Essex Property Trust Aktie

Bank of America's 2026 Global Real Estate Conference. I'm Yana Galan, BofA's residential REIT analyst. And we're thrilled to have with us Essex Property Trust's President and CEO; Angela Kleiman and CFO, Barb Pak. I'll turn it over to Angela for opening remarks, and then we can jump into Q&A.

Great. Thanks, Yana. It's great to be here. Thank you all for attending. And thank -- I want to thank Bank of America for putting together such a fantastic venue. So it's very productive, I think, for all of us. So we're happy to support this event. Essex, just a high-level overview. I think most of you I see a lot of familiar faces and know us well. We're an S&P 500 company focused in multifamily space in the West Coast of United States, so it's California and Washington, about, depending on the day, about $24 billion in total market cap and 63,000 units across this footprint.

And we focus our markets on in areas where there's low supply and catalyst for demand drivers. And so as a result of that, we have a disciplined capital allocation program that essentially converts the top line growth into the bottom line growth that outperforms the peer, which results in long-term outperformance on a total return basis in the top tier of all the REIT space. But more importantly, we have we're a dividend aristocrat with 32 years of consecutive dividend growth now. So pleased with that. And with the fundamental backdrop of low supply and demand catalyst with AI in the technology space. We are operating in a stable environment with potential upside in terms of rent growth and which is driven by strong fundamentals.

Great. Thank you. Maybe we'll start off with the operations, and you guys did provide an update. If you can just kind of go over some of those highlights and how did the peak leasing season this year compared to expectations.

Thanks. Yes, that's a good question. We actually have a presentation published that's available online. So on Page 12 of our presentation, we present the rent curve of what we've experienced to date relative to long-term averages in 2016 to 2019 and also compare it to last year. And so in both of those cases, our rent curve is doing better than long-term average and last year. And the rent curve also shows that we have an extended peak leasing season, which is fantastic. That peak is 100% driven by Northern California. So Seattle has experienced a normal seasonality and Southern California really didn't have a peak. It's pretty much performing on top of last year's performance, and that's understandable with the broad economy.

And what we're seeing that rent curve right now is that it's starting to flatten, which also makes sense as we now enter into the typical slower seasonal part of our business, especially in the fourth quarter, when employees don't typically hire and tenants don't typically want to move between, say, Thanksgiving and Christmas. And so we'll wait to see how that deceleration trend occurs. But right now, what we are anticipating based on leases that we've signed today through August is about 150 basis points of earn-in for 2027, which is good news compared to last year, it's 65 basis points above last year. And so things are doing well on the ground here.

Great. And maybe focusing first on Northern California, you've been through other kind of apartment rent cycles. Do you think that the rent growth for that region could be even stronger in 2027?

Yes, that's a good question. I think it's too early for us to predict '27. I do think, though, that the fundamental backdrop for Northern California, the demand catalyst with AI, what we're seeing with job postings and company formation, office leases that are being taken down, does -- and then the affordability component of Northern California gives -- it does give it legs for several years. What '27 is going to do, we're still working through our budgets, and we'll provide more color later this year.

But in terms of it having an extended cycle, I think we're in the early innings of the recovery. In Northern California, if you look back, it really has done nothing since 2019. It was negative and flat for several years, and we're just starting to see rent growth. And so I think given the demand catalysts that are out there and the low supply that is in this market and will be in '27 and into '28 and even into '29 because we know it takes so long to get things entitled and developed. I think we have a long runway here.

And can you maybe touch on the opportunity with rent as a percent of income in the region?

Yes. So if you look at the rent-to-income ratio, today, we're at 21%, and this is for the market in Northern California. Historically, pre-COVID, we were at 25%. So what that means is we could grow rent -- if rents go up 20% from here with no increase in wages, we would get back to our pre-COVID rent-to-income ratio. But what we are seeing is significant wage growth in the Bay Area. And so rent growth, while it is going up significantly, it is not impacting our rent-to-income ratio because wage growth is also going up at a pretty significant clip.

So there is some of the best affordability on the multifamily apartment side that we've seen in years. And as you guys all know, it's very expensive to own a home. It's much cheaper to rent than to own a home in the Bay Area. That dynamic hasn't changed. It's actually gotten even cheaper to rent versus own. It's about 2.5x more expensive to own a home than to rent in the Bay Area.

And I've gotten some incoming questions just on the kind of regulatory front or the different types of rent caps for your markets. Maybe if you could share a little bit about that.

Oh, happy to. So for the state of California and actually Washington as well, they are statewide rent control, and they're pretty much on top of each other. So California has AB 1482, that's CPI plus 5 capped at 10%. Seattle is CPI plus 7 capped at 10%. And in both of those scenarios, we view that as an anti-gouging measure. And so in that environment, Essex had a 10% self-imposed cap well before these legislations will pass. And so we will do just fine in those situations. And in terms of where the markets land, Northern California, no surprise, is pushing up right close to that cap on the renewal side. And as far as the other markets, we still have quite a bit of room.

I guess for those that are newer to Essex, can you talk about the philosophy, the history behind the 10% self-governed 10% cap and why is that a good fit?

Yes, happy to. Our theory is that our leases do turn pretty quickly. They're 9 to 12 months on average. And so 10% seemed like for us, a reasonable number in terms of just being responsible corporate citizens because it doesn't take us long to recapture or get close to where the market is. At the same time, it doesn't create so much stress for the tenant base, especially in an environment where California put so little housing, and it's tough for tenants to find alternative places to live. We didn't want to create such distress. And 10% is an environment where you can still operate efficiently and be able to manage your business and invest in capital recycling quite efficiently.

10% is great, 5% would be awesome, and there's some pretty favorable regulation. Is there any noise at all in upcoming election period of anybody trying to [indiscernible] aggressive that change legislation to be more restrictive?

We haven't heard proposals less than 10%, let's start there. And there's always going to be noise because there's a lot of rhetoric. I do think that in the recent years, what we have seen is the California legislature learned from COVID, where onerous shutdowns and onerous regulation and onerous eviction moratoriums really hurt the state of California and certainly didn't help creation of new housing, which is I think they do recognize that it's needed.

And so before the state had a limit, you guys had your own limit, I guess, the scale that you had in your markets is not enough to, let's say, impact the market. So your competitors might have been doing the 15, 20. There were a few years where there were some boom years. I guess you're saying the shorter leases, you were still able to capture the upside over those couple of years regardless.

Right.

So now the new governor, everyone at this 10%, this would be a new, right? This is the first -- it was enacted a couple of years ago. So this will be the first time that we may see the markets actually push to that potentially, it sounds like for a few years.

I think that's a reasonable assumption. So this was -- AB 1482 was enacted in [ 2018 ]. The Seattle legislation was enacted last year. And when you look at our growth cycle coming out of the Great Recession, we had a long tail of high single-digit, low double-digit growth from 2012 to, say, 2016. And because of this legislation that is now market-wide, is it possible that it's going to be a longer tail? I think that is a reasonable assumption, especially in light of the current market dynamics. Our supply as a percentage of total stock is only 30 basis points. That is record level low. The rent-to-income ratio that Barb mentioned, I've never seen a gap like this in my 30-year career in this business. And then you layer on the technology catalyst to -- as a demand driver, it's like the perfect storm of a solid fundamentals creating a long tail for this market.

So the biggest risk, of course, then would be -- if the state was able to incentivize supply, right, we've seen that the real way to limit rent growth is supply. So to confirm, I guess, what are -- what's the latest on the supply front in California.

It's still very anemic. And part of it is, well, legislation, there has been legislation proposed to facilitate supply. We've seen some tick up. It's mostly in affordable space, which is actually good because we're not -- we don't operate in that space in a meaningful way, and we really need more affordable housing than anything else. So if you look at San Jose in the next 2 to 3 years, 50% of the supply is actually in affordable space. And in L.A., the recent uptick is mostly in affordable. So that's a good thing.

But as far as generally speaking, we underwrite -- we underwrote about 100 land sites last year and picked one. And partly because even though there's accelerated entitlement available and people think about fast track, if you take it -- take that word at a face value, you think, oh, it's like immediate. Well, no, what the practical reality is that when we went through this, we're going through this with a [indiscernible] say is that, okay, instead of 3 years, it's 2.5, 6 months pickup. Yes. Now -- and this is by right. We're not rezoning.

So this is entitlement by right, and we're just going through the permitting process. So you go through that process, that's 2.5 years to put up a building like a podium mid-rise, 250-unit plus type building. So right down the fairway for us, it's 36 months minimum. So you could see in California with high conviction when supply is coming your way, and we have high conviction that the next 4 years, not a lot is going to change even if they fast track everything and more likely 5 years.

Cost, construction costs.

Continue to increase. And so that is construction costs and labor costs are 2 governors that continues to essentially temper supply in addition to the entitlement process.

Could you give us an idea of the rate of increase and compare that to a few years ago in terms of.

It's better than a few years ago. So pre-COVID and even during COVID, not a whole lot happened during COVID. But pre-COVID, construction cost in our markets was going up in the low single -- low double digits to mid, so say, around 10% to 15%. Today, it's closer to, say, inflation plus. So it's probably around 4%, 5%. And so it's probably moving depending on the market, right? So if you're in Northern California, then it's better economics. But in Southern California, it's still not going to pencil. And of course, Seattle depends on the pocket.

It's slower than rent.

Slower than rent. But you have to go back to what's the land cost on the basis as well. So all those components influences your -- our expected yield.

And can you give us a little bit of color on land -- land cost in the land transaction market?

It's actually a wide range because every -- most land holders are -- they're individuals, and they all have different holding cycles and different cost of capital. And so what we have seen is very little land site coming to market, even in Northern California and land sellers have, for the most part, a higher expectation of what the value of the land is than what the builders are willing to pay, which is why we underwrote over 100 and only picked one to move forward with last year.

Maybe go ahead.

I was just going to ask -- just a follow-up. So if we do see some supply numbers hitting, it's really going to -- saying at least half of it will be affordable housing. And that doesn't impact your [ market rate ] pricing. It does not impact.

It does not really impact our market or our market rate business. And the affordable, what I'm referring to is San Jose and L.A.

Okay.

And maybe we could shift a little bit to Greater Seattle. Leasing improved last quarter, but post COVID, it's really kind of been plagued by stops and starts. Maybe if you could share with us how trends progressed in your portfolio and the difference between downtown and Bellevue.

Yes. So Seattle, as you mentioned, has had some pockets of starts and stops. And last year in the fourth quarter, it was a little bit more challenged and even into January, there were some layoff announcements with Amazon and Microsoft. We've got those behind us. We also were dealing with some more heavy supply deliveries. That's starting to abate as well. And so the market is stable. It's not overly strong, but there are some good foundational building blocks for it to improve over the next 12 to 18 months. And really, what we're focused on is when you look at supply, and we do have a chart on Page 14 of our presentation.

In 2024, we delivered 2.4% of stock. And then that came down in '25 to 1.7%. So those are still pretty elevated years of supply. And now we're sub-1% and declining. And so the supply backdrop looks much better now than it has for the last few years, which will allow us to put up better rent growth numbers with less job growth. And then on the jobs front, what we are seeing is AI companies, some of the big names are taking office space in the Seattle market in Bellevue.

A lot of the leases that have been signed are in Bellevue. There are some in CBD, but the vast majority have been taken down in Bellevue, which benefits us because 80% of our portfolio is in the Eastside or North and South and 20% is in CBD. CBD will do just fine, but I think Bellevue and the East Side will benefit more. Now it's going to take time for these office leases to turn into employees because it's going to take time for them to build up their TIs and get bodies there. So we think end of next year into '28 is really when we're going to start to see better rent growth than what we've seen in the past.

And then just to go back to the Amazon comment, they did retrench last year, but what we have seen more recently is they actually have job postings for the first time in a long time. And so they are back hiring in that market, which we think is a good sign for the overall health of that market. So things are slow right now, but we think there are some green shoots for the future.

How do you anticipate the new mayor in Seattle impacting business conditions for yourself other than?

Yes. So far, what we've seen from the new mayor is -- let's start with rent control. The new mayor cannot change that. That's a statewide measure. And so on the margin, there has been proposals, but it hasn't been extreme from that perspective. And so obviously, we don't really have a whole lot of track record with this new mayor, but I do think that the legislature, including new mayor, recognize that if you temper -- if you make it business unfriendly, well, you've seen what happened.

You've seen the company will start to look elsewhere. But also what's important is you need to keep that supply coming in order to have affordable housing. And so we haven't seen anything in the extreme.

And then maybe just turning to Southern California and curious kind of the evictions or bad debt in L.A., how is that trending?

Yes. So we are still above our long-term average in L.A. So around 1.5% of our rent is delinquent versus historically, we're around 80 basis points. So we're about 2x the normal. And really, what's -- the issue with L.A. is the courts are still delayed. We're 4 to 5 months to get somebody out. That market has always had a little bit higher structural delinquency.

But if we can get the courts back to more normal 2 to 3 months versus 4 to 5 months, that will help. So right now, L.A. is really the only market of all of our markets where delinquency is not back to our pre-COVID levels. So in total, we are at 50 basis points of delinquency as a percent of our rents. Historically, we're at 40. And so when we get L.A. back to normal, we'll get our portfolio back to normal.

I don't know if there's any other.

Just on L.A. long-term thoughts, we do our tour each year, just the last couple of years, it's just -- we've seen this -- it feels like I'm sorry, like a deterioration just like the jobs, entertainment, et cetera. What's your long-term view on L.A.?

Yes, that's a good question, and it's something that we study closely because that does impact our long-term view. When we look at L.A., we do view that it remains soft because it mirrors the broader U.S. economy, similar in diversification, maybe a little bit more in professional services. And the U.S., we've all seen the BLS jobs. It's like 0.5%. So it's not going to do much in L.A. What we have seen is that this market has been -- remained stable. So if we look at the economic occupancy, so that is financial less delinquency.

So the true cash flow number, L.A. has been hovering around 94% for the better part of the year. It hasn't gotten worse. So that's a good sign. And when we look at our total revenue first half compared to the first half of this year compared to the first half last year, it's up slightly. Once again, nothing exciting, but not deterioration. It's 80 basis points better. So those are some good indications with L.A. But part of that is also to even have a positive revenue number in this market, it's supported by the fact that it's very low supply in this -- and L.A. supply has been going down similar to what had happened in Seattle. It peaked several years ago and has been decreasing steadily. So that's one element that's helped. But the other -- on the demand side, what we're seeing is some green shoots. And we're not expecting and we have not experienced a whole lot of impact from the entertainment industry.

And so with Paramount announcing the layoffs and et cetera, it hasn't made a whole lot of difference because the entertainment industry peaked in 2015 with about 340,000 jobs. Multiplier effect is a little over 2. So the entire ecosystem employed maybe 760,000 jobs at the peak. Today, entertainment industry jobs is only 100,000. And so that Paramount, 5,000 here, 2,000 there for the past 2 years, it's been hovering around 100,000 isn't really going to make a difference. And what we expect is that the areas that benefited from the outflow entertainment industry like Toronto or Atlanta, they're probably more vulnerable to that business shrinking because of application of AI.

As far as the green shoot is concerned, we have a presentation on Page 17. So feel free to look at that a little bit more. But what's interesting here is we are seeing this defense jobs and aerospace sector taking a foothold in the broader L.A. area concentrating in up and down the corridor from Long Beach to Huntington Beach. And what's interesting here is we're seeing job postings in aerospace incrementally increase. So this is not a robust number, but it gives us some assurance that, okay, things are on the margin, it's stable and there's some potential green shoots here.

And -- but more importantly, the VC funding in this space has more than doubled between this year and last year. And 1/3 of that funding has been allocated to Southern California. So there's a great little map there that you can see all the companies. But what's interesting here is that this sector is anticipated to grow up to $1.5 trillion in the next 10 years. Getting 30% of that, I think, will be fantastic. I'd be happy with, at this point, even 10%. But -- so there's some pretty interesting things happening on the ground.

Could be a good segue to kind of capital allocation and the way that you study markets. Essex has maintained its West Coast focus through many cycles. What's your interest today in potentially entering new markets?

No, that's a good question. So my response has been pretty consistent in that there's a price for everything. And at this point in the cycle, we're seeing cap rates are not a whole lot different from one major metro to the other. And when you look to the fundamentals with supply in our markets that essentially, on average, 0.5% of total stock and with these demand catalysts coming our way that we're starting to see in Northern California and in the future in Seattle and potentially Southern California, we're not seeing these kind of dynamics anywhere else in the country.

And so we do have conviction that the West Coast is a place to be. And our focus and if you've seen us to be disciplined allocators is continue to grow in a way that generates accretion. And we've been able to do that even though we've not need to -- we not have been able to issue stock to do so, but we've been able to do that over the past several years, acquiring close to $2 billion of assets.

And then maybe if you want to just comment on kind of cap rates and the transactions you're seeing marketed and your kind of interest level in growing.

Absolutely. Cap rates for the most part in our markets up and down the coast is around [ 4.5 ] to high 4s for high-quality institutional assets. Outside of Northern California. Northern California is lower than that. Cap rates are in the low 4s to mid-4s. So call it about 25 basis points on average lower. And we've seen that cap rate to be quite sticky despite all the interest rate movements. And in terms of scale, I'll give you one data point. Last year, about $20 billion of transactions occurred in our market. So we could have doubled the size of our company and purchased everything, although I think all of you will probably throw tomatoes at me if I do that and dilute the company.

So the focus for us is grow and add value concurrently, not just grow to grow. We have the right scale to operate efficiently. And I think scale and concentration are 2 terminologies that may be interchange, but that concentration really matters when it comes to generating operating efficiency. 80% of our properties are within 3 to 5 miles of each other. We can run 9 to 12 properties as one business unit, which makes it incredibly efficient for us. And there is a point of marginal diminishing return when you start to bolt on more properties to that.

And so we've gone through all the analysis and have found the most effective way to run our business -- we're currently running at a -- last year, when we looked and this year is probably better, we're running at a 45-unit-to-1 personnel ratio, which is industry-leading. And our operating margin is over 100 basis points above the peers, partly because we have this benefit of geographic concentration.

Great. And then maybe just touching on the structured finance and preferred equity investments. It was a little bit of a headwind to FFO this year. But now that it's rightsized, just how should we think about that going forward?

Yes. So you are right. This year, we had about 2.5% negative impact to our FFO growth because we had a lot of maturities late in 2025 and then heavy in 2026. The book is rightsized. So today, we are accruing on $100 million. And that seems like a pretty good run rate from here. We have one small maturity next year, and we have done one small deal this year.

So I think $100 million is sustainable for us. If we find deals that make sense for us on a risk-adjusted return, we will do a few more deals, but we're not going to grow the book back to where it once was. We do like a small sliver of this business. It does keep us -- especially our development team good to see other deals since we're not actively doing a ton of development. But overall, I think that dilution, that headwind that we had from the structured finance roll-down of our book is behind us, and we won't really see that in the numbers in '27.

Given that you've emphasized early innings in Northern California, but at the same time, may be constrained by the cost of capital, how can you lean harder into being more opportunistic?

