urban markets versus maybe the type of renters that would rate class B in the suburban markets?

Yes, this is Mike. There is a lot to that question, so I will try to unpack it as best I can. Every recession is a little bit different. Normally, we view Southern California as more typical of the U.S. average; therefore, it’s less volatile. In this recession, it has been incredibly volatile in a certain sector, and that is the Motion Picture sector. We didn’t talk about it this time, we have on prior calls and it’s effectively shutdown. This is the big wealth generator in Southern California. Southern California looks a lot like Northern California. I think it’s because of two key parts: the filming and entertainment business plus all of these low jobs. When you look at the sectors of jobs that have been demolished, it’s all the lower-income segments of the job base, mainly it's hospitality and restaurants and other services those jobs are down. On the metros, somewhere in the 20% range, which means in the cities which are even higher concentrated, they are even more impacted. You have got more supply coming into the cities. You also have worse job growth. Again, when we give you the averages, these are averages that are more concentrated in the cities. When you go north into the tech markets, I think that you have two things that are happening. You have all those service jobs in Seattle and the Bay Area. But you also have, I would say, greater work-from-home flexibility that is that on the margin has allowed the areas that would generally be suburban in nature, most of San Jose and suburban has small downtown up peninsula through Mountain View where Facebook is located and Google right in that area. Those areas have been much greater impacted. There is nothing fundamentally wrong with any of these businesses and so the recovery looks like a couple of things, because there is nothing fundamentally wrong. The Motion Picture business is still a high demand. The technology companies, as noted in the prepared remarks, a lot of venture capital money being invested, many investments being made by the big tech companies into locations and buildings. Everything, I think in terms of the broader economy looks fine: we need those companies to come back to the office to some extent. Also, there is always people that are retiring and again, selling their expensive California home going somewhere else and then backfilling coming from college graduates coming to take high-paying jobs. So I think there is a mismatch there; the lower-income can’t afford to stay, they either have left or are staying put. But we haven’t seen the backfill yet. You’re going to see the back starting relatively soon, and I think that they will start to solidify because we’re 90-something percent occupied. It doesn’t take that many jobs to sort of fill things up, tighten things up and then concession abating quickly. So that’s how we see it. Hopefully, that helps.

That’s helpful a lot. One final thing for me, it strikes a core to me when you say you have more information than us. I think that’s very true. I would encourage you if there was anything that you could provide on population migration trends that you are seeing in your specific markets in the coming months. I think that would be really well received, but thanks, guys. I really appreciate, as always, the dialogue.

Sure. No, we’re happy to give it. Yes, I could give you a little bit of migration information. Again, similar to prior recessions, where everyone focuses on the very short term, recessions happen about every 10 years; I have been here for 50 years; I am 60, I make a different decision when I’m 60 when I was 50 about where I live and how hard I want to work in various things. A lot of what you’re seeing is just the first leg of what always happens about every 10 years, typically around a recessionary period. But in terms of inflow, outflows, it’s a little bit different by market. We still – the migration into our markets is still dominated by New York and Boston, and even some other California metros. There are quite a few people moving from San Francisco to Los Angeles, maybe for better weather or whatever. In LA, the outflow is really Las Vegas, Phoenix and other California cities. In San Francisco, it’s Seattle, Austin, Sacramento, and Seattle is Phoenix, Boise, Austin, in terms of outflow. There is a lot of people that are leaving California, benefits of the high-scale workers; the moving going to some places like that are benefiting others. The outflows have been slower or harder. Our experience is consistent with that.

Thank you. Our next questions come from the line of Amanda Sweitzer with Baird. Please proceed with your question.

Great. Thanks for taking the question. I want to dig in a little bit more on just the near-term demand you have seen kind of as you have had occupancy pickup. Do you have a sense of where that demand is coming from? Are you taking share from other properties in the market or have you really seen renters move over in quality like you have last cycle?

Well, it’s Angela, I think, put a happy face on it, and I will let her comment in a minute. But it’s a battle out there. So I wouldn’t say we are taking anything from anyone. I’d say we are all competing fiercely to – and we all have maybe a little bit different focus. Again, as we have said before, our focus is maintain high occupancy, protect the coupon rent, we will use concessions when we have to, try to be aware of what time of year it is and what that battle is going to look like and plan ahead. I think we do a good job of that. But I don’t think there are any winners in this current situation. We are trying to turn the battleship toward a better day, but it’s not quite here yet. Obviously, apartments look ugly when they’re getting better. We lag when your leases cause us to lag, and the all-time high in terms of achieved leases will hit in Q1 and Q2, which is why year-over-year will look so ugly. But things are definitely slowly getting better, and I think we will see that down the road, as Angela said, in the second half.

