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Text: Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A.
I will provide an overview of our third quarter results, our initial operational outlook for 2022, apartment market conditions and then conclude with the regulatory environment.
Our third quarter results exceeded expectations, reflecting substantial improvement in West Coast economic conditions and housing demand.
Net effective market rents are now 6.4% above pre-COVID levels and it's notable that we've exceeded pre-COVID market rents despite having recovered only about 63% of the jobs lost during the pandemic.
As a result of improving market conditions, we reported quarterly core FFO of $3.12 per share, $0.08 per share above both our sequential results and guidance provided last quarter.
This is the first of likely many quarterly sequential improvements in core FFO.
Southern California continues to deliver the strongest growth with net effective rents up 17.2% compared to pre-COVID while Northern California is still down 5.2%.
Return to office delays at many tech companies and slower job growth compared to other West Coast areas were factors in the pace of recovery for Northern California.
Overall, September job growth in the Essex markets was 5.2%, substantially above the U.S. average of 4%.
Turning to our outlook for 2022.
We published our initial market rent estimates on page S-17 of our supplemental package.
We are expecting 7.7% net effective rent growth on average in 2022 with Northern California the notable laggard in 2021 forecasted to lead the portfolio average in market rent growth next year.
A key assumption driving our outlook for 2022 is the return to a predominantly hybrid office environment occurring over the first half of the year, supporting our 2022 job growth outlook and our expectation that the West Coast markets will resume their long-term outperformance versus U.S. averages.
Our confidence in the Bay Area recovery next year is partially driven by rental affordability following a year of solid income growth, lower effective rents and exceptional growth in single-family home prices.
Median for-sale home prices are up 17% in California and almost 16% in Seattle, making for-sale housing more costly relative to rental housing and often impeding the transition from renter to homeowner.
Finally, despite large increases in for-sale housing prices, our expectation for the production of for-sale housing in 2022 remains very muted at only 0.4% of the single-family housing stock.
We previously noted that many large tech companies in our markets have delayed their office reopenings as a result of the Delta variant this fall, which we believe is the primary factor in the slow recovery of Northern California compared to other Essex markets.
Nevertheless, recent tech company announcements regarding office expansion, open positions in the Essex markets and new commitments to office space all support our belief that the leading employers remain fully committed to a hybrid office-centric environment on the West Coast.
Page S-17.1 of our supplemental highlights recent investments by large tech companies which have continued throughout the pandemic and include Apple's 550,000 square foot recent expansion in Culver City, their new 490,000 square foot tech campus that will soon begin construction in North San Jose and a recent acquisition of five office buildings with a total of 458,000 square feet in Cupertino.
Google last quarter received needed approvals for its planned 80-acre campus near Downtown San Jose and YouTube's 2.5 million square foot campus in San Bruno was just approved by the city last week.
We continue to track the large tech companies hiring in terms of open positions and job locations, giving us confidence that we continue to grow alongside the most dynamic sector of the U.S. economy.
Our most recent survey of open positions indicates 38,000 job openings in the Essex markets for the 10 largest tech companies, up 9,000 jobs or 26% as compared to the first quarter of 2020.
Strong economic growth on the West Coast is further supported by venture capital investments which achieved new highs in Q3 '21 of $72 billion, of which 44% was directed to organizations in the Essex markets.
Turning to our supply outlook for 2022, we are expecting 0.6% housing supply growth for the full year, including 0.9% growth for the multifamily stock which is manageable relative to our expectations for job growth of 4.1% in 2022.
Overall, our West Coast markets will remain well below the national rate of new housing supply growth and especially compared to the rapid accelerating pace of housing deliveries across many low-barrier markets next year.
Longer term, residential building permits in Essex markets saw a modest 3.5% increase on a trailing 12-month basis, which is favorable compared to the U.S. where permits have increased 13.6% compared to one year ago.
While our markets often temporarily underperform the national averages during recessions, we remain disciplined in our approach to capital allocation, including the cadence of housing supply deliveries with permitting data supporting our West Coast thesis.
Turning to the apartment transaction market.
We continue to see strong demand from institutional capital to invest in the multifamily sector along the West Coast as evidenced by increasing transaction volume and cap rates in the mid-3% range.