That's a great question. We've been able to do so by a combination of cash flow from operations, which is about -- for us about $200 million before CapEx, redevelopment and selling assets. And we also have private capital partners that are very interested in our markets. So we have several levers that we can execute for us to achieve our goals.

Is that happening right now? Are you working with these private capital players to see if you could do -- I again, you passed on 99 development sites. Was it because of cost of like could you be doing it for others and generating fees or no? -- it's more acquisitions.

Well, in our philosophy with our joint venture partners is that we would transact on an asset that we would happily own. So it's not so much for the fees per se. It's really to leverage the cost of capital to make sure we're optimizing the total return to us. And so to answer your question, yes, we could do more developments and use the fees to offset that dilution. But then for us, that wouldn't be the best decision because we wouldn't have otherwise transacted on this development on our own balance sheet.

And the market is still strong, why think so short term?

In terms of -- well, I'm not sure what you mean by short term because we...

You don't want dilution, which I maybe you can correctly translate that you don't want to wait 2, 3 years to get the upside from development.

It's the -- it's how we view the risk-adjusted return. So for example, the way -- when we would transact on a development, if we can generate 100 basis points of additional yield relative to acquisitions. So it's a relative game. So 20% profit, which means if we can buy at [ 4.5 ] in order to greenlight a development, we will want to say based on today's in-place rents, not trended, that development needs to generate [ 5.5 ]. And if it's not hitting that hurdle, we're not going to transact.

Achieve those.

Well, we found one.

This finance transaction to give you ROFRs or right to purchase or...

No, we have found that we went into that business because it's a good complement to the development business because so little gets developed in our market. Having said that, we're not going to give away the yield in the hopes of getting ROFR because there's a cost to that. And at the end of that development, we may or may not want to acquire that asset depending on what our cost of capital is and what the acquisition opportunities may be elsewhere. And so we certainly wouldn't want to give that up. And that has been a very successful model for us.

And unfortunately, we're out of time, but I have 3 rapid fire questions that we were asking all the REITs at the conference. Number one, if long-term rates stay higher for longer, which has the biggest impact on your sector's earnings? Is it higher refinancing costs, lower transaction activity or less new supply?

We want to go with higher refinancing costs.

Over the next 3 years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no.

If the stock continues to perform, yes. Where it is.

For your sector, will 2027 same-store NOI growth be higher, the same or lower than 2026.

I'm not getting any help from you. I think it's higher.

Higher for the sector.

I think we're going higher.

Thank you so much, Angela and Barb appreciate it.

Good day, and welcome to the Essex Property Trust Second Quarter 2026 Earnings Call. As a reminder, today's conference is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC.

It is now my pleasure to introduce you to your host, Mrs. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.

Thank you for joining Essex's second quarter earnings call. Today, I will cover performance in the first half and outlook for the second half of the year, then conclude with an update on the transaction market. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A.

We are pleased to report a solid first half of 2026, highlighted by a substantial outperformance led by strong executions from our operations team in delivering results exceeding our original expectations. While national economic and employment growth have been measured, West Coast multifamily fundamentals continue to demonstrate durability with limited housing supply across our markets and affordability favoring renting. As such, we are meaningfully raising our full year expectations for same-property revenues and core FFO per share, which Barb will cover in a moment.

As for regional highlights, starting with Seattle, operating conditions improved in the second quarter with 2.6% blended rent growth, representing a 340 basis point sequential increase from the first quarter. Consistent with normal seasonality, market rents reached their peak around early July and are expected to moderate through the balance of the year.

Performance has been stronger on the East Side, a benefit to our portfolio allocation, which achieved a 3.2% blended rents, a considerably higher growth rate than the 1% in the urban core. We are also encouraged by recent office expansion announcements from several notable companies. These trends are consistent with prior innovation cycles and reinforces Seattle's long-term position as a leading technology market. While it will take time for these commitments to translate into meaningful hiring, they represent a positive signal for future demand. More importantly, favorable outlook for this region is supported by declining supply deliveries, which continues to moderate.

Turning to Northern California, which remains our strongest performing region and the leading multifamily market in the country, delivering blended rent growth of 6.5%, while concurrently maintaining strong occupancy. This performance is attributable to two key factors. First is the compelling supply-demand backdrop with limited housing deliveries and continued investments across the Bay Area from technology sector propelling demand. Second, positive migration trends as talent and entrepreneurs are drawn to the unique concentration of capital and innovation. As a result, we are experiencing growing momentum of demand for housing throughout the broader region. These fundamentals have translated into pricing power and outperformance relative to our original expectations, including peak leasing momentum extending beyond typical seasonal patterns.

On to Southern California. The region remains closely tied to national economic trends with job growth generally in line with the U.S. average. Against this tempered employment backdrop, limited new supply has supported relatively stable operating conditions. Accordingly, we generated a 1.4% blended rent growth in the second quarter, led by Orange County, while Los Angeles lagged.

Looking ahead to the second half of the year, we expect the broader economy to unfold generally consistent with our initial forecast for the year with modest job growth and continued macroeconomic and geopolitical uncertainty.

While demand is highly correlated to the pace of job growth, West Coast multifamily fundamentals remain well positioned with attractive affordability for rental housing, combined with new apartment deliveries moderating across most of our markets.

Lastly, on the transaction market. Investor interest in West Coast multifamily assets remain healthy with transaction volume increasing throughout the year across our markets despite a higher interest rate environment. Cap rates for institutional quality assets have generally remained in the mid-4% range, while the majority of transactions in Northern California pricing in the low 4% range. Overall, the strength of private market valuations reinforces the value of the capital we deployed in Northern California over the past several years.

We will continue to evaluate acquisitions, dispositions and other investment opportunities based on the highest relative return with a focus on maximizing growth, NAV and FFO per share accretion.

With that, I'll turn the call over to Barb.

Thanks, Angela. Today, I will recap our second quarter results, discuss key updates to our revised full year guidance and conclude with comments on the balance sheet.

Starting with our second quarter results. We achieved another solid quarter with core FFO per share exceeding the midpoint of our guidance range by $0.10. The outperformance was primarily driven by operations with same-property NOI accounting for $0.05 and non-same-property NOI contributing an additional $0.03. As for the favorable variance within our same-property portfolio, it was comprised of revenue growth, which was 20 basis points ahead of plan. In addition, operating expenses came in lower than expected, which was driven by $0.03 of favorable property taxes, mainly due to successful Prop 8 appeals that are onetime in nature. The benefit from our non-same-property portfolio was largely attributable to prior year acquisitions in Northern California, which continue to perform ahead of plan due to strong rent growth in this region.

Turning to our updated full year guidance. We are pleased to announce a $0.20 increase to the midpoint of core FFO per share, representing a 1.3% increase at the midpoint. Better operating performance within our portfolio is the key driver of the increase. As it relates to our same-property portfolio, we are raising the midpoint of NOI growth by 70 basis points to 2.8%. The increase is a result of 40 basis points improvement in revenue growth, which is driven by higher scheduled rent, occupancy and other income. In addition, we are lowering the midpoint of operating expense growth by 25 basis points, primarily reflecting the property tax savings previously discussed. Altogether, higher same-property growth contributed $0.12 to the full year increase. The balance of the increase to our guidance largely reflects better-than-expected performance within our non-same-property portfolio, as previously discussed.

As for our third quarter core FFO guidance, we are forecasting $3.99 per share at the midpoint. The $0.09 sequential decline from the second quarter primarily reflects higher operating expenses, including normal seasonal increases in utilities and California property taxes as well as increased controllable spending during the second half of the year. As I mentioned last quarter, controllable expenses were lower than expected in the first quarter, which was timing related. And as such, we expect these expenses to be $0.09 higher in the second half of the year than the first half.

Concluding with the balance sheet, we remain in a strong financial position with net debt-to-EBITDA of 5.4x, minimal debt maturities over the next 12 months, over $1 billion of available liquidity and access to multiple sources of capital. As such, we have ample flexibility to fund our commitments and capitalize on opportunities that support long-term growth.

I will now turn the call back to operator for questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] So that we may address as many participants as possible, we ask that you limit yourself to one question and one follow-up, and if time permitting, you may requeue to add any additional questions. [Operator Instructions] Thank you.

Our first question comes from the line of Steve Sakwa with Evercore ISI.

Could you maybe just elaborate a little bit on some of the July trends that you're seeing? It feels like the market certainly improved quite dramatically from maybe the start of the second quarter to the end of the second quarter. And then I'm just curious how kind of spreads and renewals are trending in July and perhaps August?

Steve, thanks for your question. It's Angela here. Happy to. From -- maybe I'll start from the blend. I think that's a good data point. So July blends are coming in similar to the second quarter. And so I think things are moving along as planned and our fundamentals remain sound. And just for context, where July is coming in this year, it's slightly better than the same period last year.

And so -- and if you want to compare from a year-over-year perspective, it's interesting how things are trending. So last year, we had a very strong first half and then a pretty significant drop in the second half. We're definitely not seeing that so far this year, and we are assuming that this year, first half and second half are quite similar.

Yes. I guess that's kind of the issue is that you're not seeing the drop-off and the market has been very strong. So I think maybe it would sort of imply that there should be more momentum into the back half of the year, but yet you're not really assuming that or maybe projecting that within guidance. So is there something holding you back on that? Or is that just conservatism on your part at this point in the year?

Yes, that's a good question, Steve. It's a little bit of both. So we are not anticipating a significant drop-off. And our base case is that we're going to land right at that 2.5% blended midpoint. And the reason we are not -- obviously, we have a range, which would point to a better performance. But what we're seeing on the ground here is that Northern California momentum remains strong. We actually haven't peaked yet, and that's fantastic.

Having said that, the broad U.S. economy actually is slower this year than last year. And we are tethered to that, especially Southern California, including L.A. So a good data point I'll point you to is if you just look at job growth, job growth for the first half of this year is actually quite a bit slower or lower than the same period last year. And for those reasons and with the geopolitical uncertainty that remains, if we were 100% Northern California, obviously, our numbers will be very different, much more robust. But given that 40% of our footprint is still in Southern California, and it is tied to the broader economy, we needed to essentially make sure that we factor some of these uncertainties out there. But at the end of the day, if you look at Southern California, while it is a lag for the West Coast, it is still a solid long-term market, generating 1.4% blended rent growth with occupancy above 95%, it performs -- outperforms most of the major metros in the U.S.

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

On new lease spreads, we were kind of surprised to see the new lease number so much lower than 2Q '25, just given all the strength in NorCal. You kind of covered it a little bit with your commentary about the broader economy, but I'm just wondering about the dynamic of lower new lease spreads year-over-year, but higher renewals and what's kind of driving that pricing decision?

Brad, thanks for your question. It's interesting how the different regions performance is quite a bit of variation there. And so in Northern California, we're definitely seeing very strong new lease spreads. But Southern California is not going to have that kind of strength. And of course, Seattle is somewhere in the middle. But overall, if you look at the combination of our composition of our portfolio, Southern California plus Seattle is 60%. And so that gives you a little bit more insight to the different components. And what we are seeing this year is that our renewal continues to be quite strong and coming in, in that 5% range. And with new lease, we're expecting that for the trend with that lower new lease to continue and elevated renewal to continue.

Okay. And Barb, two things on the preferred book. So you had the close to $90 million in redemptions in the quarter, but the balance is only down about $40 million sequentially. So can you reconcile that? And then just also give your broader perspective on how the current balance should evolve in the coming quarters?

Yes. No, that's a good question. So the redemptions that we had this quarter, two were in the preferred equity book, that was the $40 million. And then one was a mezz investment, which sits in the notes and other receivables on the balance sheet. And so it's in two different buckets on the income statement and balance sheet. So that's why you didn't see it fully drop $90 million in that preferred line.

And then what was your second question?

Just how you expect the balance there to evolve. I think that was all the redemptions for the year, but I could be wrong.

Yes. We have one other small redemption in the third quarter, which was factored into our guidance originally, but it's offsetting by the new investment that we did. The book value that we're accruing on is $100 million. And I think that's a good run rate to use going forward for guidance purposes unless we do more investments. But at this point, $100 million seems like a good run rate.

Our next question comes from the line of Eric Wolfe with Citi.

I think you mentioned a moment ago that you're still expecting like a 2.5% blended rate growth for the year. Apologies if I misheard that. But could you just talk about what drove the increase in your same-store revenue guidance, what the various components of the change were?

Yes. I'll cover the blend and Barb will talk about the revenue growth. So, just to confirm your question, yes, we are expecting for the full year to land at 2.5%. And I talked about that first year and second half to be similar and first half is coming in about 2.6%, which would imply that the second half comes in at 2.4%. So not a huge variation there. Barb?

And then in terms of the 40 basis points improvement to our same-store revenue growth, scheduled rent and other income each contribute 15 basis points to growth and then the other 10 basis points is from higher occupancy.

Got it. That's helpful. And then you spent some time talking about Seattle as well as Northern California. And I guess I'm just wondering, if you compare those markets, is it very obvious, I guess, that Northern California has sort of seen stronger demand, and it's just that they absorbed the supply earlier, and that's why you're seeing much more pricing power? Or I guess when you look at your dashboards and you look at traffic and you look at other things that signify demand, it's just NorCal just has a stronger demand right now.

Yes, it's a good question. A couple of things. With Northern California, it had a lower supply to start with relative to Seattle. Seattle last year was closer to 1% versus NorCal was half of that. So the base is very different and certainly is beneficial to Northern California. And your point as far as the demand is spot on. Demand starts with Northern California, and that's really the center of the innovation engine. And what we have seen over multiple cycles is that it starts with Northern California and then it expands out to Seattle. And we're already seeing announcements, public announcements of expansion to Seattle. But it does take time for people -- for companies once they make the expansion announcements to then build out the office space and then hiring then follows. And so there's always a lag.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Angela, if I could just continue that Seattle discussion, sort of a 2-parter on Seattle. One, do you think that the East side has the potential to put up numbers like we're seeing in Northern Cal? And two, just from being out there in the market, it seems like CBD is waking up some of the office demand coming back there just because of space -- lack of space availability on the East side. So do you think we could be surprised by CBD as well as we look over the next 12 months?

Alex, it's a great question. It all hinges on demand. And the reason why it's possible for Seattle, especially in the East side to perform at a similar level as Northern California is because it does have that tailwind of jobs to come and supply is abating. Having said that, it is a market that historically produces more supply. So it does need more jobs in order for us to have meaningful pricing power, but we've seen this before.

As far as CBD, that's a little -- as far as the CBD itself, that's a little trickier because CBD historically and as we look forward, does have a higher percentage of total supply for the market. And if you look at the location of the employers, large employers, it's throughout the whole Seattle Metro, not concentrated in the CBD. And so I do think that there is a recovery possible for CBD, but I'm not sure about the magnitude specific to pointing to Northern California, that level of magnitude.

Okay. And then, Barb, just a second question is I saw the RealPage litigation, but there was another litigation settlement as well. What was that? Was that also related to RealPage, or what was that?

Alex, it's Angela here. I'll cover the litigation. So we settled a separate dispute item, which has nothing to do with RealPage. And this was a litigation that was ongoing for multiple years, almost four years. And I know this magnitude is actually unusual for Essex. But after protracted litigation and considering the cost to defend, we decided it was in our best interest to just bring the matter to a resolution. But because the settlement is still subject to court approval, we've been advised to refrain from discussing additional details. But I can tell you that we don't have anything else of this magnitude.

Our next question comes from the line of Jana Galan with Bank of America.

Congratulations on a great quarter. Following up on your comments that Northern California rents have not yet peaked this leasing season. I just wanted to confirm, is that also the case for Seattle and Southern California markets?

Good question. No, that is not the case for Seattle and Southern California. Seattle peaked consistent with typical seasonality, so in the early July. And so -- and we are expecting and seeing a moderation for the rest of the year. As far as the Southern California, it's a little bit hard to describe the peak itself. I mean, technically, it peaked early, but it's a very flat curve. So it's not really much of a peak.

And I'll point to my earlier comment on the soft economy and the muted job growth as one of the key driver. And so Southern California is just kind of moving along and not doing much of anything this year.

And then maybe just looking at the supply outlook for 2027, it seems very favorable, especially in some of the little bit slower markets like Seattle. Just curious if there's any early comments you'd like to make on kind of the supply you see, how competitive it is to where you guys are located.

Yes, Jana, this is Barb. Yes, the supply is going to continue to trend lower in '27 versus '26. And the backdrop is already very favorable, and it's going to get more favorable. And we're not surprised by this given what we've seen on the ground and permits and things like that for the last several years. So this is -- it's good for us. We won't need a lot of incremental job growth next year just to cover the supply.

In terms of where the supply is, it is within our metros. It doesn't necessarily have to be next to our properties, but it is competitive within our submarkets that we operate in. So overall, though, I think the supply picture continues to look good for the West Coast in our markets for the foreseeable future.

Our next question comes from the line of Nick Yulico with Scotiabank.

I wanted to see in terms of the guidance for the year on same-store revenue growth, could you get a feel for what's assumed for the different regions? In particular, I'm just wondering like for Northern California, I think you're up about 4% year-over-year in the first half of the year. Is that like a similar number for the whole year? Or does it get better in the back half of the year?

Nick, yes, it's Barb. I would say in terms of the various regions, Northern California, I think, continues to improve relative to where we are today through the back half of the year given the rent growth we're seeing. And that's going to be offset by slower growth in Southern California, given the moderation in blended rent growth that we're seeing there. I think Seattle stays pretty much on par.

Okay. And then my second question is just maybe you can give us a reminder of how to think about this. I think you said Northern California blended rents were up over 6% in the quarter. We see -- look at market data, and it's all over the place, but somewhere sort of high single digit, maybe even over 10% in San Francisco specifically.

So, I guess, the question is if like that type of rent growth continues in markets, how long does it take to translate into same-store revenue growth going from 4% to some higher number, 6% or more, which is where the market rent growth has been recently?

Yes. That's a good question. Our lease turns pretty quickly. And so it doesn't take a long time for rent growth to translate into the bottom line. That's one benefit of the multifamily business. But in terms of -- if your question is how long is this tailwind, is that what you're asking? Or you're only asking about the timing of the rent?

Well, I think my question is like we're seeing rent growth that's very high coming out of Northern California, but it hasn't fully translated into your same-store revenue growth yet. So at some point, you should be accruing that benefit. But just for everyone to kind of manage expectations, how we should think about that?

Yes. Yes, I see what you're saying. We do have -- if you look at the turnover rate, that's probably a great indication of how quickly we can capture the market rent growth and turnover or retention rate is still very high with Northern Cal in particular. And that's not a surprise, right, because as markets move quickly and keep in mind, in California, we have AB 1482. So it does prolong that recovery. But to us, that's not problematic.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

I think that at NAREIT, if I remember correctly, you guys used the word sort of stabilization or stability in SoCal. Obviously, it's a different market versus NorCal versus Seattle, different employers, et cetera. But just wondering if you could maybe give us an update sort of what's the latest thinking there? Would you sort of still use that word stabilization or a different way to maybe frame what's happening fundamentals-wise there and sort of where that market is in terms of the recovery?