Okay, that makes sense. And then turning to the disposition you have lined up, can you just provide more color on the profile of those assets either in terms of age or location and then as well as the buyer pool and if that buyer pool has changed at all from pre-COVID?

Sure, yes. This is Adam. Happy to answer. For those three, they are situated throughout our portfolio. There is no general overview of the type of asset they are. In all three cases, these were actually three exchange buyers. To say there is one in the Bay Area, just to use as an example, it’s in a heavily concessioned Bay Area market, and we are underwriting it based a couple of different ways. One is on pre-COVID in-place rents. Looking at current net effective today, on current net effective that deal, again, this is a heavily concession Bay Area market. It’s in the low 3s, so call it 3.2, something like that; on pre-COVID numbers that’s about a 3.8 or so. That was underwritten in the fourth quarter. Concessions have varied before that and sense, but that’s the ballpark, and there still is enough of a transaction market out there where market has been set – the buyers are a little different than during your typical cycle, but there continue to be deals that they go down.

Appreciate all that detail. Thanks.

Thank you. Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.

Hey, thanks. Good morning and congrats everyone, and congrats to John, too, if you are listening. On the topic of the eviction moratorium, I am feeling like that could be a messy time when they start to expire, I wonder if you agree? I mean, some people just start paying again, but then perhaps a swath of people say, I got to leave now because they are making me pay. Is there a risk that you could see some volatility in occupancy when those things start to burn off and we kind of try to get back to some sort of normalcy?

Hey, Rich, it’s Mike. Maybe Angela wants to comment as well, but I think messy was a very good way to describe it because it summarizes how we are looking at it. Back in when AB3088, which was supplemented by this SB-91, was passed in August and required residents to pay – COVID-affected residents to pay at least 25% of their rent by January 31. And then SB-91 ruled that January 31 date to June. The 25% requirement is getting larger and that will definitely add pressure to that whole situation. I am not smart enough to say exactly how that’s all going to play out. We are all hoping that this federal stimulus money helps. We have mostly a B type of portfolio. We don’t have any quantification of it whatsoever, but that would certainly help a lot because that would potentially pay 80% of the unpaid rent, and we would have to walk away from the 20%. That’s a whole lot better than what we’ve assumed in terms of our delinquencies. I think we are recovered in terms of the normal to a slightly conservative case scenario. Maybe there is a little bit of upside given SB-91. That’s how I would answer, but you are absolutely right, I don’t for sure know the answer to it.

Okay. And then you kind of talked about your portfolio sort of characterization B quality. I guess I am a little surprised that the portfolio didn’t do a little bit better with the disruption going on in the urban core. You would think that your portfolio being largely once removed from those environments might have captured a bit more in terms of the flow of residents. It’s easy for me to say, obviously, there is a lot going on in your markets, but perhaps maybe it’s that very characteristic of your portfolio again sort of B quality, not necessarily downtown locations, that gives you the feeling to say something like cautious optimism? I am wondering if that’s a driving factor to some of the optimism that you are trying to say today?

I mean, optimism is – I am not sure we are if optimistic is, yes, it looks like we’ve hit bottom after getting pummeled, then yes, I guess that’s optimistic. But I wouldn’t say that. I think that as I said in the opening script and the reason why I put it in there is we’re still at a point where the nation has lost as many jobs as it lost in the financial crisis. During the financial crisis, our average market rents were down 15%, and Seattle was a little worse, about 20%, and Southern California did a little better. Therefore, I think we are kind of where we are; where we would expect to be given the extraordinary number of jobs lost. It’s not the same as the financial crisis in that you’ve lost these low-end service jobs, and they’re mostly in the city servicing at various levels, very wealthy clientele with lots of money. It’s different, but mostly the same. I would say I am not surprised about where rents have gone in general. I hope for a robust recovery with vaccine distribution and things like that because it seems like a lot of this is really focused on COVID direct outcomes, losing service jobs just because of COVID because those service jobs just aren’t there. They are shutdown by the government. I think come back pretty quickly because I think people do want to go out to dinner and do things like that. So I think it’s going to come back and hopefully soon, obviously.

