Essex Property Trust is a rarity in the public apartment REIT sphere in that it's solely focused on the West Coast. About 20% of its exposure is in Seattle, while the remaining 80% is split evenly between Northern and Southern California.
Essex President and CEO Angela L. Kleiman said the approach has been successful.
“When we look at the overall portfolio composition, we're actually pretty comfortable at where everything is sitting,” Kleiman said on the REIT’s recent first-quarter earnings call. “And our results have delivered, especially in Q1, the way we had anticipated.”
Though expanding to markets on the East Coast or Sun Belt is possible, Kleiman said the company would be disciplined in evaluating any opportunities. “We're going to continue to monitor those markets and look for opportunities,” she said.
However, Kleiman said Essex still sees the best growth opportunities in its core West Coast markets. While many Sun Belt metros are becoming saturated with new supply, new deliveries are down 22% in Northern California. And even with major tech layoffs, the economic picture is improving, according to Kleiman.
“We're just starting to rebound in terms of job growth,” she said.
Here are three other major takeaways from Essex’s call:
West Coast markets hold up
Despite stability in many submarkets in Essex’s portfolio, Kleiman noted there were “pockets of softness” in downtown Seattle and Los Angeles. However, she said that downtown Los Angeles represented only 2% of Essex’s portfolio. “In aggregate, it's not so meaningful that it gives us pause,” she said.
In Seattle, competition from new apartments is an issue. “The elevated supply in the downtown submarket is weighing on our regional performance,” Essex Senior Vice President of Operations Jessica Anderson said on the call. “The supply outlook for Seattle is comparable to 2022, and similarly, a more challenging second half of the year is expected.”
BY THE NUMBERS
|Rental income||$388.9 million||7.6%|
|Net operating income||$274.1 million||9.2%|
|Operating expenses||$114.8 million||4.0%|
|Funds from operations||$3.80||13.1%|
|Rent per unit||$2,571||6.8%|
|Occupancy rate||96.7%||40 bps|
Despite having half of its delinquency in Los Angeles and many units held up in eviction courts, the Southern California picture is solid. “Overall, Orange County is pretty stable, as are a lot of our Southern California markets,” Essex Chief Financial Officer Barbara Pak said. “San Diego is similar as well.”
Essex is seeing strength in the San Jose market offset by supply-driven weakness in Oakland, according to Anderson. “The supply outlook for Northern California remains relatively muted, which will benefit our ability to push rents presuming job growth continues to outpace the recently announced layoffs,” she said.
Banking issues have multiple effects
Essex executives, with a foothold in areas serviced by Silicon Valley Bank, have been closely monitoring the effects of the lender’s collapse on their portfolio. So far, they haven’t seen much of an impact, according to Kleiman. “Looking forward, obviously, we don't know what can happen,” but she said the company doesn’t expect further disruptions.
Essex also evaluated the more than 30 companies in the REIT’s real estate technology ventures and saw no real effects from the SVB collapse, according to Kleiman. But she sees the banking failures having a broader impact on the economy. “That's one of those reasons that we are forecasting a mild recession in our current expectations,” she said.
Even if the banking troubles last longer, capital remains available for apartment owners.
“In other sectors... I definitely think the banks have pulled back,” Pak said. “But the government financing is still available. Life insurance companies are stepping in. And I think you're seeing other lenders step in.”
But construction debt is getting hard to find. Like other REITs, Essex also has the capability to step in and lend capital to apartment developers. Chief Investment Officer Adam Berry said the REIT has seen an uptick in opportunities to provide mezzanine financing or preferred equity over the last couple of months.
Turnover leads to expenses
In expectation of eviction moratoriums ending in its Western markets and more tenants leaving their apartments, Essex implemented a strategy to retain residents in apartments. In Q1, those efforts were successful. As a result, the REIT saw occupancy increase 70 basis points from Q4 2022 to 96.7%.
Still, heightened turnover played a role in the quarter as the company’s expenses rose 4.0% year over year and 2.9% from Q4 2022. “I think the biggest variability we're seeing is really maintenance and repairs because we have more turnover,” Pak said. “We had some more flood damage this quarter. So that's kind of one time. We don't expect that to reoccur, but we do expect the turnover to be a recurring item given evictions.”
Essex is also enjoying the benefits of investments made in previous years, such as the revenue management system it rolled out earlier this year. Anderson said the platform allows the company to price at a portfolio level with its property collections model, whereas commercially available systems typically price at the property level. In addition, it allows the company to optimize amenities.
“When you're pricing properties individually, sometimes you can be cannibalizing yourself based on the occupancy position at a property,” Anderson said. “When you're looking at an entire portfolio collectively… ultimately, you can maximize revenue through a more stable approach to rents and the balance of occupancy.”
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