Yes. We would still frame it as a stable market. I mean if you look at blended lease rates at 1.4% and plan and occupancy for that region is above 95%. This is by no means a market that's fragile or broken. It's performing as you would expect in an environment of an overall slow economic environment.

Okay. That's helpful. And then just maybe flipping to Seattle. I think on the prior call, you talked about sort of positive lease growth in March and that continuing into April. Maybe just sort of how Seattle trended in terms of either new or blended through the second quarter. And I think supply there is supposed to decline pretty meaningfully over the course of this year and into next. So maybe just sort of the outlook for Seattle specifically.

Yes. I'm happy to go into a little more detail on that. And so we had talked about blended rates flipped positive in March, and it continued to increase through June, actually. And then, of course, with the peak now, it's starting to taper down. So just to give you a high level, March blended lease rate for Seattle that month was 1.4% and in June it was 2.8%. So over 140 basis points in increase. And of course, now it's starting to moderate as we would expect.

Does that help give you the color you're looking for?

Yes. That's helpful.

Our next question comes from the line of Jamie Feldman with Wells Fargo.

I was hoping to get a little bit more granular on the Southern California submarkets. I mean there's been so much capital raised, especially -- and then you listen to some of the industrial calls, and they're definitely getting more enthusiastic about some of the demand drivers, especially aerospace, defense. I mean can you give a little bit more color on -- maybe a better way to ask it, like are you seeing green shoots at all in any of the submarkets? Or how -- can you give us more color on what you are seeing as we think ahead?

Jamie, sure thing. Happy to. And we talked about Southern California being generally stable market. And so definitely seeing that continue. Orange County is leading the pack and San Diego is starting to turn for the better once it started to work through the bulk of the supply. So that's all a good sign.

What's really dragging our Southern California continues to be L.A. County. And once again, I had talked about L.A. hitting its trough back in 2023 when occupancy was only at -- or economic occupancy was only at 91%. So since then, it's improved and it's hovering around that kind of between that 93% to 94% economic occupancy, that is. And so it's remained steady. We are seeing green shoots, like you said, from Anduril and some of these aerospace defense, but they're relatively new. And so it is a positive sign for us, but it's too new to be able to point to what the magnitude will be.

Okay. And I guess, similarly, with all the capital being raised in Northern California, are you seeing people more interested in moving out to buy homes now that they have more capital? It certainly seems like it's helping you push rents. I'm just curious any just kind of consumer behavior you're seeing that's unique given how much those stocks have moved and how much money has been raised and wealth has been created.

Yes. Yes. No, that's a really good point. A couple of things. I think affordability remains much more attractive to rent even though we've been able to increase rents, but it's really a recovery increase, right? So the way to think about Northern California is this is a market, if you look at since pre-COVID, should be well above 20% rent growth, but we're nowhere near that. And so it still has quite a bit of catching up to do. More importantly, when we're talking about buying or converting from being a renter to a homeowner, the cost to own is exponentially more expensive. And so it's not -- it's very difficult to be -- to move from being a renter to a buyer. And we've not seen that as a reason for move-out in our portfolio.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Just wanted to go back to guidance a little bit. Given the 2.4% back half assumed lease rate growth versus, call it, 2% or even slightly below 2% that you had last year, is it fair to say we should start to see that scheduled rent accelerate in the back half of the year and that the earn-in for 2027 should be higher than the 85 basis points that you had heading into this year?

Well, I think that is possible, but it's way too early to predict because we will need to see the rate of deceleration. And like I said, we're not assuming a significant drop-off, but we still have a couple of more months before we can get a better -- be able to pinpoint the earn-in.

I can give you a couple of building blocks on the earn-in side that -- as it relates to 2027 in that if you look at our supply, supply is getting lower, so that's good. And affordability tailwind continues. And then lastly, our preferred equity headwind is now behind us. So I do think that we have some pretty good building blocks there. But as far as the actual rate, we really do need to see how the next couple of months perform and how the rents moderate to get a better sense.

And then just when you roll up all the differing trends across your regions, is the portfolio operating at a loss or gain to lease today? And I guess where does that stand across each of the three regions?

Yes. So we do have a loss to lease, so that's good. It's mostly driven by Northern California, so no surprise there. And as far as Southern California, we have a gain to lease, also not surprise there since the curve was very flat and Seattle is kind of in the middle, slight gain to lease.

Could you give some color around the magnitude there, Angela, for each of the regions?

Yes. So, let me see. Northern California, let's see, closer to around, say, 6%. Southern California in the 2s and Seattle, 70 basis points.

Our next question comes from the line of John Kim with BMO Capital Markets.

I wanted to ask about the change in pricing strategy. I think you said in the past, you were a little bit more agnostic on pushing renewals maybe as hard as your peers because you were looking to optimize occupancy and achieve better pricing on new leases. But now as you're pushing renewal rates higher, will that suppress new lease rates going forward? I'm just wondering why this changed?

John, we have not changed our operating philosophy or approach. The goal has always been to maximize revenues. We're agnostic on where we get that from, whether it's new lease or renewals or occupancy. Those are kind of the three big ones, if you will, or the three big levers.

Now one of the reasons why depending on the market, we favor occupancy, well, that's for obvious reasons. And as far as favoring renewals over new lease rates, we talked about the cost of turnover. And so in an environment where unless we're able to push rents above, say, 6%, for example, we're better off focusing on renewals and keeping that new lease rates flat and not to incur turnover because that is very expensive. And so ultimately, I will take you back to our strategy, which is to maximize revenues and not to focus on any specific rental rates as a metric.

Okay. And then maybe another subtle change, maybe not, but you did make a couple of preferred investments in your West Coast -- one of your West Coast joint ventures. And in the past, you had said redemptions will be used to buy fee simple assets. So has that philosophy changed? Or is it because it's in a joint venture that you've made these reinvestments back into the preferred?

John, Rylan here. Our overall philosophy as it relates to this business has not changed in recent years. I'd remind people that we've made a lot of money in this business over the past several decades. It's incredibly synergistic with our development and our investment businesses. So what we've done is just strategically resized this book of business, which has the benefit of reducing earnings volatility. And we're just going to remain highly selective.

So when we see the best risk-adjusted returns, that's where we'll step in and lean in. And that's what we've seen more recently, and we've done another one earlier this year. So we're just going to remain highly opportunistic and making sure that we're putting our dollars to work where it's really creating value for our shareholders.

Okay. So there's not a stated strategy to reduce the preferred investment book?

As Barb alluded to, it's down to $100 million. So we think it's in a very manageable space, and we could grow that if we see the right opportunities.

Our next question comes from the line of Michael Goldsmith with UBS.

This is Ami on with Michael. Given the strengthening rent growth in Northern California, are we getting close to the point where developments start to look more attractive? Or if not, what conditions need to change for development to start looking attractive again?

Ami, this is Rylan again. Development economics have improved over the past year as rent growth has outpaced cost growth. Our philosophy as it relates to new developments is we just want to make sure that we're getting compensated for the risk inherent in all developments. So we have the South San Francisco deal, which is trending very favorably relative to our initial underwriting, and we're actually ahead of schedule on that project.

We're working forward another project further down the Peninsula. And we continue to underwrite all land development sites. but just trying to remain disciplined to make sure that we're fully getting compensated for the risk inherent in development. But we continue to look at everything and the economics to answer your question bluntly, have improved.

And for those deals, what yields would you be targeting approximately?

What we said publicly is anywhere from 100 to 150 basis point spread to where we can go and buy. And so these yields, I think I've said on the seven self-fed deal, historically, we expect to stabilize closer to 6%.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

This is Mike on with Haendel at Mizuho. What has the retention rate been in your San Francisco portfolio? And are you seeing a higher retention rate given the stronger new market rent growth pricing?

Our retention rate in San Francisco has been elevated, so relative to the other regions, and it's been that way for quite some time.

As far as our expectation, yes, we expect to maintain that high retention rate, especially in an environment where market rent is moving so quickly. And so that's not a surprise to us. But to us, that just means that it's a longer tailwind.

Okay. Helpful. And also, where are renewals being sent out and executed for August and September? And how much of your 3Q renewals in terms of visibility have been executed so far?

So, August, September, we're sending renewals out in the high 5s. And we expect negotiation probably around, say, 50 basis points. So we'll land in that low 5s range. How much of it is out? Well, let's see. August is done, and we're halfway through September.

Our next question comes from the line of Peter Abramowitz with Deutsche Bank. Peter, your line is on mute on my end. We can't hear you. All right. It looks like we lost him.

Our next question comes from the line of Ann Chan with Green Street.

So I believe you have three 3 properties with ground leases expiring in '27 or '28. Could you give us a sense of whether we should expect either a large step-up on ground rent at those properties in conjunction with an extension of the ground lease? Or if you sell the properties, do you expect a very high cap rate?

Yes. And as you can imagine, these are ongoing negotiations that we'll have with the ground holders. In many instances, we'd love to figure out a way that we can renew, but it's going to go back to our broader philosophy, does this create value and at what rate. So still too early to say, but those conversations are ongoing. And it's a very, very small percentage of our portfolio.

And second question for me. On the JV disposition in San Jose, can you share the cap rate on the sale and maybe some color on the decision to sell versus consolidating the property?

It's a fair question. This was a mid-4% cap rate, sub 4.5%. This is a joint venture that had debt maturing. So that caused us to evaluate the property and the valuation. Unsurprising, we saw very strong interest in the asset. And in this instance, we thought we could generate better risk-adjusted rewards by redeploying elsewhere. So we made the decision with our partner to sell this asset, and we're very pleased with the execution.

Our last question comes from the line of Peter Abramowitz with Deutsche Bank.

Yes, just one question about Seattle. One of your peers called out tech layoffs as a pretty specific driver of softer pricing for the first half of the year. I know it's not something we discussed much on the call and wasn't mentioned in the release. Just kind of curious if that's something you've noticed as well? Has it had any impact in your Seattle portfolio or Northern California? And just any color you could provide around that would be helpful.

Happy to. We -- it could be depending on the specific location of the asset relative to our peers. I don't know what they're seeing. But certainly, on our end, we're not seeing that as a primary reason. As we have noted in the past that these tech announcements, vast majority of them are not in our markets. And when we look at the top 20 tech jobs, the job openings have remained steady, actually with incremental increase throughout the year, we're pretty darn close long-term average despite the layoff headlines.

So it's not something that we're seeing as a major impact. I'd probably point you back to the broader economy that probably has a larger influence over all the other markets, except for Northern California.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Goodbye.

Okay. Thank you so much for joining us today. My name is John Kim with BMO Capital Markets. It is my pleasure to be hosting this panel presentation with Essex Property Trust, one of the preeminent multifamily owners.

With me today, Angela Kleiman, CEO and President; to the far left, Barb Pak, Chief Financial Officer; and in between, Rylan Burns, CIO.

I think at this time, we're just going to pass it off to Angela for some opening remarks, and then we'll go to Q&A.

Great. Thanks, John, and welcome, everyone, to the Essex presentation. Just a high-level overview. Essex is an S&P 500 company and the only public company dedicated to the West Coast geography. We have our market cap, which is about $25 billion. We own somewhere around 258 units -- apartment buildings, a little over 63,000 units across our footprint. And we have generated a 32 years of consecutive dividend growth, earning us the Dividend Aristocrat standing. So we're quite pleased with that.

Some of the differentiating factors with the West Coast is really driven by the fundamentals, and the key one being that we have -- we produced a low amount of housing supply. And currently, actually, we're sitting at a historical low. We have about 40 basis points of total supply right now. And normally, it's about 70 basis points. And that's important because it provides a very safe basis in terms of where the economy is. We don't need a lot of job growth to drive demand and to have stable rent growth.

But on the other side, what's interesting with our market is being in the center of innovation, having, right now, technology as a key wealth creator, especially with artificial intelligence, we have strong catalysts for job growth and demand. And so therefore, in addition to a favorable supply environment, we have a strong growth ahead of us because of that demand. And so that sets us well as we continue in our -- investing in our markets and the prospect for rent growth is much better than the rest of the U.S.

Can I just start off? I mean, San Francisco, Northern California has just been some of the standout markets in multifamily. How much of the improvement do you think is just cyclical because they were some of the last markets to recover versus structural change in demand, just given all this growth in AI and tech?

That's a great question. At this point, we're still looking at Northern California as a recovery story. And so what I mean by that is, as John alluded, this is a market right now should be generating about 20% rent growth above pre-COVID. But on average, it's still kind of in that 10-ish percent range. So there's still a lot of runway as that this market just started recovering. We were the last to open our businesses since COVID. So there's that catch-up effect. But what's happening right now on the ground is very exciting because what we're seeing is the start of, with AI, the expansion that's happening up and down our coast. We actually have a presentation slide.

Barb, do you want to go over some of the fundamentals that we're seeing?

Yes. So we do have a slide on Page 16 of the presentation. It is available on our website. And just some of the demand drivers that we're watching and seeing, which is leading to above-average rent growth is not only AI job postings, which are up year-to-date relative to 2025. We're also seeing the top 20 tech job postings be at the '16 to '19 level, which we think is healthy. For us to see real acceleration in rent growth, we want to see that continue to move upward and stay stable for several quarters.

The other thing we're seeing is white-collar job growth in the Bay Area. There's a lot of headlines about layoffs, but the layoffs that are occurring are a fraction of the numbers highlighted in the press because that they're all over the U.S. So only about 1/3 -- 25% to 1/3 are in our markets. And the people that are getting laid off are getting gobbled up very quickly. We're not seeing unemployment claims rise, initial or continuing claims.

The last factor that we are seeing is net domestic in-migration, and we're seeing it turn positive for the first time in decades in the Bay Area. And that's really that return to office. As Angela mentioned, we're the last to reopen our markets. Tech was the last to require employees to be back to the office. They now are. And there's also this fear of missing out. And so people are returning and have come back to the Bay Area. It's just all leading to a good demand backdrop.

AI is the strongest in San Francisco, but can you talk about your other markets or submarkets where you're seeing a lot of the AI job growth?

Yes. So we also published a slide on Page 17. And you can see that AI is in San Francisco, but it also is throughout the entire peninsula where a lot of our assets are. There's a lot of start-ups that have been created. So it's not just Anthropic and OpenAI. There's 250 AI-related start-ups that are creating new products for companies to be able to bolt on to their existing platforms. And so the growth that we're seeing is throughout the entire peninsula from the AI boom.

Okay. Looking at another slide in your presentation, Slide 12, it shows that your blended lease rate growth was 1.4% in the first quarter, going up to 3.1% in April and then 3.7% in May. Can you just talk about your occupancy versus pricing strategy today? Do you have more pricing power in your market? And where should we see this trend line go?

Sure thing. So what you're alluding to is on Page 12 of our presentation. And typically, we have our seasonality where the seasonal peak is in the second and the third quarter, which means the seasonal low or where demand is lowest in the first and the fourth quarter. During those 2 periods, first and fourth quarter, we tend to focus on building occupancy, so preserving occupancy because that's more of a defensive move. As if we move into the second quarter and we see strength in our market, we've now flipped. For our markets, for the majority, we are pushing rents. And so we're stepping back on occupancy, pushing rents and which is why one of the reasons you're seeing that 3.7% blended lease rates. It's definitely heading the right direction, and we're seeing that momentum continuing.

On that same slide, there's a graph on the left-hand side that shows where we are trending on the market rent relative to historical levels. So where we are right now is we're higher than last year, which is great, heading in the right direction, but we're still slightly below the long-term average. So that tells us that we still have room to -- and more upside to capture in our markets.

You talked about seasonality, and it's been a little bit more unpredictable in recent years. Your guidance basically calls for blended rents to be flat in the second half of the year versus first half. Are you still expecting that to happen? Or what kind of visibility do you have on the second half of the year?

Yes, that's a great question. What we have -- the reason we have a first half and the second half relatively similar is because we did not forecast the economy accelerating in the second half. We're assuming that for the rest of the year, job growth remains somewhat muted. And part of it is not because we're concerned about our markets or we are in fear of a recession. It's really the uncertainties. The second half, we have the midterm elections. We still have -- what that means is that will employers really make meaningful capital spending and hire in a meaningful way? We don't know, and they probably don't know either.

And right now, we're still in a war or kind of in a war, I'm not quite sure what to call it these days. But there's just more uncertainty in the second half. So where we are right now is we are trending ahead of our guidance. Having said that, we'll probably look at -- once we have the second quarter numbers and when we're well into our peak leasing season, we'll revisit how we're going to guide the Street.

Okay. Can we talk a little bit about perception versus reality or tell us what you're seeing in your portfolio with the -- we talked about a little bit about this before, but the AI job growth versus the tech layoffs. The tech layoffs are up year-over-year, but they're still below 2023 levels. And we're seeing the headlines, but at the same time, your rent growth is very strong. So what are you seeing in your portfolio?

Yes. We would just encourage investors to unpack the headline layoff announcements. For example, Meta announced a 9,500-person layoff recently. The WARN notices were -- which is actually how many people will be laid off within California was 2,446. So these -- many of these tech companies hired significantly in '21, '22 coming out of COVID. And we know that, that hiring was not occurring in our markets because their campuses were closed in many instances. We were not seeing the rent growth that would typically be associated with that level of job growth. So we're seeing the reversal of that where many remote hires or in secondary locations, the majority of these cuts are occurring. So the headline numbers don't line up with what we're seeing on the ground.

And then at a bigger picture, you've seen AI be incredibly disruptive or productivity improving for software engineers. And you would think, hey, you'd see a bunch of software engineers unemployed. We have not seen that in our markets, and we've actually seen the inverse where software engineers and coders are actually in higher demand as the cost of software is coming down with AI, you're seeing more companies look to pick these people back up.

So the reality on the ground is that the Peninsula and San Francisco are doing incredibly well. The economy is vibrant. The city is fun and vibrant. Again, there's a lot of young people on the streets. It feels really great. And I would encourage everyone to come out and visit our markets because it's not necessarily what we've been seeing on some of the headline news programs over the past several years. And our view is that, hey, this is just getting started in terms of the capital flowing into new AI-enabled companies and that application layer of companies. We think we're really early stages as it relates to an investment cycle in new technology companies along the peninsula.

Turning from your strongest markets to probably your most lackluster, L.A., Southern California. The recovery has been, I think, a little bit slow. What do you need to see to have L.A. recover? We have a mayoral election, which could be kind of interesting. There's the Olympics coming up in a couple of years. But what would you like to see for the market to turn?

Yes. We've been describing L.A. I mean it's weighted on performance in recent years, which I think everyone is very aware of. It's fortunately been somewhat stable the past 1.5 years, I would say. 2 years ago, we were at 92.5% economic occupancy. So that's physical occupancy less bad debt. We're currently at 94.5%. We're very close to a point where we're going to actually have pricing power in L.A. The supply has started to come down, which is helping us. And in terms of near-term catalyst, it's more difficult to point to in L.A. L.A. is the largest county in the U.S. It's the biggest economy county in the U.S. And so it's much more representative and has historically grown in line with the U.S. economy.