Okay. And just real quick on the delinquency, kind of just take reserve against all of the $0.45 hit to this year, I mean, when you really look at that, what’s your experience in terms of then actually not deserving the bad debt tag and they actually become collectible; is it 50% in past cycles or is it hard to say because this one is so different?

Yes, this is Barb. This cycle is very different than any other cycle. Even during the financial crisis, our delinquency was only 50 to 60 basis points of scheduled rent. Being at 2.7%, which is where we have been the last couple of quarters, is obviously a lot higher. I think in the fourth quarter, we did take – reserved against all of it, and that was really due to the environment. We were in a severe lockdown state for most of the quarter and into January, not really knowing when any of that was going to lift. We decided to take a pause. We will reassess in Q1 and see where things are at as that goes. The $0.45 that I alluded to in my script, that’s really compared to our historical run rate. For the foreseeable future, we do expect delinquency to remain elevated. This eviction protection moratorium SB-91 goes until June. We don’t know what’s going to happen after that. We have assumed that we don’t make a lot of progress on delinquency, which is not because we can’t collect. It’s a combination of both; people not paying and collections getting us to that mid-2% range of scheduled rent.

Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your questions.

Hey, good morning out there, guys. Just a quick one from me. We have covered a lot of ground. But just on this disconnect between reported same-store and FFO, given the cash concession accounting treatment versus GAAP with respect to revenue and FFO. If we sort of assume the concessions shut down on June 30, let’s say, which I think is sort of implied in the outlook. Help us understand the cadence thereafter when you would sort of stop seeing that disconnect between the two series just as we think about modeling that into 2022?

Yes. Well, I don’t have 2022 guidance at this point. But in the back half of the year, we do expect concessions to moderate, not to abate completely but to moderate. That’s where you will see – it will benefit same-store revenue growth but the offset will be on core FFO growth given that we will have to amortize the straight line of concessions. So that will mute our core FFO growth relative to the same-property growth you will see. We expect that to happen in the last two quarters of this year and then 2022 is not something I can give at this time.

Yes, right. Thanks, Barb. I guess that part of it for – while the concessions are still heaviest. But I mean, could you – is there a way to walk through the timing, assuming a 12-month lease or something like that, that would say, okay, by this point in 2022 you would see same-store and FFO converge or correlate more in the way they have historically? Is there a way to frame that out or is it just sort of reaching too far at this point?

Yes, Rich, this is Mike. Let me add something here. Angela is in the middle of this, so she can comment too. But it’s more like a battle every day because we are constantly increasing or pulling back concessions, changing rent levels, trying to find the optimum for net effective rents. It’s impossible to model that. I’d say trust us to do a good job of trying to figure that out. We have people that are spending very senior people that are spending a lot of time in the trenches pricing units. Everyone is a little bit different; you can imagine supply and demand changes on a daily basis. We just can’t tell you what’s going to happen. Our guidance is based on something, but the reality is, we can’t tell you that that exactly is going to happen. The mix of concession and rent differential it could change. I have been here for a really long time, many of you probably say too long. This is unlike any other period I’ve seen. Therefore, it’s very difficult to be too granular with respect to answering these questions.

Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, good morning. Congratulations to Angela and Barb on your new roles, that’s wonderful. But Mike, to the point of CEO succession planning, obviously, we saw Avalon Bay do it. You guys did it a number of years ago when Keith handed the reins over to you. It did seem from the outside that John was being groomed. Maybe that wasn’t the case. But again, on the outside, that’s what it looked like. Can you just talk a little bit about CEO succession? Does this impact anything? Does it not? Any other impact that may come of this or maybe this opens up spots in the senior ranks to allow you to groom more people to raise the more senior roles at Essex?