Apartment values across our markets are up approximately 15% on average compared to pre-COVID valuations.
The company has recently seen more development opportunities, and we were able to purchase two commercial properties in the third quarter, one located in South San Francisco that we expect to become a near-term apartment development opportunity and another in Seattle that we will begin to entitle for apartments while earning an attractive 6% going-in yield with a high-quality tenant.
Barb will discuss a new co-investment program in a moment, which is strategically important given our preference not to issue common stock at the current market price.
Finally, the California statewide eviction moratorium ended September 30.
However, a few meaningful local jurisdictions have extended their separate eviction prohibitions.
The net result is that a significant portion of our portfolio remains subject to eviction moratoria and other regulations that will slow the pace of scheduled rent growth in 2022.
Fortunately, the Federal tenant relief program has come to the aid of many of our residents, although the reimbursement process continues to be slow and requires a significant coordination and support from the Essex team.
I am grateful for this extensive team effort.
First, I'll start by expressing my appreciation for our operations team as we are in the midst of a strong recovery, our team has been busier and working harder than ever.
Our third quarter results reflect a combination of the operating strategy implemented early in the pandemic and a healthy recovery in net effective rents that began in the second quarter as California and Washington finally reopened from the pandemic shutdowns.
As you may recall, in the second quarter of 2020 when the pandemic-mandated shutdowns halted our economy, Essex quickly pivoted to a strategy that focused on maintaining high occupancy and coupon rents with the use of significant concessions.
Now over a year later, as our markets recover, we are starting to see the benefits of this strategy flow through our financial results.
In the third quarter, same-property revenue -- same-property revenues grew by 2.7%, which is primarily attributable to a reduction in concessions compared to the previous period.
By primarily utilizing concessions last year, we were able to limit the in-place rent decline to only 1.1% in the third quarter.
The benefit of this strategy is also coming through our sequential revenue growth, which increased 3.2% this quarter from the second quarter.
With the market volatility we experienced over the past year, this is an extraordinary result and positions the company well going forward.
From a portfoliowide perspective, market conditions remain strong compared to a year ago as demonstrated by the 12.6% blended net effective rent growth in the quarter.
In addition, rents relative to pre-COVID levels have continued to improve, further enhanced by a delay to the typical seasonal slowdown in all our markets.
Turning to some market-specific commentary from north to south.
Rents and jobs in the Seattle region have had a strong recovery with net effective rents up 8.3% compared to pre-COVID levels and year-over-year job growth of 5.5% in September.
New supply continues to be largely concentrated in the CBD, which is less impactful to Essex because 85% of our Seattle portfolio is located outside of CBD.
Looking forward to 2022, as outlined in our S-17 of the supplemental, total housing supply deliveries for the region is expected to decline compared to 2021, and we anticipate job recovery to continue, led by Amazon, which recently announced plans to hire over 12,000 corporate and tech employees in Seattle.
As such, we are forecasting market rent growth of 7.2% in 2022.
Moving down to Northern California, which is our only region where net effective rents remain below pre-COVID levels.
Greater job loss and apartment supply deliveries caused net effective rents to fall further in Northern California since the onset of the pandemic.
In addition, the job recovery in Northern California has been at a slower pace than our other regions, with only 4.4% year-over-year improvement compared to a 5.2% for the entire Essex portfolio as of September.
We believe this is partly driven by the more owner mandates delaying normal business activities.
Apartment supply, particularly in San Mateo and Oakland CBD are also presenting challenges for nearby properties, leading to financial concessions for stabilized properties for -- of over a week in these markets in September.
On the other hand, we anticipate that Northern California will be our best-performing region in 2022, with market rent growth forecast of 8.7% on our S-17.
As Mike discussed, we expect hybrid office reopenings to continue, which will drive additional job growth and healthy demand for apartment units.
With similar level of supply delivery expected in 2022 as this year, we are optimistic that Northern California is in its early stages of its recovery.
Lastly, on Southern California.
Rent growth has continued to improve in the third quarter, and net effective rents in September are 17.2% above pre-COVID levels.
As we have mentioned in the past, Southern California is a tale of two markets, the urban areas in the downtown L.A. versus the more suburban communities, which have generally outperformed.