So to the extent that the U.S. economy starts to pick up and we see widespread job growth, we would expect that to be a positive catalyst for L.A. Some industries to highlight aerospace as well as defense tech. There are some very interesting companies in Long Beach, in particular, that are doing some really interesting stuff where it feels like capital is flowing in. And then the mayoral races we talked about here, who knows how that's going to play out over the next several months. But I do think there's a growing awareness that some of the issues you see when you tour downtown L.A., it's reached a point of frustration for many Angelenos and they're looking for change.

So with the Olympics coming in 2 years, we are cautiously optimistic that we're going to see the political will to really try to reinvigorate our downtown in L.A. and clean it up and make sure people feel safe and that the businesses can come back. And so L.A. feels stable. We don't have a clear catalyst to point to that this is going to turn this year, similar to our outlook for the U.S. economy. But again, the supply is low relative to the majority of the other markets in the country. So it won't take much for us to really regain that pricing power.

Camden Property Trust made the headlines for putting for sale a large Southern California and L.A. portfolio. How did that pricing come out relative to your expectations? And what does that mean in terms of investor demand for SoCal?

Yes. This was a -- Camden is a good operator and a high-quality portfolio, 2000s and newer in Southern California. We were not surprised, and I think recently, a publication came out that disclosed some of the pricing levels, and I'm sure Camden will be speaking more about it in the upcoming earnings calls. But there has been significant capital demand for properties in Southern California. It has not matched what I think public perception as viewed through the public REITs would be, but we were not surprised. There's been $12 billion of transactions on the West Coast last year. I think we're on pace to exceed that this year. These are deep liquid markets. And the majority of assets that we've seen trade in Southern California, generally around that 4.5% cap rate range. So there is a lot of capital, private capital that wants exposure to the high quality of life communities in Southern California. And I think as Camden provides some more detail about the level of bidding, it was a well-bid portfolio, and it just speaks to the liquidity in our markets.

I think it was either 1 or 2 years ago, sometime in the not too distant past, you were looking to buy as much as you could in Northern California and funding that with SoCal sales. Is that still the case? Or are you looking for opportunities?

Yes. Thank you for mentioning that, John. So we have allocated about $1.7 billion into Northern California over the past 2 years, really targeting assets along the Peninsula where we can put them onto our operating platform, operate them much more efficiently. What I would say is there has been a significant sentiment shift over the past year in terms of private capital now moving back into Northern California, recognizing some of the demand and supply trends that we've been speaking to. So those cap rates have compressed, but there's always going to be opportunities for us to add value that is still generally are -- we're looking quite closely through all our markets. But if we see an opportunity to add value, put it on our platform and increase that NOI yield through our more efficient operations, we will continue to do so.

So we have been executing on that thesis for the past 2 years, and that will likely be the go-forward strategy until something else changes. Again, everything has a price, and we are tracking everything in our market to make sure that we are adding value on an FFO and NAV per share basis for our shareholders.

Your other major metro market is Seattle, and it's gotten a lot of attention recently because I think Starbucks was looking to move and maybe they haven't. Amazon, the same thing. There's more rent control measures and income tax being introduced potentially. So can you just talk about how Seattle has performed relative to the rest of your portfolio and where you see it trending going forward?

Yes. We have seen legislation aside, what we have seen is a very stable and improving performance out of our Seattle portfolio. And some of the softness in Seattle in the recent quarters was more attributed to the fact that there was competitive supply. And that supply has, for the most part, abated. And in fact, supply is going to be lower by about 25% this year and another quite a bit lower next year. And so that's what really drives the pricing power and the ability to raise rents in Seattle.

At this point, what we have seen is when we look at our lease rates in Seattle, it turned positive in March. And since then, every month, it has improved on that, and it's actually slightly ahead of our expectations at this point. Now as it relates to your comments on legislation, having income tax, well, it's disappointing for the citizens of Seattle. It's not unusual for any state to have a state income tax. So that in itself, I don't think will significantly impact the attractiveness of Seattle to do business in. And as far as the statewide rent control, the level is comparable to that of California. And in that environment, it's really more -- we view it as more of an anti-price-gouging. And in that environment, it's a win-win for everybody, both the landlord and also for the tenants.

Okay. Another large -- big news item was the announced merger between 2 of your peers, AvalonBay and Equity Residential, leaving you as the only coastal multifamily REIT left. Actually, they're already in Sunbelt. But what do you think that's going to -- how is that going to impact the multifamily sector? And do you -- how do you react to that once that closes?

Yes. It's an interesting case study in that -- let's start with -- they're both in our markets right now. They're both currently bigger than us. So they're going to be, I guess, more bigger but I don't expect that to have any impact on our operations. I mean we run an incredibly efficient operating model. We operate 9 to 10 properties, 12 properties as 1 business unit, and that's not going to change. As far as in terms of -- on the investment side, if you believe that by being bigger, you will have a better cost of capital, then yes, they could become, say, more competitive. But you would need to generate a better cost of capital in a way that is a meaningful margin to all the other companies.

And it could be an interesting case if that plays out. What I've seen in the past is that the large cap REITs for the most part, they have less volatility in their name. But overall total return, it depends on the time frame. There's 3- to 5-year time frames where smaller mid-cap REITs outperform. And so I don't know if there's a foregone conclusion just by being the biggest, but it's an interesting strategy.

And can you talk about the market share that you have in your markets? And if you had greater scale, would that give you an advantage, do you think compared to where you are today?

Well, at this point, I mean, the multifamily sector is pretty highly fragmented. And even though we are the largest public company in those markets, we own less than 10% of the total housing stock. So that in and of itself probably wouldn't be a game changer. But in terms of the scale and concentration, there's a point where you have marginal diminishing return. So what I mean by that is scale is great up to a certain number. But once you are beyond that certain number, you still have to add to it. You have to add staff, you have to add infrastructure. And so just purely scale for the sake of scale itself wouldn't allow you to have a huge advantage. It's really how you optimize it within your concentration of assets.

A lot of the investors look at the multifamily sector and see a huge disparity between private valuations and cap rates below 5%, like we talked about with the SoCal sale and the public REITs that trade closer to 6%, you're at a premium to your peers. So you're in the mid-5s. But what do you think the market -- the public market is getting wrong? Or do you think private market valuations are a little bit too frothy? What's your view on that discrepancy?

Yes. Well, there's a couple of things happening that in the public markets, that's not as impactful in the private markets. So what I mean by that is, for example, in the public markets, there is a sentiment trade that happens, and there is also a rotation from one industry to the other. So in the recent past, multifamily has not been a favorite asset class. Funds have been going to, say, the data centers and industrial, for example. The private market has a very different view when it comes to investing. They invest in long horizons and not as focused on sentiment trades. We have a private equity business where we have joint ventures and funds with people that want to own direct real estate with us, and they tend to have a 7, 10 or even longer investment horizons, and it's more fundamentally driven rather than sentiment driven.

And when you look at acquisitions and you compete for acquisition opportunities, how are you underwriting market rent growth? And where do you think the public and private buyers are in terms of underwriting that growth?

Yes. It's not too inconsistent with the guidance we've provided in recent years in terms of broadly rent growth and 4% in Northern California, 2% in Southern California, 3% in Seattle. I mean those are our base cases. Now there are specific subpockets and every asset is underwritten individually based on the individual characteristics of where we're seeing competitive supply, demand drivers. So in some cases, that will be flexed up and down. I would say on the private side, and the last year to my comment about the sentiment significantly improving along the Peninsula, you are seeing groups step in and in many cases, win deals by being quite aggressive on their growth assumptions. And you look at some of these fundamentals, they might not be incorrect in some of these submarkets. But we have a pretty disciplined process. We want to make sure that every acquisition, we have a high level of conviction that this is going to generate FFO and NAV per share almost immediately for the company. And so that's where you've seen us step in and be most active.

Again, we have been the largest buyer in California for the past 2 years, all in Northern California. So we have stepped in and been aggressive, and I think we're starting to see that thesis play out, and we will continue to be looking for opportunities to add when we know we can add value to our shareholders.

And negative leverage transactions, is that still prevalent in the market?

That's correct. That's correct, which I think confuses a lot of public investors in some instances, why would someone be willing to buy below in-place debt yields. But again, it goes back to the fundamentals. And like if you have no supply and positive trade-outs and really attractive demand side on the other side, it doesn't take that long to get to positive leverage. So many private investors are willing to underwrite through this. They have a little bit of a longer-term focus than a portion of our public investors that are very short-term focus. So it doesn't surprise us. You can still make really good returns beginning with negative leverage in some instances. So you have to be cautious, but yes, that has been the case for the past several years.

Any questions from the audience? I wanted to ask about ADUs as a way to, like, add density in some of your projects and maybe it helps with affordability. Can you talk about where you are in your portfolio in terms of ADUs, adding that to your existing communities?

Yes. This is a recent California law changes in several years that allowed by right zoning to add ADUs to your projects. And so we've done a pretty thorough portfolio analysis of where we have opportunity. We have a very significant opportunity for 2 reasons. One, our operating model as we've consolidated our operations into operating 10 buildings as 1 operating unit, it's unlocked some underutilized leasing spaces that we've turned into very attractive units. What we're most excited about, given that the vast majority of our portfolio is garden style, well-located assets, we have a lot of tuck-under garages where we're adding 10 to 15 units. The per unit cost is about a fraction of what it would have -- 50% of what it would cost to build a new unit out of the ground. And these are double-digit returns.

So we've ramped that up. We're expecting to deliver 80 next year, and we're continuing to build that pipeline of ADUs to, one, help with the -- we need new supply in our markets, but also these are very attractive returns for investors.

Okay. And then I also wanted to ask about your structured finance program. It's been coming down pretty recently, and that's created a little bit of earnings headwinds that I think you're going to be past after this year. But how should investors think about that program going forward?

Yes. We remain committed to the business. It's incredibly synergistic with what we do in our relationships with developers. You've had 2 factors over the past several years. One, you've had development starts come down considerably, which is in the supply numbers that we're talking about over the last few years. So that's created fewer opportunities to add preferred investments on the development side. And then you've also seen a lot of capital that was raised coming '22, '23 to take advantage of distress. In many instances, we have not seen that yet. And that capital has flowed into that preferred space. We feel like you're seeing examples of stabilized product preferreds in the high single digits. We thought you could get much better risk-adjusted returns by owning the fee simple for the past several years.

But we remain involved. It's a relationship business. If we see the right opportunity to manufacture a yield and a return that we wouldn't otherwise be able to generate through our other opportunities to invest, you'll see us committed to that business. But it's at a much more manageable portion of our business to create less earnings volatility going forward. And so we feel really good about where we are today, and we'll continue to look to add value through that program.

Okay. I think we're going to try to do something a little bit different and go through a speed round. So I'm going to ask you a question. Give a very short answer. Maybe one of you answer, and then if the other 2 agree or disagree, then chime in. Okay. So what -- this could be a total disaster, but what is the most underappreciated Essex market today?

Most underappreciated. I would say Oakland. Oakland has had a tough go because of supply and supply has significantly dwindled. And Oakland at this point is tracking pretty darn close to what San Francisco and South Bay is performing. And so it's a great up and comer.

Anyone...

I agree. We don't agree with everything, but we...

This one I'll direct to Barb. What matters more today, AI hiring and job growth or the return to office?

I think we've gotten through most of the return to office. So I think it's the AI hiring at this point.

Okay. What's one metric -- this probably goes to Barb as well but what's one metric investors should watch most closely in the second half of the year for Essex?

Just for 2026?

Yes.

I think we're always focused on same-store revenue growth and core FFO growth. This year, core FFO growth obviously is going to be a little challenged because of the preferred equity headwinds. But we're always trying to maximize our revenue growth, and I think you should watch that number.

Angela, what will investors have gotten wrong about Essex 1 year from today?

I think investors underappreciate the power of supply and the kind of supply in our markets, it's so low that we just need very low job growth to outperform. And I think investors are looking at other markets and seeing, oh, well, supply is coming down in other markets as well, but they don't realize that in other markets, the supply is heavily influenced by single-family that can ramp up very quickly. And even if you're going from, say, 3% of supply stock to 2%, even though that's a decrease, it's still a lot of supply.

Rylan, are private market buyers too bullish or public market investors too bearish? I'm sure I know the answer to this.

Yes, I think you know where I'm going. I think public investors -- the marginal public investor, that growth investor, right, is focused on AI and high momentum type subsectors and real estate is live for the past couple of years. Eventually, that will shift, and I think that flows back into really great well-compounding return vehicles like Essex.

Okay. Any closing remarks because I think we're pretty much out of time, but...

No. Thank you for joining the Essex presentation.

Thank you.

Good day, and welcome to the Essex Property Trust First Quarter 2026 Earnings Call. As a reminder, today's conference call is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with SEC.

It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Ms. Kleiman, you may begin.

Good morning, and welcome to Essex's first quarter earnings call. Today, I will cover our first quarter performance, discuss regional trends and conclude with an update on the transaction market. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A.

Starting with the macro environment. U.S. economic conditions year-to-date have generally unfolded in line with our outlook with national labor trends remaining soft. Additionally, heightened geopolitical tensions and inflationary pressure in recent months have contributed to increased near-term uncertainty. Against this backdrop, we delivered a solid first quarter with core FFO per share exceeding the high end of our guidance range and same property revenues trending ahead of plan.

Two key factors contributed to these results. First, we successfully deployed an occupancy-focused strategy to maximize revenues, generating a 20 basis point year-over-year occupancy gain. Second is the strength in Northern California combined with the durability of our supply-constrained West Coast markets. There is a direct correlation between housing supply and the cost of housing for consumers. It is no surprise that markets with some of the highest rental rates are typically markets with significant legislative burden on housing providers, which deters building activities, leading to a chronic housing shortage.

Looking forward, permitting activities remain at a historical low in California. And as such, we expect new housing deliveries to remain low at around 0.5% of existing stock for the next several years.

On the demand side, we are seeing early indicators of improvement in 3 areas: first, job postings from the top 20 technology companies have remained steady despite the layoff headlines. Second, elevated levels of venture capital investments in the Bay Area are funding a new wave of startup companies. And third, continued office expansion announcements in our markets. In summary, the low level of housing supply throughout our markets provides resilience across a wide range of economic conditions while improving demand indicators position the portfolio for sector-leading long-term rent growth.

Moving on to property operating highlights. We achieved same-store blended rent growth of 1.4% for the quarter, which is generally in line with our expectations as we execute an occupancy-focused strategy ahead of the peak leasing season. From a regional perspective, Northern California was our best market, performing ahead of plan for the quarter, with blended rent growth of 3.2% led by San Francisco and San Mateo, followed by Santa Clara County.

During the quarter, while occupancy increased by 50 basis points sequentially, we were also able to increase rents, demonstrating the strength of this market. Attractive affordability, favorable demand drivers and limited supply support our expectations for solid growth to continue in this region.

As for Seattle, this region performed in line with our expectations for a slow start to the year, with blended rent growth of negative 80 basis points. This was primarily driven by a soft demand environment combined with the absorption of supply delivered last year. Encouragingly, during the quarter, we achieved sequential improvements each month in net effective new lease rent growth and occupancy while reducing concessions. With additional office expansions recently announced in the region, we maintain our conviction with the long-term outlook for this market.

On to Southern California, which is closely linked to broader national employment trends. This region also performed on plan with blended rent growth of approximately 1%, led by Orange County and Ventura. In Los Angeles, incremental improvements continues at a modest pace. Heading into peak leasing season, we have shifted our operating strategy to driving rent growth across most markets, and our portfolio is well positioned with April financial occupancy at 96.4% and blended lease rate growth north of 3%.

Turning to transaction activities. With minimal forward-looking supply deliveries and favorable fundamentals, interest in multifamily assets on the West Coast remains healthy, especially in the Bay Area, as evidenced by the 50 basis points cap rate compression since 2024. Essex has been the largest investor in this market in the past 2 years as we allocated approximately $1.7 billion of capital ahead of the cap rate compression, generating substantial value for our shareholders.

Overall, cap rates across our markets remain consistently in the mid-4% range. However, with our stock trading close to a 6% implied cap rate over the past several months, which is a significant discount to private market valuation, we shifted gears and repurchased approximately $62 million of stock, thereby continuing our strong capital allocation track record of maximizing accretion for our shareholders.

With that, I'll turn the call over to Barb.

Thanks, Angela. Today, I will discuss our first quarter results and full year guidance and conclude with comments on the balance sheet. We are pleased to report a solid first quarter with core FFO per share exceeding the midpoint of our guidance range by $0.11.

There are 3 key drivers of the outperformance. First, same-property revenues, which grew 2.9% on a year-over-year basis, was 50 basis points ahead of plan and accounted for $0.04 of the beat. Higher occupancy and other income were the key components of better revenue growth during the quarter. Second, same-property operating expense growth was flat on a year-over-year basis, which was lower than expected and accounted for another $0.04. However, this benefit is timing related and expected to reverse in the second half of the year. Third, non-same-property and co-investment NOI make up the remaining $0.03 of outperformance.

As for our full year outlook, we are reaffirming our same-property growth and core FFO per share guidance ranges. While we have started off the year in a solid position with revenue growth trending ahead of plan, we'd like to get further visibility into peak leasing season before adjusting our forecast due to the current macro uncertainty. As it relates to the remainder of our FFO forecast, there are 2 key factors that are different from our original guidance. First, we expect to receive approximately $90 million in early structured finance redemption proceeds, which are expected to occur in the second quarter. We are pleased to see this early redemption activity despite it causing a $0.07 headwind to our second half forecast as it demonstrates the continued strength of the West Coast markets.

The second factor is share buybacks. We took advantage of the significant discount in our stock price and repurchased approximately $62 million at an average price of $243.76, which equates to an attractive FFO yield of 6.5%. As such, the near-term earnings headwinds from the structured finance redemptions is largely offset by the benefits from the buybacks, and our full year forecast is unchanged at this time.

Concluding with the balance sheet. We recently repaid $450 million in unsecured bonds that mature, resulting in limited remaining maturities for the balance of the year. With net debt to EBITDA of 5.5x, over $1 billion in available liquidity and ample sources of available capital, the balance sheet remains in a strong position.

I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question is from Nick Yulico with Scotiabank.

In terms of the blended rate growth, I know, Angela, you gave the April stats there. I think you said north of 3%. Can you just remind us how to think about how that's going to trend this year to get to your 2.5% guidance for the year?

Nick, thanks for your question. We're on plan as it relates to our guidance. And so if you look at first quarter coming in at 1.4% and April is already north of 3%, it's -- we don't anticipate challenges to hitting that 2.5% for the year. And we -- at this point, we're still anticipating that first half and second half are pretty similar to each other. And so things are on plan.

Okay. Great. And then second question, I guess, Barb, on you talked about the FFO guidance the $90 million. I just want to be clear, the $90 million of additional or early redemptions, is that like a pull forward for redemptions you assumed in the back half of the year? Or is it just an additional level of capital coming back altogether? And how should we think about -- is there any potential for that FFO headwind to get even worse throughout the year if this kind of repeats again?

Nick, that's a good question. So the $90 million is effectively maturities that were set to mature in '27 and '28. And so it's been pulled forward into 2026. And because of that, we don't have any redemptions in '27 and '28 now. So the headwind is effectively behind us at this point.

Our next question is from Jana Galan of Bank of America.