Yes, Alex, thanks for the question. It’s a good one and really important. We take succession planning super seriously. I’m really pleased that I have three very, very capable executives around me. I think as I look even beyond them, we have a pretty deep bench. You are right, I was somewhat surprised when John contacted me late third quarter, early fourth quarter about sort of a change of plans involving him. I asked him to reconsider. We all need to live our lives and make connections. We decided on the course, and it probably took too long to come to agreement about what his role was going to be going forward. We ended up with the press release after Christmas; it could have been much earlier, just took time to finalize what that was going to look like. Apologies for the optics of it. John is always in our minds and hearts, and he’s forever a part of the company. Certainly, we wish him well. He’s done a tremendous amount of good for the company. We think about succession planning, our basic philosophy is the doors to or the path to the CEO job are always open. The historical path has been mostly through finance. I came through finance and then ran ops and then up. We want other paths to be open too, including maybe through operations or through investment. Wherever we see talented people, it’s one of my primary jobs to keep those paths open and don’t let them be blocked by people that are not interested in being CEO. That’s the key to the whole thing. Backing off of that down into looking at the people below and making sure that they have diverse experience and moved around the organization. In the case of Barb, Angela, John, all of them wore multiple hats on their way to up in the organization. We expect to continue to do that. I think that’s the way it has to be in order to have a proper succession process.

Okay. And then the second question is, one of the hallmarks of Essex has been investing when there are abnormalities in the market. Mike, you mentioned something interesting that in the suburbs, the rent affordability index was at perhaps an all-time high, definitely elevated. You guys have sold out of the urban areas and been more suburban. So does this make you want to switch and now sell more suburban, get back into the urban, or are there other dynamics at work where with this pricing affordability imbalance, you wouldn’t do what maybe you would have historically done prior to the pandemic?

Maybe I’ll have Adam comment on that, and then I’ll fill in afterward. He looks at the stuff in a lot of detail, and he gives a lot of credit because he’s out there transacting when no one else is. Some of the transactions he’s done, we are so close to the pre-COVID period. It’s pretty exceptional what we’ve accomplished. Adam, do you want to comment?

Sure, yes. And Alex, hopefully, this answers what you’re looking for. We are looking at all our markets at all times. During this recent COVID period, we’ve been primarily sellers. Most of those we sold in the CBDs. We’ve done that for a variety of reasons, my feeling back to you – we sold Eteno and downtown LA, sold Masso in San Francisco prior to COVID. The pricing on those deals was significantly above what our in-place NAV was at the time. So we felt at the time the right decision from an arbitrage standpoint was to sell those and reinvest in existing portfolios, buy back stock or other assets in suburban locations. The heavily impacted CBD locations and quality of life in locations such as downtown LA, in Soma in San Francisco has been challenging and will likely continue to be challenging here for the foreseeable future. Many of the, what we consider suburbs, are very densely populated suburbs, and that is where we see opportunity and where we see much of the market coming back sooner rather than later. We’re constantly assessing where we are. If there are opportunities in CBD where we can buy at a good basis, and we see significant rent growth, we’ll do that. But yes, I mean, we’ve been net sellers here. We’ve sold all the deals that we’ve sold last year and then into this year, have been within 2% of our pre-COVID NAV, some above, some slightly below. So that’s been the right philosophy and strategy, and we’ll assess as we go along.

I say it well. Alex, maybe I’ll add one more thing, just briefly. The walk score issue is pretty interesting to me because the areas with the best rent growth have the worst walk scores. The CBDs and some of these places that have the best walk scores have been hammered in terms of rent. Everyone needs to ask themselves a question: will walk score ever matter again? My view is it will. It will be nuanced, and it may not be the highest walk score gives you the best rents, but I believe having a nice location, low crime, pleasant surroundings, amenities, good food options is going to continue to be important; those are the high-quality suburbs.

Thank you. Our next questions come from the line of Zach Silverberg with Mizuho. Please proceed with your question.

Hi, good morning out there. Just a quick one for me. Just a follow-up on an earlier one. In your supplemental and in your prepared remarks, you talked about the VC investments and job postings in Essex market. Can you give a little historical context around that? Is there a specific correlation that you’re looking for or bag time or how are you able to sort of quantify this momentum in terms of lease-up or lease rates?

Yes. This is Mike. I have the experience of living through the dot-com bubble and then bust. I would say that what I see relative to that is not even close. During the dot-com bubble period, rent surged about 40% in 2 years. It set our all-time high in terms of rent-to-income level, so rents being at a very high percentage of income level. In contrast, rents appear very affordable. San Francisco real rents down somewhere around 20%. Northern California, in general, is about 7% below our long-term average of rent-to-income in terms of affordability. If I compare that number to the financial crisis, I think we got to about 90% of the long-term average. In Northern California, we are at 93%. So starting to feel pretty affordable again, these are areas that support high income, high jobs, high-paying jobs, and the rent levels are now at a point where I doubt that the tech companies are going to be at all that much at the cost of living because affordability has changed dramatically overnight. It doesn’t take that many new apartment units of demand to come in and take 96% occupancy to 97%, and then it’s a whole different game. That’s the way we look at it. We’ve said the band between rental income, between 90% and 110% is kind of the green zone that we do well in. In the markets that have been hardest hit, we are closer to the 90% of the long-term historical average, and again in Ventura, we are above the 110%. It will change the choices renters make, I believe.