In June, L.A. rents were still below pre-COVID levels, but as of September, they are now 6.8% above.
While Orange County, San Diego and Ventura have achieved rents between 17% to 30% above pre-COVID levels.
Job growth in Southern California continues to progress well, up 5.9% in September as the region's economy continues to reopen and recover.
With the exception of the Downtown L.A. area where concessions averaged one week in September, the rest of our Southern California market has demonstrated solid fundamentals with no concessions recognized in September.
We expect Southern California strong rent growth to continue in 2022, led by Los Angeles, which has just begun to recover the jobs lost during the COVID recession.
Apartment supply in the region is forecasted to increase next year compared to this year and could present pockets of interim softness counterbalanced by a continued favorable job to supply ratio across the region.
As you can see on our S-17 market rent growth for Southern California of 7.1%, we anticipate this region to perform at a comparable level as Seattle.
With this backdrop of stable occupancy amid a favorable supply demand relationship, our portfolio is well positioned for the continued growth.
I'll start with a few comments on our third quarter results, discuss changes to our full year guidance, followed by an update on investments and the balance sheet.
I'm pleased to report core FFO for the third quarter exceeded the midpoint of our guidance range by $0.08 per share.
The favorable outcome was due to stronger operating results at both our consolidated and co-investment properties, higher commercial income and lower G&A expense.
During the quarter, we saw an improvement in our delinquency rate, which declined to 1.4% of scheduled rent on a cash basis compared to 2.6% in the second quarter.
The decline is attributable to an increase in income from the Federal tenant relief programs that were established to repay landlords for past due rents.
Year-to-date through September, we have received $11.6 million from the various tenant relief programs, of which $9.5 million was received in the third quarter.
Given the increased pace of reimbursement, we began to reduce our net accounts receivable balance in order to maintain our conservative approach to delinquencies and collections.
As a result of the strong third quarter results, we are raising the full year midpoint for same-property revenues by 20 basis points to minus 1.2%.
As should be noted, this was the prior high end of our range.
There are two factors I want to highlight as it relates to our fourth quarter guidance.
First, as Angela discussed, we are seeing strong rent growth in our markets.
While there will be a small benefit to the fourth quarter, the vast majority of the benefit from higher rent growth won't be felt until 2022 when we have the opportunity to turn more leases.
Second, our fourth quarter guidance assumes we continue to receive additional government reimbursements for past due rents and contemplates a continued reduction in our net accounts receivable balance.
Thus, we expect our reported delinquencies as a percent of scheduled rent to be above our cash delinquencies, which is consistent with the third quarter reported results.
As it relates to full year core FFO, we are raising our midpoint by $0.11 per share to $12.44.
This reflects the better-than-expected third quarter results and changes to our full year outlook.
Year-to-date, we have raised core FFO by $0.28 or 2.3% at the midpoint.
Turning to the investment markets.
During the quarter, we raised a new institutional joint venture to fund acquisitions as we believe this is the most attractive source of capital today to maximize shareholder value.
The new venture will have approximately $660 million of buying power, a portion of which is expected to be invested by year-end.
As I discussed on our last call, we are seeing an elevated level of early redemptions of our preferred equity investments due to strong demand for West Coast apartments and inexpensive debt financing, which is leading to sales and recapitalization.
For the year, we expect redemptions to be around $290 million.
Roughly 40% of these redemptions are expected to occur in the fourth quarter.
Given the current environment, we could see continued elevated levels of early redemptions in 2022.
In terms of new preferred equity and structured finance commitment, we are on track to achieve our 2021 objectives as outlined at the start of the year.
Year-to-date, we have closed on approximately $110 million of new commitments.
As a reminder, it typically takes three to six months post closing to fund our commitments given they tend to be tied to development projects.
Moving to the balance sheet.
As we expected, we are starting to see an improvement in our financial metrics, driven by a recovery in our operating results.
In the third quarter, our net debt-to-EBITDA ratio declined from 6.6 times last quarter to 6.4 times.
We believe this ratio will continue to decline through growth in EBITDA over the next several quarters.
With limited near-term debt maturities and ample liquidity, we remain in a strong financial position.

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q3 core ffo per share $3.12.

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