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Text: I'll also discuss the status of reopening the West Coast economies and related factors concluding with an overview of the West Coast apartment transaction markets and investments.
Our second quarter results were ahead of our initial expectations entering the year, as the economic recovery from the pandemic occurred faster than we expected.
With a strong economy and high vaccination rates, we are now confident that the worst of the pandemic-related impacts are behind us.
As noted on previous calls, our strategy during the pandemic was to maintain high occupancy and scheduled rent, both necessary for rapid recovery.
To that end, net effective rent surged during the second quarter, along with year-over-year improvement in occupancy, other income and delinquency.
The recovery and net effective rents continued unabated in July and we are now pleased to announce that July net effective rents for the Essex portfolio have now surpassed pre-pandemic levels with our suburban markets leading the way.
While the downtowns are improving, but still generally below pre-pandemic levels.
Obviously these higher rents will be converted into revenue as leases turn and Angela will provide additional details in a moment.
Having passed the midpoint of 2021 and looking forward, we made a second set of positive revisions to our West Coast market forecast, which can be found on page S-17 of the supplemental.
Driving the changes is an increase in 2021 GDP and job growth estimates to 7% and 5%, up from 4.3% and 3.2% respectively from our initial forecast.
As a result, we now expect our average 2021 net effective rent growth to improve to minus 0.9% from minus 1.9% from the beginning of the year.
To put this into perspective, consider that our net effective rents were down about 9% year-over-year in Q1 2021.
Given our current expectation of minus 0.9% rent growth for the year, year-over-year net effective market rents are now forecasted to increase about 6% in the fourth quarter of 2021.
Cash delinquencies were up modestly on a sequential basis at 2.6% of scheduled rent for the quarter and well above our 30-year average delinquency rate of 30 to 40 basis points.
The American Rescue Plan of 2021 provides funding for emergency rental assistance, which was allocated to the stage for distribution to renters for pandemic-related delinquencies.
During the second quarter, collections of delinquent rents from the American Rescue Plan were negligible as the pace of processing reimbursements has been slow, since the program launched in March.
We expect that to improve in the coming months.
We expect delinquency rates to return to normal levels over time as more workers enter the workforce and eviction protections labs on September 30 in both California and Washington.
Only about $7 million of the $55 million in delinquent rent shown on page S-16 of the supplemental has been recorded as revenue.
Given uncertainty about the timing of collections, no additional revenues are contemplated in our financial guidance.
Even with the approved job and economic outlook, the reopening process was gradual through the second quarter, with full reopening declared in mid-and late June for California and Washington respectively.
The unemployment rate was still 6.5% in the Essex markets as of May 2021 underperforming the nation.
Through Q2 we have regained about half of the jobs lost in the early months of the pandemic.
Employment in the Essex markets dropped over 15% in April 2020 and while job growth in our markets outpaced the nation in the second quarter, we are still 7.9% below pre-pandemic employment, compared to 4.4% for the U.S. overall.
We see the gap is an opportunity for growth to continue in the coming months, as we benefit from the full reopening of the West Coast economies.
We believe that many workers that exited the primary employment centers during pandemic-related shutdowns and work from home programs, will return as businesses reopen and resume expansion that was placed on hold during the pandemic.
As we proceed through the summer months, we edge closer to the targeted office reopening dates set by most large tech employers in early September.
As recent reports about Apple and Google suggest, the COVID-19 Delta variant could lead to temporary delays in this reopening process.
Our survey of job openings in the Essex markets for the largest tech companies continues to be very strong as we reported 33,000 job openings as of July, a 99% increase over last year's trough.
New venture capital investment has set a record pace this year with Essex markets once again leading with respect to funds invested providing growth capital that supports future jobs.
Generally economic sectors that sell before this during the pandemic, are now positioned for the strongest recovery and the reopening process led by restaurants, hotels, entertainment venues, travel and so many.
Return to office plans, which remain focused on hybrid approaches will continue to draw employees closer to corporate offices.
Given that many workers won't be required to be in the office on a full-time basis, we expect average new distances to increase.
As we highlight on page S-17.1 of our supplemental, this transition has already started in recent months as our hardest hit markets in the Bay Area once again experienced net positive migration from beyond the NorCal region.