Sorry, just a quick question on the change in methodology for the net effective rate growth. I guess, like, one, what drove the decision to change it? And then two, when comparing with the prior disclosure, it appears like it's higher in 2Q, 3Q and then lower in 4Q and 1Q. Would that be correct?

Jana, you are right on point on the cadence when it comes to the lease rates. So effectively, we made this change, and we actually signaled this change last year when we reported or detailed like-for-like lease terms, but we also reported all lease terms because with feedback from investors that it was easier for everyone to look at how we report the same way as our peers. So just really to be in line with our peers. So there's no change to our business and certainly no change to how we approach our business. And as far as the cadence, all leases means there will be a little bit more variability and with the highs in the second and third quarter and lower lows around the first and the fourth quarter.

And I appreciate the color on, kind of, the April operating stats. I'm wondering if you could share where renewals are being sent out for the summer?

Yes. Yes. We are actually in a good position. We continue to be with renewals sending out around 5%. And of course, that can get negotiated. But so far, our renewals have been pretty darn sticky, which is a good indication of the fundamentals of our markets.

Our next question is from Eric Wolfe with Citi.

It's Nick Joseph here with Eric. California is off to a strong start, but obviously, there have been some recent layoff announcements from some of the larger tech companies. Are you seeing any changes in that market or all the forward indicators holding strong?

Yes, Nick, that's a good question. Job -- the demand side is something we do watch closely and BLS visibility is not as great nowadays. But what we are seeing is the layoff announcements, if you look through to the WARN notices, it shows that the majority of the layoffs are not in our markets. These are -- these layoffs apply to global locations. And a couple of areas that we track that I'm happy to share with you that gives you a better forward-looking indication. One is that when we look at the top 20 tech job openings, they remain steady and it's actually improved a little bit in the past couple of months. But we don't expect that to accelerate. Having said that, things are just fine on the ground.

We also look at both new and continued unemployment claims, which remains at a low level. Now this tells us that people that are displaced in our markets, they're able to find another job quickly. But most importantly, is our Northern California performance, which is -- that market has the highest concentration of tech companies, and it's our best-performing region.

Our next question is from Steve Sakwa from Evercore.

Maybe just going back to the -- I guess, the repayment. Is there any chance that you could backfill that with, I guess, new investments? I don't know exactly kind of what the market looks like to make some of these new investments and kind of where your head is in terms of making new investments.

Steve, Rylan here. As we've communicated, we remain actively involved in many conversations related to new investments on the structured finance side. We were not anticipating going into this year that we'd get that $90 million back. But as Barb alluded to, this business has kind of been level set at a lower rate. So we're continuing those conversations. We're tracking a few deals that we think could present really attractive risk-adjusted returns. So we remain committed to the business, and we'll continue to look for opportunities when the opportunities present themselves.

Okay. And maybe just going back to the expense. Can you provide just maybe a little bit more color? I mean, I realize it was pretty flat in the first quarter, and it sounds like a lot of that was timing. Can you maybe just provide a little more detail on kind of where the surprises came in the first quarter and what, I guess, is likely to reverse itself in the back half of the year?

Yes, Steve, this is Barb. On the expense side, it really came down to lower controllable expense spend in the first quarter as we delayed several projects from the first quarter into the second and third quarters. And so that's really what drove it. For the full year, our controllable expense spend is expected to be around 2%. So it's still very low in anemic, and we do still think it's going to hit at this point. It was just a delay in our spend.

Our next question is from Brad Heffern with RBC.

Barb, last quarter, you said that you were assuming no redemption proceeds for a couple of the 2026 maturities. I was wondering if you have any update there or if that's still the case?

Yes. So good memory. That is the case. We did have one of our investments did mature at the end of March, and the sponsor did contribute some additional equity, and we did grant a small extension on that investment. And there is still a lot of moving parts with that investment and not everything is finalized. And while we could have continued to accrue from an FFO perspective and it would have benefited our FFO, given some of the uncertainty related to this investment, we decided not to continue to accrue.

There is value there, and there will be upside to our FFO, but it really is depending on the timing of when we can settle a few of these open items. And right now, it looks like it's probably an early '27 event, but more to follow as we go forward. The other large investment that we had stopped accruing on in the fourth quarter, we're in ongoing discussions with the sponsor. That one doesn't mature for a couple more months. So more to follow on that one. No difference in how we budgeted that one as of yet.

Okay. Got it. And then just a follow-on to the change in the spread methodology. Do you have the number handy for what 1Q would have been under the old methodology just so that we can kind of compare to what we had in our models?

Sure. Happy to. Angela here. So on a like-for-like Q1 blended would have been 2%, so a little bit higher than on all lease. And the components are new lease will be negative 1.2% and renewal will be the same, 3.9%.

Our next question is from Jamie Feldman with Wells Fargo.

So I appreciate the color on blends in 1Q across the regions and even in April. Can you talk about new versus renewal in April? And then also for 1Q, can you talk about new versus renewal across the regions?

Sure, happy to. So in April, I'll start with April, new versus renewal, let's see. New is -- where to go. Hold on, James, I have it somewhere. Here you go. New is about negative 90 basis points and renewal is about 5%. So that takes April to 3.1%. And on a regional basis, Northern California, once again, the shiny star with the blend at north of 5% and followed by Seattle with a blend north of 2% and Southern California around 1.5%. So that gets you to that 3.1%. So it's generally playing out as we had anticipated. And I know I had guided to, for the full year, renewal around 3% to 4% and new around 0% to 1%. And all the markets are pretty much coming in, in line with the exception of Northern California outperforming.

Okay. And there's been a lot of kind of political tax headlines across some of the West Coast markets. I mean any thoughts or any feedback from tenants if there's any implications to demand? Or it sounds like you're feeling pretty good about the job market and job postings, but any color or conversations with your peers about how people are thinking about the political environment?

Yes, that's a good question, and it's so hard to predict, and it's just too early to know how this will play out. There's the wealth tax that is probably what you're referring to, but at the same time, there's also what we're seeing is a lot of opposition to it, and there's actually a counterbalance measure to advocate responsible expense management rather than imposing more taxes. So I think this will -- we just need a little more time to see how this plays out. But we've not seen any impact to our business, and we've not heard from others about having a direct impact to Essex or multifamily directly.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Could you guys speak to affordability within Northern California? And just given kind of the optimism that you highlighted around job trends and supply conditions, I guess, what the runway looks like for you to continue to push on blended lease rate growth within that region?

Austin, this is Rylan here. I mean this has been a key component of our fundamental thesis on Northern California for the past several years. You've seen significant steady increases in household income growth over the past decade continued through COVID. So as it stands today, our current rent-to-median income ratios in Northern California stand at around 21.5% compared to a 20-year average of almost 26% and a historical peak over the past 20 years, closer to 32%. So there is significant rent upside on those metrics alone to get back to a point that's more in balance or closer to those historical peaks. So again, it's not the primary driver, but it is a fundamental thesis that we feel very attractive as it relates to Northern California. Wages continue to increase in these markets. And yes, again, I think the consumer is feeling very healthy in Northern California in particular.

That's helpful. And then just switching maybe to Southern California. I mean, last quarter, I think you indicated maybe it was L.A. specifically that conditions were stabilizing and maybe we're seeing sort of some early signs of rent growth improving. What's sort of the latest thoughts and outlook for that region as well?

Yes, Austin, good question. L.A. is progressing at a glacial pace. It continues to be our most challenging. So for example, if we excluded L.A. portfolio, our April new lease rates actually would be 180 basis points higher. It will flip to 90 basis points positive. Having said that, we didn't anticipate things to move quickly. We expect the progress to be slow and choppy, which has been the case. And so we don't get too caught up by short-term numbers because you'll see puts and takes. For example, if you look at economic occupancy compared sequentially from fourth quarter to first quarter, it's a slight decline. But if you look at blended, it actually went up by 70 basis points. So you're going to see that dynamic to continue to play out. But the net-net is that this market is stable. We are -- we've seen the trough, and there's now -- it's trending better, but just slow.

Our next question is from John Kim with BMO Capital Markets.

We're halfway or half an hour into this call, and I don't think you've mentioned AI. So I'm wondering if you feel like you're getting a direct benefit or you a direct beneficiary of AI job growth? Or is it more indirect for you or more moderate given most of your assets are in Santa Clara and San Mateo County. I was just wondering if you could just comment on if you're seeing a lot of tenants in your market employed by AI companies.

Sure thing, John. I do believe that we are getting a direct benefit from AI, especially as you get closer to San Francisco. But more importantly, what we don't have clarity on is all the start-ups that's happening because of AI, and that is throughout our markets. And if you look at the strength of our market, while downtown is doing strong or doing well, it also is still in recovery because it recovered later than the Peninsula. And so we certainly anticipate that benefit of AI to continue. And more importantly, we are also seeing a lot of these large AI companies expand to the Peninsula as well. So over the long term, I think all of our markets will continue to benefit, particularly in the suburban markets.

Okay. And then I wanted to ask Jana's question maybe a little bit different way. But looking at your lease growth under the old definition, you had a peak in the second quarter and a deceleration of 70 basis points in the third quarter. Under your new definition, that drop-off is steeper. It's 130 basis points. So do you see that a similar dynamic occurring this year? Or do you think this -- the seasonal trends will be different and that drop-off would be more moderate?

Yes, John, that's a good question. Big picture from -- when you look at all lease perspective, it's going to be -- you're going to have more variability. Now I don't know the exact magnitude at this point because we are just starting to enter into our peak leasing season. But it wouldn't surprise me that, that drop becomes more significant because keep in mind, all leases means you're going to have different terms, so it's going to just have a lot more noise in it.

Our next question is from Alexander Goldfarb with Piper Sandler.

So 2 questions. The first is on Seattle. We sort of hear different things like East Side, super strong, Seattle CBD softer. Certainly, on the office side, we hear that and on the apartment side, it sounds like the same, but yet there's a lot of job growth out there, especially on the East Side. So can you just provide a little bit more color on how the market breaks out? Seattle CBD would certainly seem culturally to be a little bit more exciting than maybe sort of the 95 Bellevue. But can you just provide more color of how the residents are looking at the broader market and how you guys are thinking about where you want to either own more assets, divest assets, et cetera?

Alex, yes, it's a good question. With Seattle, it's a combination of 2 things. It's demand and supply because Seattle historically generates more supply than California. So it's the impact of those 2 playing out that then drives the rent growth. So East Side has performed better than CBD, although not by a huge margin from what we're seeing. But over the long term, East Side has historically outperformed mostly because it has a strong employer base, but lower supply. And we do expect that to continue. And as far as generally speaking, this is a market that has greater highs and lows because of supply, combination of supply. And so with first quarter, demand was soft, and we anticipated that. So we -- the performance was pretty much in line with our expectation.

Okay. And then the second question is, and obviously, looking at public information, but Camden has their portfolio out there for sale. You guys obviously look at everything. Are you -- the interest that you hear that they're receiving, is it what you expected? Or are you surprised by maybe the number of people who are coming to look at the portfolio? I'm just trying to get a sense of the appetite for California real estate, Southern Cal real estate, if it's in line from an institutional perspective, if it's more then you're like, wow, there are a lot more people coming or wow, I would have thought more people would have come. Just trying to get a sense for the investment appetite as people look at California versus other parts of the country.

Alex, Rylan here. As you mentioned, we do look at everything in our markets. We're also subject to nondisclosure agreements. So I can't elaborate on details on any one deal specifically. But what I would say is I feel like there has been a significant uptick in terms of capital interest on the West Coast, partly driven by performance issues you're seeing throughout the rest of the country and the relative strength and the forward-looking fundamentals, particularly as it relates to supply as well as some of the demand drivers that Angela mentioned. So I think there's been an increase in capital interest on assets in the West Coast. You've seen this in terms of the cap rate compression we've seen in Northern California. And as we look at the fundamentals over the next several years, I wouldn't be surprised if that continues. So very healthy demand for assets on the West Coast.

Our next question is from Adam Kramer with Morgan Stanley.

I just wanted to ask about renewal growth trends. And I recognize sort of the methodological change here that might be sort of impacting this comparison I'm about to make. But I guess just bear with me. So if I look at Q4 2024 versus Q1 2025, it looks like about a 10 basis point decel in renewal growth. If I look at what you guys just reported yesterday, it looks like it was about an 80 basis point decel this year.

So just wondering, I guess, number one, if sort of the methodological changes played any impact here on just sort of what's happening with renewal growth, maybe there's sort of an operational or strategic change in terms of how you guys are thinking about renewal growth. I just sort of wanted to focus on that piece here today, just sort of that Q-over-Q decel that you reported last night.

Yes. Adam, good question. And as far as our pricing methodology or operating strategy, it hasn't changed. The reporting change to all leases is really a reflection of what -- just to make things easier for comparative purposes for our peers versus our peers. But ultimately, we continue to focus on maximizing revenues, and we don't manage to a specific metric. So what you're seeing on renewal is really an output, not an input.

And ultimately, we can manufacture a high lease rate by reducing occupancy, but you wouldn't want to do that. And just back to the basics, we're running a business here, and the goal is to try to maximize revenues. So I wouldn't get too caught up on the renewal rates. At a minimum, I would point you to look at the blends. The blends have improved, continue to improve sequentially. And ultimately, that is what really hits the bottom line, the combination of your blended and your occupancy.

That's helpful. And then just maybe switching gears to capital allocation. I don't think we've touched on that yet. I recognize there was some buyback activity in the quarter and subsequent to quarter end. I don't think you did much, if any, of buybacks last year, so a little bit of a shift there. Stock has moved a little bit versus sort of the average share price that you bought back at. So just wondering sort of as you sit here today with where the stock is, how do you sort of think about stack ranking capital allocation opportunities? And where does the buyback fit into that?

Adam, it's Angela here again. I do want to point to last year, the environment was different in that cap rate compression has not really take hold, and we were very opportunistic in our capital allocation strategy. And by buying assets before cap rate compression, we were actually able to generate a lot of accretion.

And also, the pricing level was different back then. I'm very pleased with our finance team executing at that $243 pricing on average, that's a terrific execution. So what you'll see us do is we're going to be thoughtful and opportunistic. And at every point in -- when you look at the investment spectrum, we're going to pick our spots. And so that means that there's not an exact price today because the relative value will change based on what's available to us in the future.

Our next question is from Haendel St. Juste of Mizuho Securities.

I wanted to go back to Seattle. Your tone there seems to be more constructive relative to L.A. where it sounds like things will be more challenged for a bit longer. So is your view on Seattle, I guess, the more constructive, more hopeful view tied to that reduction in supply you're referring to? Perhaps are there other KPIs you're watching more closely? I'm curious what those are and what they're telling you? And when do you think we can expect Seattle to track a bit more closely to San Francisco, which historically has shared a lot of the same demand drivers?

Yes. Haendel, yes, I think you picked up on my tone being more constructive on Seattle for a couple of reasons. One, you mentioned on the supply, I think that it certainly has a direct impact. And first quarter, we did expect that legacy absorption for last year is going to have some overhang. And so it's good that we are mostly behind that. But more importantly, as we look at where leases are, while Q1 overall lease rate was negative, the rates actually flipped positive in March and has continued in April. And we know we are aware that because this is our most seasonal market, it could flip quickly. And so the fundamentals are quite sound in this market. And so we do view that it already has started to trend toward what -- at the midpoint of our expectations.

Maybe unfair to ask, but I'll try anyway. Would it be your expectation that Seattle would perform more closely to San Fran next year, narrow the gap?

That's a good question. I have a -- I'm not sure on the exact timing. We are seeing office announcements and expansions into Seattle, and you would expect that Seattle does follow the Northern California market. It's hard to predict the actual timing because once they expand, they're going to have to hire, and we don't know how long that's going to take. I will tell you that at this point, just even on the renewal side, Seattle is starting to catch up to the Bay Area market, which is a good sign. So it tells us that it's going to get there. I just don't have enough data to be able to tell you when.

Fair enough. Fair enough. Second question is on concessions. Maybe some color on where they stand today across the portfolio, how that compares to a year ago last quarter, some context.

Sure. Happy to. So concessions, this -- it's not a whole lot different. So first quarter concession for the portfolio was about 6 days. And last year, first quarter was about 4 days. So it's not a huge variation. I think the largest area is really L.A. continues to be lumpy. And so L.A. concessions this year is a little bit higher than last year, although that's not anything that we're surprised by. San Diego is a little higher because of supply that I talked about, which you would expect. And then the rest of it generally performing in line.

Our next question is from Julien Blouin with Goldman Sachs.

And sorry if I missed this. But on the new reporting last year, was April the highest blend month? I'm just trying to get a sense on that north of 3% for April. Would you expect it to be even higher as we move into May and June?

Yes. Typically, you would expect blends to continue to improve as we head into our peak leasing season. And so on average, you would say we would anticipate blends to peak, say, around June through July, somewhere in that time period. The question here is really the trajectory of that increase. And I do want to say that while we're performing well here, we are still in a soft demand environment generally across the U.S. and with geopolitical uncertainty. So how much that blend is going to increase will have some of that impact.

And one of the reasons why we didn't raise our same-store revenues. We're very comfortable with where we're at. And in fact, our same-store, if it performed consistent with what we had anticipated when we released our guidance, just based on the first quarter results, same-store revenues will be about 15 basis higher. Having said that, when we set our guidance last year in early February, we weren't in a war with a new country. So things are moving around, and there's a lot of noise out there in the broader economy.

Our next question is from Wes Golladay with Baird.

Can you comment on what's going on in Alameda? It looks like it's having a little bit of an acceleration. Just curious if this is more of a concession burn off or a pickup in demand.

Wes, it's a combination of a couple of things. One is that we do have concession burn off. We had talked about supply abating and starting to benefit this year. So concession in the first quarter of last year was almost 2 weeks, and now it's half a week, which is terrific. And we're seeing both rental rates and financial occupancy improve. We're also seeing that there's, of course, the spillover effect that helps with San Francisco performing well. And so there's some demand driver as well. So both of those components are helping Oakland, which is playing out what we had expected.

Okay. And then maybe just one on the financial modeling. Do you have a timing expectation for the preferred investments being redeemed for the second half?

They're expected to be redeemed in the second quarter. I think if you model mid-Q2 redemption, that will get you close on the guidance.

Our next question is from Michael Goldsmith with UBS.

This is Ami on with Michael. We were just wondering, what are you seeing in terms of residents moving in from outside of your MSAs? Has there been any change in either domestic or international immigration?

Ami, this is Barb. Yes, on the immigration front, what we're seeing is domestic immigration within the Bay Area has continued to improve, and it is above pre-COVID levels. And I think that's a function of the demand for tech jobs and tech workers. In terms of international immigration on the legal side, we haven't seen any material change on H-1B visas or anything like that. We know that the H-1B visas for 2027, they've already hit the cap. And so those will all get filled. So overall, it's been a slight benefit on the immigration side to our markets, specifically in the Bay Area and no material change from what we said in the past.

Great. And just a follow-up on some of the questions about the structured finance opportunities. How has competition trended for these deals? And for the deals that you guys look at and underwrite, how far off are you from getting these deals and being the selected bidder?

