Essex Property Trust (NYSE:ESS) reported full year results after the bell on Thursday and hosted a conference call on Friday morning. While management worked diligently to maintain occupancy (96.5%), 4Q NOI suffered as from: 1) lower rents/higher concessions and (2) elevated delinquency as a result of the eviction moratorium. These issues are expected to continue to hamper results through 1H21 - comps become easier and headwinds ease considerably as we move into 2H21.
As most of you are no doubt aware, CA has suffered greatly from COVID with most tech workers told they wouldn't need to return to the office until 2H21 (negatively impacting SF Bay Area and Seattle and to some extent LA), most of Hollywood preproduction/production/postproduction shut down (hurts LA), and tourism dead (LA). This will cause NOI to see a year over year decline in 1H21. As vaccination occurs, many workers return to offices, Hollywood production will be full speed ahead, and Americans will resume tourism. LA and SF will bounce back strong and management expects to see NOI growth in 2H.
More important than results themselves is that the private market (real market as described below) for apartment assets in CA remains strong and tells us that ESS is significantly undervalued. Unlike Essex shares (which remain down ~20% or so from pre-pandemic levels), private market valuations for assets in SF, LA, Seattle remain strong. On Friday's (2/5) call, management noted that private market values for suburban assets (the vast majority of ESS portfolio) are at or above pre-COVID levels. Similarly prices for hard hit urban assets have barely budged - management believes that these are down only 5% or so.
On the call management described a hard hit urban SF property Essex is in the process of selling. The asset is being sold for a 3.8% cap rate