Got it. I appreciate the color. I just have one quick follow-up on. In your guidance, you’re not really guiding for any development. Can you maybe just comment there? Is there any future opportunity that you guys are looking at? Anything that right now you just sort of haven’t contemplated in the guidance?

Yes. Zach, this is Adam. We’re constantly looking at different development opportunities. We do get exposed to quite a few to work through our pref pipeline, and they can both feed off of each other. We have a couple of deals right now where we’re looking at relatively seriously in predevelopment stages where we’re spending minimal pursue dollars. We actually walked away from a predevelopment deal last year, but there continues to be some potential there. We are looking for unique opportunities. The development yields right now are potential, generally speaking, but these two or three that we are looking at ones are really well located, high-quality of life, suburban location. One is a good job center, and another one is also a very good job situation with some existing income. We are looking at everything and one or two might fit the bill.

Thank you. Our next question is come from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Thank you. Good morning everyone. Two questions. One for Mike, one for Adam, and also congratulations Angela and Barb as well. First, looking at the recovery that you guys are talking about and starting in the second half. I guess I just want to understand what you think that looks like in terms of the timeline to get back to coverage. I asked because you look at your main Essex markets, about 1.1 million jobs have been lost in 2020. You’re assuming like 3.4% or around 400,000 jobs. So a little under 3 years of that kind of growth will be needed to get back to a level commensurate with pre-COVID. So just based on those things, Mike, how do you guys see that recovery? I understand the comps in the second half of this year are going to be very easy. But after that, what do you guys kind of think about we are at again like pre-COVID type pricing?

Yes. That’s a great question. For example, based on the job losses in San Francisco, we should be a lot lower occupied than we really are. What happens during the recession is people move closer into the better areas. Plenty of people will say, hey, I would live in San Francisco, but the rents are too high. They live within the proximity around San Francisco and commute in. Once this happens, they make a different choice, and they say, hey, with those rents, there is a backfilling approach. Our view is a little bit longer-term that you are going to see a very significant movement back towards high-quality cities that are pretty affordable. We’re still at 96%. It doesn’t take that many jobs to sort of fill things up, tighten things up and concession abating is pretty quickly. That’s the way we see it. Hopefully, that helps.

I totally appreciate that strategy. I think it’s the right one. I guess, I am just trying to get at – like totally – it’s great that you have 96% occupancy, but that doesn’t – the market rents are still terrible. So yes, I guess, I mean like 2022, I don’t know, I’m just saying, like 2023, are you back? I’m just trying to kind of assess what that looks like for the portfolio. I don’t know if that makes sense.

No, you are spot on. Unfortunately, we won’t be able to be all that specific about this. I would tell you that part of the reason why we do what we do is because concessions can abate pretty quickly. I can’t tell you how quickly, and I can’t tell you how many jobs it’s going to take in order for that to happen. But I can tell you that typically this is what happens; concessions abate pretty quickly, and we are going to have an overhang from the straight-line rent issue, which is a different factor. Our hope is that we get enough demand drivers that tech companies continue to hire people; they decide to live somewhere close to the urban centers or where most of the job locations are. It doesn’t take that much. I would guess that in a little bit longer period of time it would take at least a year to improve. It’s a battleship.

Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Thanks, guys. I appreciate you keeping this going. So – and also a lot of great detail in the release on jobs posting and some of the macro forecasts despite all of this uncertainty. Your response to a question on migration patterns that some people left aren’t coming back certainly seems to be the case. But how are you contemplating or does your guidance account for the portion of residents that didn’t lose their jobs or even students that temporarily left your market or campuses in these markets?

It really doesn’t. We assume that there is a tailwind, a demographic tailwind in that people live longer. They retired about at the same time that they used to retire. They have longer retirements, people live longer, and consume houses without consuming jobs. And so there’s a presumption that that is a demographic tailwind that’s going to be with us as long as we live longer. In terms of being more granular than that, we’re really not. All those people are out there. A lot of contract workers and I don’t have that data. I wish I had. But a lot of contract workers that left amid COVID and connected with both the entertainment industry and the tech industry.