Ami, a good question. As we've said for the past couple of years, there was a significant amount of capital raised in the past several years to invest in this structure. So there has been more competition. We have seen yields compress. And it's somewhat opaque in terms of like where on specific deals we might miss out. But we're just trying to be diligent and stick to our process. So we still feel it's a relationship business. If you start to see developments pick up, that will create some more opportunities for us. We have a long history in this business. We're viewed as a good partner on the preferred side. So we're going to continue to see opportunities, but we're just trying to stay disciplined as it relates to our underwriting process and not chase the market as some covenants get weaker and/or yields compress. We're going to stay disciplined to our return requirements.

Yes, Ami, it's Angela here. Ultimately, there's been a lot of volatility to our earnings because of the preferred book overhang and the size of the preferred book. I, for one -- and poor Barb here has had to deal with the direct impact, and we are quite relieved that this is the last year of that volatility. And so going forward, what we have been is much more selective and in an effort to maintain a size that's going to be accretive to the portfolio and our business but not create so much noise that it becomes a distraction to our business.

Our next question is from John Pawlowski with Green Street.

On the capital allocation front, assuming your cost of capital stays in a similar ZIP code as it is today, what kind of -- what rough range of disposition volume could we expect this year and then the most likely use of those funds?

John, Rylan here. As Angela mentioned, our capital allocation strategy doesn't change. We're really trying to maximize FFO and NAV per share accretion and improve the growth profile of the company. We have several assets that are currently on the market. So we will probably do several dispositions this year, and those proceeds will be allocated to whatever is the highest risk-adjusted return at the time of that. So we have the ability, as we talked about the health of the transaction market, which I think you're aware of, we have the ability to ramp that up and down as we see fit. And again, the strategy has not changed, and we'll continue to do as we have for many, many years.

Okay. But today, given the health of the private market pricing, is it fair to assume that currently the best use of the funds is share repurchases on your guys' math?

I don't think so, John. Once again, it depends on what the opportunity is available at the time. And so I would point back to the transactions that we completed, over 60% of it was off market. And so we certainly have an incredible network and extensive relationships and a reputation that gives us an advantage. And the stock price is going to change every day. And so to pinpoint, what we're going to do based on today's stock price is probably not something you want us to do.

John, I would add on that when I look at our menu of investment opportunities today, we've got several development land sites that we're quite excited about. We think these are going to be very attractive risk-adjusted returns as well as our redevelopment opportunities, particularly ADUs. This is a business that we've been ramping up where we're getting 10% return on cost. The per unit costs are a fraction of in-place value. So those are 2 areas that we're going to continue to invest in because the returns, in many cases, exceed the highest risk-adjusted returns.

Okay. Last one for me. Barb, can you talk a little bit about the insurance market, the property insurance market? I think you're expecting maybe a 5% decline on your insurance and other expenses this year. Curious if the market is healing faster and more dramatically than you thought or if that's still a fair bogey.

Yes, John, we actually went to the insurance market and did our renewal for property in December. And so we did see a healthy reduction in our property insurance. And so I do think that market has held up from what we're hearing even today. I know we're, I think, 4 months past or 5 months past the renewal. It sounds like on the commercial side, that is the case. I think if you're talking residential, it's a much more challenging market, but we have seen the reinsurers come back in and the insurance premiums have come down from where they were over the last couple of years.

Our next question is from Omotayo Okusanya of Deutsche Bank. Our next question is from Alex Kim from Zelman & Associates.

I wanted to circle back quickly to Los Angeles and the extent to which the eviction processing time line impacts the pace of improvement. Have those eviction processing time lines improved at all in the first quarter? And when do you anticipate that the supply reduction in 2026 shows up in meaningful pricing power improvement?

Yes, that's a great question on L.A. So delinquency processing or the court processing time has improved over time. It's -- as far as just from fourth quarter to first quarter, it's pretty sticky. It's around 4 months, but this is a huge improvement from -- it wasn't too long ago when it was 6 months and thereafter. And -- so what we would want to see is for that to improve, say, closer to 3 months, that's closer to our long-term average. And that will definitely help on the delinquency front.

As far as pricing power is concerned, we would want that economic occupancy to be at about 95% or better. We are very close right now. We were above 94% in the fourth quarter, and we're still above 94% in the first quarter, although it's a little bit lower than the fourth quarter. But pricing power is -- will be available to us once we hit 95%, and we're feeling good that we're close to it.

Got it. So just taking a bit longer than occupancy returns. That's all for me.

Yes, it's taken longer. But then again, we didn't expect this to happen quickly. We had thought it was going to take multiple years.

Our last question is from Rich Anderson with Cantor Fitzgerald.

Angela, when I was -- I was just reading the transcript from last quarter and you were talking about Los Angeles and you described it as just so close to the magic 95% economic occupancy where things perhaps get a little bit better for you. I know you described SoCal in general is in line, perhaps L.A. in line with your expectations, but deep in your heart, were you expecting more this quarter from L.A. that you didn't get? I'm just curious, and I have a follow-up to that.

Rich, always happy to hold out for you. Deep in my heart, I always hope for better numbers. And I think anybody who works with me knows that we push pretty darn harder. Having said that, the expectations are such. And sometimes things do better. Northern California expected -- exceed expectations and sometimes they meet expectations. And with L.A., I think we have always said that it was going to take a little bit longer and occupancy, once again, it's so close. But even though we didn't see significant occupancy improvement from quarter-to-quarter, which we didn't expect, 70 basis points improvement in blends, that's not bad. I'll take it.

Okay. And then on the Camden process, I don't think you're a buyer, but is there anything about it that's informing you strategically around the area, whether it's L.A., Orange County, San Diego and Inland Empire that they're looking to sell that you're sort of tapping the reception that they're getting, which sounds like it's been pretty substantial. Does it inform you about what you might do as a corollary to the process they're undertaking, whether it's as a buyer or a seller or anything?

Yes, Rich, that's a good question. As far as Southern California is concerned, it's part of our stable or it's a stable part of our portfolio. We have about 40% in SoCal and a little bit more in NorCal, maybe 45%-ish. And that allocation makes sense to us. We're in Southern California because it mirrors the U.S. and with more professional services and lower supply as a whole.

And so other companies are going to make capital allocations differently than us. And I will say that Camden is a good company. It's run by smart people, but dynamics are different, right? Because having a handful of portfolios in a huge region, it's very tough to be efficient versus for us, 70% of our portfolio -- of our properties are within 3 to 5 miles for each other. We can run it incredibly efficiently. And so it's just very different reasons why people make portfolio allocation decisions.

This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Welcome to Citi's 2026 Global Property CEO Conference. I'm Nick Joseph here with Eric Wolfe with Citi Research. Pleased to have with us Essex Property Trust and CEO, Angela Kleiman. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter the code GPC26 to submit any questions.

Angela, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A. And Red is actually on.

Great. Thanks, Nick. And great being here, and thanks for having us. Here with me is Barb Pak, our Chief Financial Officer. And normally, Rylan would be here with us as well, but he's at home having a baby. So we're going to let him off the hook at this time.

So Essex is an S&P 500 company with over 63,000 units. We are the only public apartment REIT that is solely focused on the West Coast of the United States. In our investment strategy we own, develop, operate anything multifamily, we're involved and then [indiscernible] since our IPO, we have delivered one of the best long-term CAGRs and total returns of the [ RE ] sector. And we are pleased to announce that this year is our 32nd year of increasing our dividends consecutively. So this track record is really foundational. It's based on a combination of strong fundamentals and our unique operating platform.

On the fundamental side, California, especially has a widely known characteristic of low supply. And currently, we're at a historical low. We're only building at about 0.5% of total supply to stock. And this is total housing, so it includes single-family as well. This is incredibly compelling because the downside risk is very low. But on the other hand, we have demand catalysts, especially in our northern region, from the technology sectors, and it's over multiple cycles, this has continued with most recently, artificial intelligence, spurring demand and job growth. And we expect that to continue to occur in the foreseeable future.

And lastly, what's unique is our operating platform. We operate in a collections model where we're operating about 10 to 12 properties as a single business unit. This gives us fantastic marketing, leasing and customer service economies of scale and efficiency. So our controllables is -- expense and expense per unit or even a percentage basis is significantly better than our peers.

And the one key compelling reason to invest in Essex today is that we are still in the recovery phase. So if you look at the post-COVID recovery cycle, Northern California, particularly Santa Clara, or San Jose markets started recovery only in 2024. San Francisco followed in 2025, but we are still well below our long term [indiscernible] of rent growth in a cumulative way. And so with historically low supply, fantastic affordability because income growth has been outpacing rent growth, and the demand catalysts ahead of us, these are compelling fundamentals for our markets and for Essex.

Great. I'll start off, and if I lose my voice, then somebody else, please help me out. When I look at Essex over your history, and this is in a lot of your presentations, but you've had a great rate of core FFO growth. I think now what people are looking at and trying to understand is whether you can continue that when you have, perhaps, some increased regulatory burdens in California? Maybe you can say whether that's true or not.

But then you also have artificial intelligence and other things that people are questioning whether job growth just going forward is going to be structurally lower. So my question to you is sort of what gives you the confidence that you're going to be able to continue this track record of great growth?

That's a great question. It's actually an important strategic debate for us because we have a long view of our markets. And we are not in the West Coast because we have to. It's really because it has generated the best -- one of the best long-term [ growth ]. And as we look forward, while regulatory is probably more challenging in California than other parts of the U.S., there's also benefits of regulation. For example, low supply. And when you're competing with a lease-up that's giving 2, 3 months concessions, forget about regulation, you're a sitting duck for a long period of time.

On the flip side, what we're seeing on the regulatory is that the environment has remained quite stable. The November election was a moderate sweep which is great for the citizens of the state of California. But currently, there's always rhetoric and there's always noise, and that will continue. But in terms of the actual public policy that's getting to the front of the committees that's getting passed, we're not seeing anything that is on the extreme or that gives us concern. And so the political environment actually from our experience is more stable now than it has been prior to COVID.

As far as jobs and AI is concerned, that is an interesting dynamic because we do see AI disrupting certain companies and some of them are going to be software companies. But that disruption in jobs is also getting absorbed, or offset by the companies that are new companies that are being created, or the growth in AI companies. What we're seeing is the two largest AI companies. They have continued to add jobs, and we're seeing new claims, unemployment claims or continuing claims to remain at an all-time low. So that tells us that people that are losing their jobs in our markets are getting rehired quickly.

So then the question is the long-term durability of AI as a catalyst for job growth. There's actually, in our view, it will play out in two ways. One is that in the near term, say, 3 to 5 years. We expect that AI will be a net, or neutral add to jobs. And the reason is because AI is still in its infancy and the need for developers is significant, for the right kind of developers, but also it's facilitating the number of start-ups that we've never seen before. That was not possible. But now because utilizing AI, they can. And so office space that are, say, around 5,000 square feet are getting absorbed in an accelerated rate. And we are seeing VC funding almost doubling this year. And so that inerts to the tailwind that's still possible with AI.

So what happens after that? It depends on what you believe. So there are two schools of thought. One is AI will take over and everybody will lose their jobs, and machines will do everything. In that case, after the run, you're right. We will be looking at a very anemic economy, but not just for Northern California. This will be all of U.S. and probably globally. The other school of thought is perhaps something else will happen because the former means technology and innovation stops with AI. So it's done, it's over. That seems like a stretch to me.

Our belief -- and we've seen this play out in multiple cycles, over 3 to 5 cycles at this point, that there will be something else after AI. We don't know what it is, but what we know is that 20% of the jobs today did not exist just 5 years ago in 2020. So there are possibilities out there.

And so part of your point there, I think, is that, look, if AI is as disruptive as people believe, it's not like this is a California issue, West Coast issue. This is a everywhere issue. So the idea of diversifying away from that into other markets, it doesn't really eliminate that risk, I guess, if I'm hearing you correctly. Because I think some of your peers would say, look, we don't know the answer to a lot of these questions. We actually don't even know where our customers are really going anymore. We thought it was all Coastal markets at one point. Now they're going to Sunbelt markets and in some instances. So we're just going to diversify, operate things really well. But your point is that you can't really diversify that risk way, if I'm hearing you correctly?

That's correct. And it's because technology is now everywhere. It's ubiquitous. And AI environmental rate is very high. Adoption rate is low because it's just not ready, and that's what I mean by -- in its early stages. But this will become more of a global issue. And at the end of the day, we're [indiscernible] business here. Where is money going to go? It's going to go where there's innovation and wealth creation, and that's going to continue to be in California. It's the same logic that we heard when Internet of Things, or even social media, we can proliferate it. Everybody said, well, you can go anywhere. Why do you need to stay in Northern California? It's sticky. And we have on one of our presentations, we show that Walmart, the all-time low-cost provider, just opened another office in Mountview. They could be anywhere but they chose Northern California for a very specific reason.

So can we talk about what you're seeing, I guess, in real time? My understanding of most companies' pricing systems, revenue management systems, that sort of gives you a view on where your occupancy will be, where your sort of lease risk is 30 to 60 days out. Can you talk about what your system is telling you now in terms of -- maybe the early part of the peak leasing season where pricing is going? Is it [ progress ] as planned? Are you seeing some pockets of strength, pockets of weakness?

Yes, that's a great question. From just a current view perspective, what we're seeing is pockets of strength. And no surprise, mostly in Northern California, which obviously wouldn't happen if everyone is losing your jobs. So -- and in certain pockets of east side of Seattle. And where we are tracking right now is that we are slightly ahead of plan, don't get excited. It's 2 months into the year. But it's a good sign. It's a good start. Northern region slightly ahead and Southern region playing out on plan.

And when you say we're 2 months into the year, I mean, I guess, for 2 months -- but you do have fairly good understanding of where March will be, you have okay understanding of April. Is that misplaced to say?

Yes, I think that's a fair point. And we were -- because we could see by our acting rents, or how we're sending out renewals. And it's consistent with what we had communicated in our first quarter earnings call. We're sending out renewals around 4% to mid-4%. And we're negotiating, of course. That always happens. And landing, say, around mid- to high [ 3s ], depending on the market. So like I said, slightly ahead of plan in some cases, but generally on plan.

And maybe you could just talk about demand for a second, how you measure it, and I'm partly asking the question because the way that people search for things is changing a bit. Like if I'm looking for something now, I might just go into Gemini and just say, like give me the best 4 apartment buildings around this price point. And then I go directly to your site afterwards as opposed to, maybe, Googling it and clicking on and all that.

I guess how are you measuring demand internally when you're meeting each other and you're having your weekly meetings or daily meetings about how things going, what are you talking about? And have you seen sort of a change in how you measure demand based on kind of a different way that people are finding you now? Maybe they're finding you the same way as they were a year ago?

Yes. No, that's a good comment in terms of the consumer behavior. There has been a change and of course, more active usage of Gemini, or cloud, or some of these other applications. We have also tilted our marketing efforts to make sure that we're capturing the broader segment. And we started doing that about, I want to say, 1.5 years to 2 years ago. And so in terms of how our customers are getting to us, they're still able to get to us regardless of how they're doing the search.

And in terms of our metrics, we continue to look at closing ratios and -- because traffic is really driven by your marketing efforts. So it's really closing ratios. And of course, how much we're negotiating when we're sending out asking rents. So when market is really, really strong, which is not right now, we're negotiating very, very little. Maybe from zero to, say, 30 basis points. When it's a more normal level, which is consistent with current level, we're negotiating, say, between 30 to 60 basis points. And when its soft, it's between 75 to 100 basis points. And we're right in that middle zone currently.

Okay. So you're putting out renewals sort of in the 4% to 4.5% range, and there's like you say, 50 basis points of negotiation or so?

Yes. Yes. So that lands you have around high 3s, depending on where your starting point is. Or [ 4%, 4.5% ].

And I guess in terms of markets, L.A., its supply is coming down. It feels like it's maybe on the cusp finding some pricing power. It's obviously an important market for you as well as your peers. I guess, most people are sort of guiding, I don't say conservatively, but guiding to muted growth there this year. I guess when do you think we'll sort of know whether this market is finding a bit more in power? Do you think we'll have a good sense for it around May or June? Or do you think it's going to take longer to sort of work through the bad debt situation, and some of the other issues going on in that market?

Yes. In terms of timing, Southern California tend to peak a little bit later than Northern. Seattle is usually early June. Northern California, early July. And Southern California, say, later in July. So that's the timing framework. But in terms of our view, Barb has some good data on that.

Yes. I think you're correct in terms of how we underwrote the market this year and guide it. We did guide conservatively. It is expected to be our lowest performing market for the year. That said, we did see a meaningful increase in our occupancy in the fourth quarter. And when you look at occupancy net of delinquency, what we call economic occupancy, we're at 94.7% in the fourth quarter, 100 basis points higher than a year ago. And that's a combination of the market improving from an occupancy perspective, but also from a delinquency perspective.

We're not quite back to our long-term historical run rate on delinquency. We're about 50 basis points shy of that. It's really tied up in the court. So courts are still a month to 2 months slower than they were historically. But we are continuing to make good progress. What we've said in the past, though, is we need to be above 95% economic occupancy to really have pricing power. We're still short of that. And so that was part of our view of guiding conservatively.

But could we get there this year? Potentially. We don't need a lot more incremental demand, given supply is coming down pretty significantly this year. It's really when is that -- what is the job catalyst. That's a little harder to discern in L.A. than it is in our Northern regions.

Got it. And then maybe on Northern California. When you see an announcement like from block, I'm just using an example, 4,000 employees, is that like sort of irrelevant for your portfolio? I mean, when you have some assets in Oakland, 4,000 people being laid off, does that actually impact things on the ground? Or is that so small that you wouldn't really see much, unless you just have like your buildings like right next to blocks headquarters or something?

We haven't seen a significant impact, but I think it's primarily because a lot of those jobs are remote. And so it's not going to impact that [Audio Gap]

Got their options before telling you?

It's actually pretty quick and more often than not, we've seen ahead of the public announcement because they probably know, or have some inclination. We see typically people make housing decisions 45 days in advance of an event. And if they're not sure, they probably just won't renew. Or they would go month-to-month until they have better clarity. And so you actually kind of get more of a leading indication or real-time right way.

Got it. And so the number of people that are either breaking leases today or telling you there's an issue just similar as to what it normally is. There's no?

We have not seen an elevated trend in leak breakage currently.

And then maybe on Seattle -- and obviously, everyone feel free to ask questions on the live QA if you want to not do it through the microphone. But on Seattle, you talked about how it's one of your more volatile markets because of supply, and how California historically just has had the same supply issues, which is what makes it bit more consistent of a grower.

I guess what keeps you committed to the Seattle market in spite of that supply fluctuations, the greater volatility? I think you're also seeing some pretty large increases in property taxes there. So what keeps you committed to that market?

Yes. With Seattle, what has been compelling to us is if you just step back and look at it from a long-term CAGR perspective, it's still -- it's more volatile, but from a long-term growth perspective, it's still a great market. It's better in Southern California, for example, from a long-term CAGR perspective. If the Bay Area is at a [ 4 ], Seattle's [ 3 ]. The U.S. is [ 2 or sub-2 ], and Southern California is about [ 2.25 to 2.5 ]. Seattle has a couple of things going forward. Even though it is more elevated in supply, we're talking 1 to 1.5% generally, is a total new supply as a percent of stock.