In particular, since the end of Q1, the submarket surrounding San Francisco Bay have seen positive net migration that represents 18% of total move-outs over the trailing three months compared to minus 8% a year ago.
These inflows are led by residents returning from adjacent metros, such as Sacramento and the Monterey, Peninsula as well as renewed flow of recent grads -- graduates arriving from college towns across the country, a notable positive turnaround from last year.
In Seattle CBD, we've seen similar or even stronger recent inflows and we're likewise experiences -- experiencing a strong market rent recovery.
On the supply outlook, we provided our semi-annual update to our 2021 forecast on S-17 of the supplemental with slight increases to 2021 supply as COVID-related construction delays shifted incremental yields from late 2020 into 2021.
We expect modestly fewer apartment deliveries in the second half of 2021 with more significant declines in Los Angeles and Oakland.
While it is still too early to quantify recent volatility in lumber prices and shortages for building materials may impact construction starts and the timing of deliveries in subsequent years.
Multifamily permitting activity in Essex markets also continues to trend favorably, declining 200 basis points on a trailing 12 month basis as of May 2021 compared to the national average, which grew 230 basis points.
Median single family home prices in Essex markets continued upward in California and Seattle, growing 18% and 21% respectively on a trailing three-month basis.
The escalating cost of homeownership combined with greater rental affordability from the pandemic have increased the financial incentive to rent.
We suspect these trends will continue given muted single family supply and limited permitting activity and I believe these factors will be a key differentiator for our markets in the coming years compared to many U.S. markets with greater housing supply.
Turning to apartment transactions, activity is steadily accelerated since the start of the year, with the majority of apartment trades occurring in the low-to-mid 3% cap rate range based on current rents.
Generally investors anticipate a robust rate recovery, especially in markets where current rents are substantially below pre-pandemic levels.
With the recent improvement in our cost to capital, we have turned our focus once again to acquisitions and development while remaining disciplined with respect to FFO accretion targets.
With respect to our preferred equity program, we continue to see new deals, although the market is becoming more competitive.
Lower cap rates from pre-pandemic levels have produced higher-than-anticipated market valuations, which in turn has resulted in higher levels of early redemption.
That concludes my comments.
My comments today will focus on our second quarter results and current market dynamics.
With the reopening of the West Coast economy, the recovery has generated improvements in demand and thus pricing power.
Our operating strategy during COVID to favor occupancy while adjusting concessions to maintain scheduled rents enabled us to optimize rent growth concurrent with the increase in demand resulting in same-store net effective rent growth of 8.3% since January 1 and most of this growth occurred in the second quarter.
A key contributor of this accomplishment is the fantastic job by our operations team in responding quickly to this dynamic market environment.
While market conditions have improved rapidly, during our second quarter -- driving our second quarter results to exceed expectations.
I would like to provide some context for why sequential same-property revenues declined by 90 basis points compared to the first quarter.
The two major factors that drove the decline were 50 basis points of delinquency and 50 basis points in concessions.
Delinquency in the first quarter was temporarily lifted by the one-time unemployment disbursements from the stimulus funds.
As expected in the second quarter, delinquency reverted back to 2.6% of scheduled rent versus the 2.1% in the first quarter.
On concessions, the nominal amount increased from higher volume of leases in the second quarter relative to the first quarter of this year.
To declare concessions in our markets have declined substantially and are virtually none existent except for select CBD markets.
Our average concession for the stabilized portfolio is under one week in the second quarter compared to over a week in the first quarter and over two weeks in the fourth quarter.
Although concessions have generally improved in the second quarter, they remain elevated ranging from 2.5 to 3 weeks in certain CBDs such as CBD, LA, San Jose and Oakland.
Given the extraordinary pandemic-related volatility in once in concessions over the past year and a half.
I thought it would be insightful to provide an overview of the change in net effective rents compared to pre-COVID levels.
As of this June, our same-store average net effective rents compared to March of last year was down by 3.1%.
Since then, we have seen continued strength and based on preliminary July results, our average net effective [Indecipherable] are now 1.5% above pre-COVID levels.
it is notable that this 1.5% portfolio average diverged regionally with both Seattle and Southern California up 5.8% and 9.3% respectively while Northern California has yet to fully recover with net effective rents currently at 8% below pre-COVID levels.
