Essex Property’s tenant concessions help drive down Q3 earnings

Multifamily REIT provided tenants with $17M in concessions; reported steady occupancy rate

Essex Property Trust president Michael Schall (Photo via Nareit)
Essex Property Trust president Michael Schall (Photo via Nareit)

Essex Property Trust, one of the largest apartment owners on the West Coast, reported double-digit declines in funds from operation in the third quarter, including a substantial amount that came from concessions the company provided to renters. The company has been one of the main financial supporters behind a campaign to defeat a California ballot measure that would seek to expand rent control.

At its earnings call on Thursday, the San Mateo, California-based real estate investment trust reported $194 million in funds from operations and $315 million in same-property revenue from July through September. That compared to $239 million in FFO and $338 million in same-property revenue in Q3 2019.

The REIT, which owns 60,000 apartments, said occupancy remained steady at 96 percent, but attributed a bulk of the income drop to $17 million it provided tenants in concessions. It was not clear whether those involved Covid-related negotiations, new leases or a combination.

One analyst called the company’s Q3 performance “less bad,” which he said is all the market can hope for amid increasing Covid-19 cases and a scattershot government response.

A report prepared by Piper Sandler noted that Essex benefited from most of its holdings being in suburban markets — just 10 percent of its portfolio is in urban areas.

The work-from-home revolution has seen movement of people and companies to less densely populated areas. In San Francisco, Essex reported a drop in occupancy of 2.2 percent and in Los Angeles, occupancy declined 1.6 percent compared to the same period in 2019. But in suburban areas like Contra Costa County, occupancy grew 2.1 percent, in San Mateo County it ticked up 1.6 percent, and Orange County saw a 1.4 percent rise.

Essex president Michael Schall said during the call that “as long as those employees remain in major metros, we’re in good shape. We may not get the rent growth in San Francisco, but we’ll get it in the suburbs — and we’ll continue to do pretty well.”

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Essex shares were down 43 percent year-over-year, but lifted 7.2 percent to $199.94 following the earnings release.

The company’s executives sought to allay investor concerns over the work-from-home world, pointing out that many industries — hotels, film, bars and restaurants — all require a physical presence. As for other industries whose work-from-home policies may be more permanent — such as the technology sector — Schall said that as the country emerges from the pandemic, many firms will adopt a “hybrid model.” That model will offer work from home as a lifestyle choice for employees, he said, while incentivizing others to return to the office.

Schall also said Essex remains committed to California but added the REIT is open to investing outside of the West Coast.

One question brought up on the call was how the outcome of the latest California ballot measure that seeks to expand rent control could affect the REIT’s ability to raise rents. The measure is on the Nov. 3 ballot.

Essex touted its campaign to oppose that measure, Proposition 21, which is being led by the company’s executive vice president, John Eudy. Last October, the California legislature passed sweeping rent reform, which the governor signed and took effect Jan. 1. Housing advocates say it doesn’t go far enough.

This election cycle, Essex is the top spender to defeat Prop 21. It has shelled out $11.8 million, according to contribution records. Other real estate companies opposing the measure include Equity Residential and AvalonBay Communities, two REITs with massive residential holdings in California that have spent $11 million and $8 million, respectively.

Its biggest proponent has been the AIDS Healthcare Foundation, which gathered the signature to put Prop 21 on the ballot, and which has spent $30.6 million in support of the measure.