Compare that to other markets, that's generating [indiscernible], it's still a market that can quickly absorb the supply pretty efficiently, say, within 6 to 9 months. The reason is because it has strong demand catalyst. It does have a benefit drafting off of technology sector, and we're seeing that already. We're seeing AI taking a foothold in Northern California. And now it's starting. We're seeing green shoots in Seattle. So ChatGPT announced an office in the East Bay, and there are several other companies. It's in one of our slides, you can see the map there. And so there's actually great demand drivers in Seattle that makes it a great market to invest in.

Maybe switching over to capital allocation. I'll call Ryland after and tell them congratulate -- hopefully, congratulations, everything is going well there. Is there any goals, I mean, that Rylan you all have set for this year? Like what we would like to see by the end of the year in terms of -- I know you don't guide to certain amount of acquisitions, but you probably talk internally about things that you would like to accomplish if you can, if it makes sense, if your cost of capital supports it. So maybe talk through sort of what the goals are for this year?

Yes. We -- I mean, you know us for a long time. We don't tend to deal in absolute. So you're not going to hear from me that we're going to buy $1 billion. But what you will hear from me, and in my conversation with Rylan is, that's focused on investing in such a way that we can generate accretion. And so if you look at what we've acquired, we acquired over $2 billion over the past 2 years. Rylan has done a terrific job and the team has as well. And the track record stands. Those deals have all been accretive.

We've either sold or used internal cash flow in a way that provided not just FFO accretion, but also NAV accretion. So that's the goal, and that's the [indiscernible] he has to hit. He has to invest in an accretive way. And if that means -- at some point, the stock buyback is more compelling. Well, you've seen us do that, too. And so everything is on the table, but we certainly did not invest [ issuing ] stock in the past 2 years.

And maybe on the buybacks, I think I'd asked you kind of like a version of this question, but I guess I still don't completely get it because maybe our valuation is just completely wrong. But I think most people have been trading somewhere between like a 5.5%, 6% implied cap rate. I think you've said on the calls that assets are trading from a buyer's point of view. So I understand there's a mark-to-market on the taxes, but somewhere between a 4.5% -- kind of 4.5%, maybe even lower. If there's still -- if there's that difference in cap rates, how does it not make sense to sell some assets and buy back stock?

That's a great question. And you'll see that we did not transact in 4.5%. And obviously, I'm not going to comment on what's going on currently in the ground. And -- but what we have done in the past is whatever the buyer cap rate is, and we overlay our operating platform. So we do get immediate accretion. You don't have to wait. We ended up close to over 5%. And during those times, our stock, we're trading at around 5.5%, maybe [ 5.7% ]. Well, let's do the math here.

We're buying a 5%. We're growing a long-term CAGR in Northern California 4%, that's a 9% total return. That math works all day long, much better than a stock buyback. Now what we will do moving forward is we're going to go through the same excercise, with the same discipline. What's the going in yield? What's the growth? Where's the stock? And where can we generate the most accretion, and we will execute that way.

Got it. And so Northern California, you think guys like a 4% type of long-term growth to it?

The long-term CAGR for Northern California. Yes, that's proven out to be above 4%.

So that would compare to like in L.A., where you'd put like a 2.5% on or 3% or something like that?

Probably closer to 2%, [ 2.25-ish ] for L.A.

In all these conversations. So I mean you probably spent way too much time talking about AI for the better part of the day. Are there any of these sort of conversations impacting private pricing at all? So like when you go into conferences and you meet with the people that are deploying capital either in California, other places, is this top of mind for them?

I would assume it would be, but it doesn't seem to be showing up much in price. Like it's very obvious in the public market, that there's an element of discount for this. But it doesn't seem like there is one in the private market. So, like, why is that the case?

Let me make sure I understand your question. Are you asking why private buyers are still buying or they're not buying?

Well, I guess what I'm saying is this -- I mean, I assume that they just have to put money to work and maybe they're getting good enough debt rates that they're getting positive leverage or something on it. I guess my point is that when you think about the disconnect between public and private, is this something that is top of mind for the private investor right now? The impact that AI can have on job growth, or it's just not like this conference where you're getting asked about it probably every session?

Well, it's interesting with the private market. First of all, their motivation to deploy capital is really driven by what they've raised. And so private investment vehicles typically have a [ 3 ] deployment investment period. Which means they have money left over from the past 2 to 3 years, or even last year capital raise, and a lot of them also locked in financing when it was still low. So it's a different cost of capital structure.

In terms of the AI conversation, we're not seeing that as a deterrent. In fact, it's a -- if you look at where the most aggressive bids are happening, it's in the Bay Area. And because the view is there's growth coming and catalyst for demand.

Maybe just sticking on AI, but more micro, more Essex specifically. Where are you seeing the opportunity to deploy and use AI within the organization? And how do you think it could drive either efficiencies or better processes?

So we have rolled out AI leasing capabilities. So on the sales front, we piloted that last year. We had to make some tweaks because the thing is off the shelf ready. And -- so that is one obvious area.

In terms of our data analytics and reporting those functionality, we're seeing some near-term benefits. Having said that, we're also not seeing that as a reason for attrition. We're piloting several other AI functionalities in the maintenance area, in procurement, and some other customer service and marketing initiatives. So doing a lot, but I don't think we're all that different. Most companies are -- have a high experimental rate, but a low adoption rate. And so we're going to continue to do that. But yes, near term on the sales front, that definitely.

Are you excited about -- I mean that makes a lot of sense. Are you excited about the opportunity. I mean it makes sense that you're going to try a lot of different things and see what works. But do you think there's a meaningful ability to drive either operating margins, or G&A savings at an apartment company?

Well, we're excited about the possibility, but it's really how you use it. So it's not just AI. It's how you run the business using AI. It's kind of like, I will make it analogous to revenue management. Everybody has it, but that doesn't mean everybody knows how to optimize their total revenue. So it's all about how you use it.

Does that lend itself more to partnering or building yourself or buying, I mean, kind of the revenue management makes a lot of sense, right? You buy it, but then you really customize it for kind of what you're looking to do? Is that kind of a similar idea for how you think AI plays at?

Yes, it's a combination. And so there's nothing off the shelf, you could just fly and plug it in. But we're a real estate company. So we're not set up to build. And what we would do and what we have been doing is looking at products that's close to what we need and customize it. And generally, these things takes a year or 2 to get it right. Because once you customize it, you have to pilot it and work all the kinks.

Maybe on the preferred. I think understand that it creates some earnings dilution this year. I guess your point on the call is, I guess, first, that beyond this year, we're not going to have this issue again. I guess, first, I want to confirm that. And then second, what type of returns would you want to see if you were to get -- try to grow your preferred book? Like what would you need to see to actually want to grow it?

Yes. So that is a good question. And your point is correct. Like the bulk of our preferred equity book has rolled off or we're not accruing on it. And so the headwinds that we're experiencing this year will not carry forward into 2027. So we do expect 180 basis points of headwinds this year and then -- and we had a lot last year. So given the bulkiness of the maturities over the last 2 years, which is about $400 million. So that is behind us. We'll have about $170 million in book that we are accruing on. And so the amount that we're going to have experiencing for the foreseeable future is pretty low in terms of redemption headwinds.

In terms of growing the book, we're open to that if we can find the right risk-adjusted return. And it's going to depend on where we are in the capital stack and a variety of factors. So if it's a development, we're going to want a higher return. And if we have to go up to 85% in the capital stack, it's getting north of at least 13% to 14%. So it will depend if it's stabilized versus development and then where we are in the stack.

And for the preferred that's maturing soon, where are you in discussions with that sponsor? I think you said that you're kind of nearing the maturity date. So curious where the conversation stands there?

They're still ongoing. And so I don't have an update with you for you on that. We're not at maturity yet, so we're still working through it.

But the range of options would be effectively late. They put in more equity, or you take control over the asset and -- like what would be the...

We could do an extension, a short-term extension. They could put in more equity to get that extension. We could take back the asset. So there is a variety of potential outcomes. It's just too uncertain. So that's why we guided to what we did, where we assume no redemption proceeds back on the two assets. There's really two assets maturity in 2026 that are the bulk of it. But the guidance is derisked. There could be upside depending on the timing of these negotiations and what the final outcome is.

Thank you. So we do have a rapid fire to end the session. What will same-store NOI growth be for the apartment sector overall next year in 2027?

For the sector, we're going to say 2%.

And then a year from now, will there be more fewer of the same number of public apartment companies?

Well, there's not that many of us left. So I'm going to go with same or less.

And I guess, is it the Sunbelt dragging that number down for 2027?

Most likely, yes.

Okay. Thank you.

Thank you.

Thank you.

Good day, and welcome to the Essex Property Trust Fourth Quarter 2025 Earnings Call. As a reminder, today's conference is being recorded.

Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC.

It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.

Good morning. Welcome to Essex's fourth quarter earnings call. Barb Pak will follow with prepared remarks, and Roland Burns is here for Q&A. Today, I will cover highlights of our fourth quarter and full year performance for 2025, provide our outlook for 2026 and conclude with an update on the transaction market.

'25 played out generally in line with our initial macro forecast for the U.S. with job growth moderating throughout the year. Within this environment, we achieved full year same-store revenue growth at the high end and FFO per share growth above the midpoint of our guidance range. I'm particularly pleased with the well coordinated efforts between our property operations and corporate teams to drive results, especially in other income growth and improving delinquency recovery to near pre-COVID levels.

From a market perspective, two key factors contributed to our performance in 2025. First, Northern California outperformed expectations as a result of expansion in the technology sector, favorable migration trends and limited housing supply. Second, rent growth across most Essex markets outperformed the U.S. average, demonstrating the significant advantage of limited housing supply even in a soft employment environment.

Turning to the fourth quarter property operations. The results were generally consistent with our expectations with 1.9% blended lease rate growth in the fourth quarter. Occupancy increased by 20 basis points sequentially to 96.3% and concessions averaged approximately one week, which is typical for this period.

Within the portfolio, Los Angeles delivered the best occupancy improvement, increasing 70 basis points sequentially, a good indication that this market continues to progress towards stabilization. As for regional performance, Northern California was our best region followed by Seattle then Southern California.

Moving on to our 2026 outlook. Consensus expectations for the broader U.S. point to slow but stable economic growth. Further, employment trends are expected to remain consistent with what we have seen recently with major employers maintaining a cautious approach to hiring. Against this backdrop, our base case assumes the current level of demand continues in 2026.

On the supply side, we forecast total new housing supply to decline by approximately 20% year-over-year. Accordingly, we anticipate steady West Coast fundamentals to deliver solid blended rent growth above the U.S. average and at a level comparable to 2025 with the Essex markets to be led by Northern California, followed by Seattle and lastly, Southern California.

In terms of scenarios, local uncertainty continues to weigh on the economy and job growth and represents the primary driver of low end of our guidance range. This uncertainty has contributed to a measured hiring environment, which has tempered near-term acceleration in demand. On the other hand, we see a path to the high end of our guidance range if hiring trends improve modestly. Given historically low levels of new housing supply across our markets, even a small inflection in demand could have an outsized impact on fundamentals. While broader expectations call for mute hiring internationally, we believe Northern regions are better positioned.

Activities in the technology sector remains constructive with companies expanding office footprints and investments in artificial intelligence continuing. In addition, these markets should continue to benefit from ongoing return to office enforcements. In summary, the favorable supply backdrop across West Coast multifamily markets combined with the continued recovery in Northern California, reinforces our outlook for our markets to outperform over the long term.

Turning to the investment market. Activities in our market remains healthy with $12.6 billion of non-portfolio institutional multifamily transactions in 2025, a substantial increase of 43% compared to 2024. Improving operating fundamentals and minimal forward-looking supply deliveries led to a significant sentiment shift to the West Coast, resulting in deeper bidder pools and cap rate compression, especially in Northern California and Seattle. Generally, cap rates for the highly sought after submarkets, which represents approximately 1/3 of the total deal volume occurred in the low 4% range and cap rates for the remaining 2/3 occurred in the mid-4% range.

Lastly, Essex has been the largest investor in Northern California over the past two years. With the majority of our acquisitions transacted ahead of the cap rate compression, resulting in significant NAV appreciation. Looking forward to 2026, we will continue to evaluate all opportunities and allocate capital with a disciplined focus on creating shareholder value.

With that, I'll turn the call over to Barb.

Thanks, Angela. Today, I will briefly discuss 2025 results, the key components to our 2026 guidance, followed by comments on funding needs and the balance sheet. We are pleased with our fourth quarter and full year results as we were able to achieve same property revenue growth of 3.3%, which was at the high end of our most recent guidance range and 30 basis points ahead of our original projections for the year. The outperformance in the fourth quarter was driven by lower concessions, higher occupancy and other income.

Turning to the key drivers of our 2026 outlook. The components of our full year same property revenue midpoint of 2.4% is outlined on the chart on Page S-16.1 of the supplemental. There are three key drivers of revenue growth this year. First, as anticipated, our earn-in based on our 2025 results will contribute 85 basis points to growth. Second, our guidance assumes a blended lease rate growth of 2.5% at the midpoint. As Angela noted, our outlook for market rent growth is based on tempered job growth, which is partially offset by a meaningful reduction in new supply. As such, this should allow us to achieve similar blended net effective rent growth as last year. And third, we expect 30 basis points contribution from other income.

Moving to operating expenses. We forecast 3% same property expense growth at the midpoint, which is the lowest rate of expense growth we have seen in several years. There are a couple of factors contributing to this outcome. First, we expect controllable expenses to increase around 2%, which reflects the continued benefits of our operating model. Second, we expect insurance costs to be down around 5% on a year-over-year basis as the property insurance market has continued to improve over the past year. These benefits will be partially offset by increases in utilities and property taxes. As a result, same-property NOI growth is forecasted to increase 2.1% at the midpoint. As for 2026 core FFO per share, we expect growth to be flat on a year-over-year basis. The drivers of our forecasts are illustrated on S-16.2 of the supplemental.

While we expect solid top line performance and growth in net operating income, it is being offset by recent and expected redemptions within our structured finance portfolio, which are contributing to a 1.8% headwind to growth. This reduction to FFO reflects a conservative modeling approach, which excludes any redemption proceeds and minimal income from the 2026 maturities. We expect 2026 to be the final year of structured finance-related headwinds due to the substantial reduction in the size of this book over the past several years. We are pleased to have strategically reallocated redemption proceeds into higher growth fee simple acquisitions in Northern California, which provides better risk-adjusted returns.

Lastly, a few comments on the balance sheet. We are well positioned from a funding perspective as our free cash flow covers our dividend and all planned capital expenditures and development plans for the year. In addition, our finance team has done a great job proactively reducing our near-term maturity risk, with a portion of our 2026 maturities accounted for via the bond offering we did in December with strong credit metrics over $1.7 billion in liquidity and ample sources of capital available, the company is well positioned.

I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Jamie Feldman with Wells Fargo.

Great. Maybe just -- I mean there's been so much movement in the tech market in the last couple of weeks. As you think about demand for your assets, especially in Northern California, I mean what are your latest thoughts on what we should be watching in terms of where the risk is, where the growth is? And what are you seeing on the ground in terms of changes? And I guess we could ask the same question about Seattle.

Jamie, thanks for your question. Northern California is in a very interesting position at this point in time because we had talked about the potential recovery and it's finally starting to take hold. So it's an exciting time for us from that perspective. And in terms of -- we're watching a couple of things. I think it's fair to acknowledge that the jobs environment broadly across the U.S. has been soft, and that relates to my comment on Seattle in a second. But in Northern California, it's done fine. And we look at a couple of things, job openings of the top 20 tech companies. And from that perspective, it's done well in that when we looked at 2025, it ticked up above pre-COVID levels around the second quarter. But then if we treat it in the fourth quarter. Though it's not too inconsistent from a seasonal norm. But it is an indication that this market is not robust when it comes to jobs, but it is stable and it's doing fine.

And so with that backdrop, when we look forward, we are seeing a couple of activities that gives us encouragement that this area is going to continue to improve. And when we look at, for example, VC funding in the fourth quarter, it's at the highest level for over 4 years, and it increased by 91%. So almost doubled quarter-over-quarter. And over 65% of that spending is in the Bay Area.

Now that doesn't mean that there's going to be job acceleration tomorrow, but it is a great sign of growth to come. And when we look at office absorption, another indicator, we're seeing positive absorption for the first time in all three major markets in our northern region, San Francisco, San Jose and Seattle. So that's the backdrop.

In Seattle, I have to acknowledge that in the fourth quarter, it was soft. It performed -- they did not achieve the expectations that we had planned in terms of the rent growth and the lease numbers. We had several corporate announcements in terms of layoffs. But having said that, looking forward in Seattle, we still like the fundamentals. Supply is down by 30% in that market. And other than in addition to the positive office absorption, we're also seeing additional leasing activities with -- by OpenAI. They quadrupled their space in Seattle. And so with -- and additionally, we have return to office tailwind in Seattle. Amazon starts enforcing return to office in January, Microsoft starts return to office in Q1.

So there's a path to the high end of our range. And I just want to note that with the backdrop of the employment landscape, there is an element of unpredictability with that because it's highly influenced by public policy and public policy so far has tempered job growth. And so that's an environment which we are in, and we do have to be sensitive to that.

Okay. And then can you talk about what you're thinking on new and renewal blends for the year?

Yes, of course. So we're assuming that our blends at this point is going to come in similar to 2025 at about 2.5%. And that's because, as I mentioned earlier, we're assuming that demand is generally flat going forward.

So what that means in renewal is that -- and I'll give you a range because that's probably more relevant because different markets behave differently. So under the new leases, we're assuming somewhere around flat to 2% and the renewals around 3% to 4% for the year. So not too different from last year.

Our next question comes from the line of Nick Yulico with Scotiabank.

I guess, first off, I just wanted to ask about Los Angeles. You talked about occupancy picking up there in the fourth quarter. Where is that market now in terms of where you're hoping it to be on occupancy and to be able to drive rental pricing a little bit better this year. Maybe you can just talk a little bit more about how you're expecting L.A. to perform this year.

Nick, yes, on L.A., what we've seen is a steady increase or improvement in occupancy. So that's good, especially -- we all know that the jobs environment has been quite soft. And where we are today, if you look at economic occupancy, which is the financial occupancy we report less than delinquency. In the fourth quarter, this market sits at 94.7%. So we're just so close to stabilization of 95%. And compared to last quarter, I'm sorry, compared to third quarter, 94% economic and, of course, second quarter, 93.8%. So it's been steadily improving, which is fantastic. And what we're seeing next year in 2026 is that supply decreases by 20% in this market. So we are hopeful that we will move towards this 95% stabilization sooner rather than later.

But having said that, once again, the timing is not so much in our control because the eviction processing time line is what really drives our ability to move that delinquency number. And so we try to take a more prudent approach on that front, but it's moving in the right direction.