On a sequential basis, net effective rents on new leases have improved rapidly throughout the second quarter and preliminary July rent increased 4.7% compared to the month of June, led by CBD San Francisco and CBD Seattle, both up about 11%.
Not surprisingly, these two markets were hit hardest during the pandemic, and are now experiencing the most rent growth.
Moving on to office development activities, which we view as an indicator of future job growth and accordingly housing demand.
In general, the areas along the West Coast with the greatest amount of office developments have been San Jose and Seattle.
Currently San Jose has 8.1% of total office stock under construction and similarly Seattle has 7.7% of office stock under construction.
Notable activities include Apple leasing an additional 700,000 sqft and LinkedIn announced recent plans to upgrade our existing offices in Sunnyvale.
In the Seattle region, Facebook expanded their Bellevue footprint by 330,000 sqft and Amazon announced 1400 new web services jobs in Redmond.
We expect in the long-term areas with higher office deliveries such as San Jose and Seattle will have capacity for greater apartment supply with our impacting rental rates.
While these normal relationships were disrupted during the pandemic, we anticipate conditions to normalize in the coming quarters.
Lastly, as the economic recovery continues to gain momentum, we have restarted both our apartment renovation programs and technology initiatives including actively enhancing the functionality of our mobile leasing platform and smart rent home automation.
I'll start with a few comments on our second quarter results, discuss changes to our full year guidance, followed by an update on our investments and the balance sheet.
I'm pleased to report core FFO for the second quarter exceeded the midpoint of the revised range we provided during the NAREIT conference by $0.08 per share.
The favorable results are primarily attributable to stronger same property revenues, higher commercial income and lower operating expenses.
Of the $0.08, the $0.03 relates to the timing of operating expenses and G&A spend, which is now forecasted to occur in the second half of the year.
As Angela discussed, we are seeing stronger rent growth in our markets than we expected just a few months ago.
As such, we are raising the full year midpoint of our same-property revenue growth by 50 basis points to minus 1.4%.
It should be noted, this was the high end of the revised range we provided in June.
In addition, we have lowered our operating expense growth by 25 basis points at the midpoint, due to lower taxes in the Seattle portfolio.
All of this resulted in an improvement in same property NOI growth by 80 basis points at the midpoint to minus 3%.
Year to date, we have revived our same-property revenue growth at the midpoint, up 110 basis points and NOI by 160 basis points.
As it relates to full year core FFO, we are raising our midpoint by $0.09 per share to $12.33.
This reflects the stronger operating results, partially offset by the impact of the early redemption of preferred equity investments, which I will discuss in a minute.
Year-to-date we, have raised core FFO by $0.17 or 1.4%.
Turning to the investment markets.
As we've discussed on previous calls, strong demand for West Coast apartments and inexpensive debt financing has led to sales and recapitalization of several properties underlying our preferred equity and subordinated loan investments resulting in several early redemptions.
During the quarter, we received $36 million from an early redemption of a subordinated loan, which included $4.7 million in prepayment fees, which have been excluded from Core FFO.
Year-to-date, we have been redeemed on approximately $150 million of investment and expect that number to grow to approximately $250 million by year-end.
This is significantly above the high end of the range we provided at the start of the year.
However, this speaks to the high valuation apartment properties are commanding today which is good for Essex and the net asset value of the company.
As for new preferred equity investments, we have a healthy pipeline of accretive deals and we are still on track to achieve our original guidance of $100 million to $150 million in the second half of the year.
As a reminder, our original guidance assumed new investment would match redemptions during the year.
However, the timing mismatch between the higher level of early redemptions coupled with funding of new investments expected later this year has led to an approximate $0.10 per share drag on our FFO for the year.
Moving to the balance sheet, we remain in a strong financial position due to refinancing over 1/3 of our debt over the past year and a half taking advantage of the low interest rate environment to reduce our weighted average rate by 70 basis points to 3.1% and lengthening our maturity profile by an additional two years.
We currently have only 7% of our debt maturing through the end of 2023.
Given our laddered maturity schedule, limited near term funding needs and ample liquidity, we are in a strong position to take advantage of opportunities as they arise.

user
essex increases full-year 2021 guidance.
raised midpoint of full-year same-property revenues to high-end of prior guidance range.

assistant