Okay. No, that’s helpful. I appreciate the thoughts there. And then, Barb, I think you mentioned concessions run high in the first half of the year, but was wondering if you could put a finer point on that. Do you expect the net effective pricing that you provided in the release this quarter? Do you expect the pricing you achieved in 4Q in early part of the year that that reverses because we don’t see the demand come back until maybe later in the year, or does it hold around current levels and then improve in the back half of the year?

I think Angela can talk about pricing, but yes, in the guidance, we do assume concessions remain relatively consistent with Q4 for the first half of the year. Then moderate in the second half of the year.

That’s a good question. The way we think of it is that Mike talked about market rents troughing currently, fourth quarter, December, January. I talked about scheduled rents troughing by the end of the second quarter because I was looking at year-over-year. There are a couple of different factors, which may be a little confusing. As far as pricing is concerned, we currently do see what we reported in January is holding. Keep in mind this is also toward the lower peaking season. As we progress and if the economy continues to improve and reopen, we – that’s why we talked about the second half of the year being better. It’s hard to talk about it month-to-month. Right now, we’re in good position because we employed the strategy of higher occupancy, which allows us to reduce our concession. We’re able to continue to do that and that’s what we are targeting for our guidance for the year.

Thank you. Our next questions come from the line of Nick Ellico with Scotiabank. Please proceed with your question.

Hi, guys. This is Sumit here for Nick. I apologize, I know we all asked the same questions differently, but I just want to sort of understand how you guys look at this problem. 2020 wasn’t a normal year for leasing. The cadence actually changed. Most of your occupancy gains happened in Q3. And in Q3, I thought looking at the month-to-month stuff, July was the peak year sort of occupancy burst and then a little bit sort of 50-50 split in August, September. You also offered more concessions in the Labor Day kind of timeframe. I guess if everything – the concession side, vaccine aside, everything is sort of – if you look at it from a normal lease expiration schedule perspective, things are weighted towards the Q3. How does that sort of reset the more normal kind of cadence of turnover and leasing unless you invite in shorter leases? I’m just inquisitive on that?

This is Angela here. I think you’re asking about the cadence of our leasing season, and if that is your question, we would expect that cadence itself for 2021 to be somewhat similar to prior years. We would expect, depending on our markets, for the most part, they kind of peak around June and July. During those times, we tend to have the least amount of concessions, but because our leases also renew during that time, we may end up with slightly lower occupancy just by the way the number works. So that kind of gives you the trajectory in terms of our business. The reason we’re talking about when things trough and the year-over-year comparables impacts the entire year and behaves differently because of COVID last year. The second half of 2020 was much better than second half. You have a harder time in first half in 2021.

Got it. Okay. Yes, yes. A little more clarity on the cadence is what I wanted to hear. So, thank you. And in terms of like when we look at your macroeconomic forecast, kudos to Mr. Paul Morgan and team. I guess it appears that Northern California has the highest job growth at 3.4% but the lowest rent growth at minus 3.6%. So there’s a lag. I assume that the lag is related to the hyper concession activity we saw in 2021 and 2020. I’m also wondering whether you guys have any sort of factors or discounts for jobs created by companies domiciled in California but have offered employees the flexibility to work from anywhere. Does that factor into your kind of negative 1.9% rent growth forecast, effective rent forecast?

Let me comment on the minus 1.9. What that represents is each month, year-over-year, what the market that effective rent differential is year-over-year. If you look at January of this year, the prior year rents were going up, and obviously, we’ve had a big decline in current rent. We start with a large negative number. As we go through the year, those lines are going to cross because we’re going to end up with a lot easier comps in the second half of the year. It’s really the trajectory of rents year-over-year. It’s going to start with a big negative in January, and then it’s going to go to a mid-single-digit positive by the end of the year. Averaging all that out, you get -1.9%. It’s not intended to be because of concessions. It’s really because we’ve had – we start the year. Again, the prior year rents were all-time highs. Rents have rolled down a lot. So we start in a hole for the first half of this year.

Got it. Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

Thank you, operator, and thanks everyone for joining the call today. We look forward to participating in the Citi Conference coming up in about a month and hopefully, we will meet with many of you there remotely. I also hope that sometime in the not distant future, we can meet once again in person. Have a nice day. Again, thank you for joining the call.

Thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time. Have a great day.