Okay. And then second question is just on San Francisco and I guess, the Bay Area broadly. I know -- I think some of the strong rent growth we've seen from the market data has been helped by removing concessions from that market. And so there was a comp issue, I think, helping the numbers. Does that become like a headwind this year in terms of us just thinking about like how San Francisco rent growth could look this year versus last year?

Yes. Nick, I think on the concession, the margin, it could be a result of hangover from previous supply pressures. But what we're seeing concession level in this market is not too different from historical averages, and it's not a factor when it comes to the uplift in San Francisco. It's really been more of a recovery story. We are finally at a point where San Francisco as a market is somewhere around 9% above pre-COVID level. And if you look at where it should be, it should be somewhere around 20% above pre-COVID levels. So it's still in the recovery phase. And so it's less of a concessionary story hiccup.

Our next question comes from the line of Eric Wolfe with Citi.

It's Nick Joseph here with Eric. There were reports, I guess, last week about a large Southern California portfolio coming on to the market. So curious where you see buyer cap rates today and, I guess, across your markets, but maybe specific to Southern California if there's any differences between the regions? And then just broader your thoughts on kind of external growth and capital allocation coming into this year.

Nick, Rylan here. I'll start on the comment on the portfolio in Southern California. In general, not going to go into details. I don't really want to comment on a live transaction. But for background, there's been approximately $11 billion of transactions in Southern California over the past two years. The majority of the transactions last year occurred in that 4.5% to 4.75% cap rate range. So this is a healthy environment where there's a lot of capital coming in that I think they're going to do quite well. Obviously, we look at everything that comes through our markets, so we will be evaluating. And if there's an opportunity to create value, you would expect us to participate there.

In terms of just bigger picture -- sorry, go ahead, Nick. Yes.

No. Go ahead.

Yes. Capital allocation, just a reminder of our broader philosophy, right? So for investment criteria, we have three things that we're looking to solve for: one, FFO per share accretion; two, per share accretion; and looking for opportunities that are better growth profile than the rest of our portfolio. And our strategy, which is unchanged, is to allocate capital to those investments that offer the highest potential accretion relative to the cost of capital. So we're going to continue, as we've done for this team been here in the past 5 years and over the past 30 years to look for those opportunities where we can drive the highest potential accretion.

And so for that 4.5% to 4.7% you quoted, is that buyer or seller? And how wide is that spread typically?

That's buyer cap rates. Those are economic cap rates on in-place rents. Obviously, seller, it really depends on when the asset was purchased and what the tax base is involved. That's where you'll see some difference between buyer and seller cap rates in Southern California.

Got it. And then just in terms of the capital allocation, just given where the stock is trading today, how do buybacks play into the stack of opportunity just given where you're seeing cap rates versus where the implied cap rate for the stock is?

Nick, it's a good question. And it's a calculation that we go through on a regular basis. And so I want to start with everything is on the table: buybacks, prefer equity, development, acquisition, all of the above. And when we think about buyback, we also look at the yield that we can generate from a straight acquisitions or development and the growth thereof. So there's an IR consideration.

Based on the stock today, which is in the mid $255, it's kind of a close tie across the board, if you will. And so then we need to look at how do we create value for the company. And I just want to point to that what we've done, when we directed capital deployment for fee simple properties in Northern California over the past 1.5 years, it's done well for us even though our stock was trading in this range because those assets ended up generating portfolio-leading rent growth with cap rate compression, we really provided -- produced a lot of appreciation of these assets and the shareholder value. And so we have to consider that fact. And also, if you look at if we had done the buyback, say, 6 months ago, well the stock has gotten cheaper. So not as attractive. And so there's a lot of things that we really -- we do consider and I hope that you realize that we do try to be very thoughtful about it. And you've seen us buy back stock in big chunks when it makes sense to do so.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

I think, Angela, you had mentioned that renewals would be in the 3% to 4% range for the year. I'm just curious, what have you experienced thus far kind of in the January, February and presumably March time frame?

Steve, right now, our renewal is looking at around 4-ish to mid-4% for February, March. And so we're pretty much on track.

And are you doing a lot of discounting? Are you pretty much getting what you're asking for? Or is there a gap between kind of what you ask and what you achieved?

So far, the negotiation is somewhere between 30 to 50 basis points. So it's -- to us, that point to just a normal stabilized environment.

Great. And then, I guess, following up on the capital allocation discussion, you talked about sort of acquisitions and buybacks. But I think in the release, you explicitly said you would not have any development starts. So I'm just curious where would development pencil, if you were to start one? And I guess, what does that mean about costs having to come down or rents having to grow in order to get to a yield that makes sense to you?

Steve, this is Rylan. We -- currently in our development pipeline, right, we have two land sites that we continue to move -- work forward with, but they're not expected to start in 2026. Our team underwrote probably about 100 land sites last year, and none of them really made sense from an economic perspective. So you really need to see land sellers take a reduction in their expectation on land prices to make the numbers work today and/or you're going to have to see 10%-plus rent growth for some of these deals to make economic sense. So we're closer. We have our own pipeline that we continue to work forward to. And if we can find something at a significant premium to the transaction rate where we feel comfortable for the risk that we'd be taking in development, we'd happily step in. We do think there's going to be some opportunities on the development side. We're just trying to make sure we're getting the best risk-adjusted returns.

And sorry, just what would you need on that? Is that a 6%? Is that 6.5%? Is that 5.5% in your markets?

Yes. As I said, depending on the submarket in Northern California, as Angela mentioned, where the transaction market feels like it's shaking in that 4.25% type range. Something close to 6%, I think would definitely be worth the risk. If we have clear visibility on entitlements, we knew exactly what we're going to build. We felt good about the land basis. Those are the types of opportunities that we would jump at.

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

Another question on L.A. Obviously, you're seeing some improvements there. Can you talk about if the guidance assumes a significant improvement in performance year-over-year? And if not, when do you expect L.A. to become more of a positive contributor?

Brad, we are assuming that L.A. continues to improve gradually. And so we are hopeful that by year-end next year that if we turn to a normal delinquency rate, long term for L.A. is a little elevated than our typical portfolio average, but that's okay. That's what we expected. So we do have that baked in. The potential upside really comes from the general jobs environment for -- especially with supply going down, certainly, there's opportunities there with L.A.

Okay. Got it. And then on the immigration front, has there been any sort of noticeable impact on demand or anything that you can see on your dashboards just from the lack of immigration?

We have not seen any direct impact from the immigration front. I think -- I'm assuming you're talking about international migration. What we have seen is it's generally returned to pre-COVID historical norm, and activities are at a normalized level. And when we look at legislation -- that impact that really is like an H-1B, we certainly haven't seen any adverse impact from that. In fact, that continues to be viewed as a positive. And there are certain carve-outs for students and et cetera, that really should not hurt our business.

Our next question comes from the line of Jana Galan with Bank of America.

This year, there's a mayoral election in L.A. and an election for Governor in California as well as a number of proposals that could impact real estate. I'm curious if you can kind of let us know what you're watching from a policy front that could potentially be beneficial for rental housing.

Jana, thanks for your question. It's an interesting situation here in that we've seen California slowly migrate away from these extreme liberal policies, which has been actually good for the overall economy and the voter population as well. So there's been a couple of proposals that were more under extreme end, and we were pleased to see that those proposals actually were not successful. So that's a good indication. What we're watching on the margin, of course, is the outcome, and we don't have any more insight to the election than what's publicly available. But what we can tell is that from the sentiment is that the general view is people want to have a normal function and economy. And these extreme measures have not been well received.

And then on the structured finance book, now that it's kind of rightsized or will be at the end of '26. Just going forward, how should we think about modeling the growth here?

Yes, it's Barb. That's a good question. So how you should think about it is at the end of the year, our book value is $330 million, but what is in our guidance for '26 is $175 million that we are having income on that's hitting our numbers. And that is a 3-year maturity. So there will be future redemptions, but it will be much more manageable over the next three years. And we are looking for new opportunities to backfill. We obviously want to make sure the there are appropriate risk-adjusted returns, but it is a much more stable book than what we've had two to three years ago. So I think if you take the $175 million, that will get you a stable number going forward.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Just going back to L.A. for a minute. Are you guys seeing conditions, I guess, broadly in your submarkets stabilize and rent growth may be approaching an inflection or was this more of a strategic approach on your part to build occupancy back to a stabilized level and everything you're seeing is kind of specific to your portfolio?

Austin, that's a good question. It's more Essex' operational strategy driven with how we are operating in L.A. But ultimately, our goal is, of course, to maximize revenues. And so in an environment where you don't have stabilized occupancy, it's just -- you really don't have pricing power. And so it's critical to focus on delinquency, which I think our team has done an exceptional job and focus on building occupancy. And once we get to that 95% occupancy -- stabilized economic occupancy for our portfolio, then we will have some pricing power.

Got it. And then just going back, I mean, does that speak a little bit to the negative 2.4% new lease rate growth in the fourth quarter and maybe what was the driver of that? Because it did seem that was a little lower than it's been in many years outside the COVID period? And have you started to see that reaccelerate into the new year given that occupancy is now in a better position even than it was a year ago at this time?

Yes, that's a good question. That new lease rate is driven by the weakness in Seattle and weakness in San Diego more due to supply. L.A. was more -- is not as exciting. It was a little -- well, it's still negative. Okay. It's all not great on that front. Never mind.

I think looking forward, there are a couple of things happening with the supply decreasing. And also the environment in L.A. stabilizing is certainly that it should turn -- is just starting to turn.

Our next question comes from the line of John Kim with BMO Capital Markets.

On the new lease growth rate expectations of flat to 2%. I'm wondering what your thoughts were on cadence? Last year, it peaked in the first quarter at 1%, and I'm wondering if you expect a similar dynamic this year? And as part of that, I was wondering if you could share your new lease rate growth in January.

So that's a good question. In terms of cadence, we do assume that 2026 is going to be pretty moderate. We're not expecting say, first half to be significantly greater than second half and vice versa. And that's really driven by our view that job -- the current job environment is going to continue just because both political uncertainty. And keep in mind, we have a midyear -- midterm election in the second half, and we don't know how public policy is going to behave in light of that. So it built in, kind of, some of those unknowns.

As far as January numbers, I don't -- I mean I don't think it's all that productive to talk about that because December and January are always, always the worst period in our business because of seasonality. And it's not going to point to anything relevant with what's going to happen for the rest of the year.

Okay. And Angela, in the past, meaning last year, you talked about happily trading out of Southern California or would you sell Southern California and buying in Northern California based on Rylan's commentary about being perhaps a little bit more opportunistic and the occupancy improvement you saw in L.A. this quarter, is that trade still the case? Or are you more agnostic on markets?

Well, at this point -- well, let me start with we -- our view has always been there's a price for everything. And in an environment where cap rates are all generally consistent throughout our markets. We certainly would want to deploy capital in a market where we believe has an elevated level of rent growth ahead of us, which is Northern California. So if you look at the current environment, if all cap rates remain generally in line in Northern California is still a more compelling place to deploy capital because it's just -- it's in the recovery space. But once you start seeing a gap between -- among the cap rates in the different submarkets, then it's a different calculation. And so we're going to have to look at that holistically rather than just based on a specific number.

And how much should that gap be in your mind?

Well, it depends on the growth. And it really is more submarket driven. So for example, when I say Northern California, we certainly wouldn't invest in Mountainview at the same cap rate as we would invest in Oakland. And so I wish I could give you a finite number because that will make everyone's life so much easier. But it really depends on the growth rate of that specific asset, which has a lot to do with how it's managed and what's going in the submarket. And it's just not as simple as a one data set that fits all situation.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

A couple of follow-ups for me. First, I guess I want to go back to the blends. I know you talked quite a bit about it, but I just wanted to clarify a few things. I guess by our math, it looks like your outlook for blended rents for the year implies a slight decel in the back half of the year, which seems pretty unlike your peers who are embedding an acceleration in the second half. So first, is that fair? And then second, can you comment on what your expectations are for market rate growth by key regions for this year?

Haendel, sure thing, and thanks for your question. I'm not sure where you're seeing a decel in the second half, maybe we can sync up after call because we're modeling pretty much a consistent rate and what we typically assume is that first quarter and fourth quarter blends are at the lowest level and then second and third quarter blends are higher. And so they kind of offset each other as far as the market rents by market. It's actually in an environment of low growth, it's not all that different from our blend. So last year, our market rents landed in the mid-2s and we're assuming that in 2026, market rents will be very similar. And we're assuming Northern California to be on the higher end, say, in the mid 3s to 4 range and Seattle in the mid-2s and Southern California in the mid-1s.

Got it. That's helpful. And I guess to your point on the blend, maybe it's not decel, but certainly, there's not an acceleration required in the back half of the year like your peers.

Second question, I wanted to talk a little bit about Southern California, but ex L.A. Obviously, you know L.A. is going to be a bit challenged near term, but curious how you're thinking about the prospects for Orange County and San Diego near term? And then maybe sprinkling a question on L.A., how you would think of L.A. growth over the next few years? You mentioned cap rates generally being kind of in that sub 5-ish range. But curious how you think an IRR for a L.A. portfolio would look like.

Good questions. Ryland will talk about the cap rates. In terms of Southern California, we're assuming that -- I mean, sorry, in San Diego and Orange County performed similar to this year. It's really more driven by the fact that we view the job growth to be generally constant and supply from what we see in San Diego, it's about at the same level and Orange County, it's slightly elevated, but not in such a huge magnitude that it's going to drive a significant movement. So stable, not very exciting, but kind of -- is more of the same for Orange County and San Diego.

Haendel, I'll jump in on the IRR expectations. I think where we've seen a lot of transactions in Southern California with our growth expectations in these markets. We've seen market clearing trades, I would say, in the low 7 IRR type range. Again, a wide variety depending on the asset and the business plan for some of these assets. But we think we've been able to achieve much better returns in our submarket selection in Northern California. So that's where we've really been focused. Now if any of those assumptions were to change as it relates to the going-in cap rate the business plan on a specific asset and/or the growth rates, then you would see us change our capital allocation priorities. But that's where it's been trending in 2025, I'd say.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Two questions. First, Angela, you guys have -- you outlined what you expect advocacy costs in your guidance, although it's not part of core FFO, it's just part of NAREIT FFO, but given that advocacy is sort of a recurring part of operating assets and real estate in California, would these expenses just be a normal part of the business, like not -- it's core to the business of being in California, no different than insurance costs, earthquake costs or any of that in California or weather costs, et cetera. So just curious about that because I would think, especially as people are contemplating that other portfolio in Southern California, the regulatory costs are part of the calculus of how they look at whether or not to invest.

Alex, it's Barb. So in terms of the advocacy costs or the political costs that we had, we had $2 million in 2025. We have not specifically outlined what the cost will be in '26. We've provided a number, but it does include other legal fees that are outside of our normal core operations. So we don't expect there to be significant advocacy costs in 2026. There will be a small amount, but we don't see them as necessarily reoccurring. They can be lumpy from year-to-year when we have a big ballot measure, we're not expecting a lot on the advocacy front in 2026.

Okay. And then Ryland, -- just in looking at deal flow, it seems like 2021 was a banner year for ultra-low rate deals that may not have hit their pro forma and maybe have it coming back for debt maturities or restructuring in the next year or two. Do you see a lot of these deals coming to the market to trade? Or as you guys take a look at these deals that are having issues, most of them seem to be resolved internally between the existing sponsor and the lenders. I'm just trying to figure out if the 2021 vintage is going to create opportunity for you guys or if it's going to be one of these where most of the stuff gets resolved on its own.

Alex, I think you're correct in that there were a lot of deals done at very low cap rates in 2021, and most of them were funded 5-year debt as typical. So in theory, there should be a lot of deals coming to market that have lost an attractive debt rate there.

However, as you also acknowledge, there is a lot of debt capital out there looking to report in the multifamily space. So I think there's been a lot of deals being done between lenders and sponsors. And we really have not seen any indications of distressed sales coming to our market.

The other thing to keep in mind is that Southern California, in particular, has done fairly well relative to the rest of the country over the past 5 years. So NOIs are up and these -- they've created value in many cases. So I'm not anticipating a significant onslaught of distress in '26 for the reasons you mentioned. One general really favorable lending environment. And then two, performance has done okay.

Our next question comes from the line of Wes Golladay with Baird.

This quarter, you took control of an asset in Los Angeles tied to the preferred portfolio. Can you talk about when you expect that asset to stabilize, if it hasn't? And was it much of a drag on earnings this year?

Wes, this is Ryland here. Yes, this is a unique asset. It's -- we expect this to stabilize in the mid-5 range. There was no impact to the economics last year. We just took management of it at the end of last year. Going in, it's probably a low to mid-4 cap. The previous sponsor had a unique business model where a certain portion of the units were rented is fully furnished short-term rentals, which had not done well elevated delinquency and a little bit higher controllable expenses. So putting it onto our platform with no assumption of significant rent growth on that asset, we are very confident we're going to be able to get this to a mid-5 by the end of the year.

Our next question comes from the line of Michael Goldsmith with UBS.

First question is on the legislative front. Are you seeing anything that may be related to the so-called junk fees or Essex' ability to continue to grow non-rental income?

Michael, we have looked at our practices as it relates to other fees, and we've also utilized consultants to make sure they have our practices are in compliance and so we don't expect that to be -- to have a meaningful impact to our business.

Got it. And then just as a follow-up, have you seen any changes in the pace of move-ins from outside of Essex's core markets?

Would you repeat that question, sorry?

Have you seen any change in the pace of move-ins from -- into Essex' market from outside markets. The pace of move-ins into the market.

Sorry. Good question. We have seen an increase in the migration trends, especially in our northern region. And -- but I do want to caution you on the immigration numbers in that this is really driven more probably by return to office. It's not driven by robust job hiring environment. And so -- but so far, it's showing positive and it's been a nice little tailwind for us.

Our next question comes from the line of Julian Blouin with Goldman Sachs.

I just want to go back to Seattle. You mentioned the return to office plans for Amazon and Microsoft. But then on the other hand, both of those companies have announced corporate layoffs there by the thousands over the past 6 months. I guess, what is your sense of how that push and pull will sort of play out this year? Can the RTO benefit really outweigh the continued layoffs we've seen?

Yes, that's a good question, and that's really -- as far as how we judge or how we decide on setting our guidance, right, what does that mean? How long does it take? What we have seen with Seattle, in particular, is that it moves quickly. So yes, there's layoffs offset by return to office, but Seattle also has -- having a 30% reduction in supply. And so absent of, say, additional job growth, for example, this market should stay just fine if not slightly better than last year, but it's going to do just fine.

But secondly, when we look at the layoffs, we do dig into the reason for the layoffs because that really matter. So when we look at the reasons for layoffs with the large companies and including Amazon, the reasons cited are they're either eliminating nonprofitable businesses, for example, Amazon Fresh, pivoting to Whole Foods or they're expanding. They're putting in -- they're investing to expand into new business units or expand the business. And so the layoffs are not because of distress. And that's actually a good reason for layoffs. And additional data points to that, of course, the increased office absorption and increase in office leasing activity, all these data points together point to that. This is still a good vibrant market to be in.

No, that's very helpful. Maybe digging into the South Bay as well, just in light of the fears that are out there around sort of AI native companies disrupting legacy tech and software. On the face of it, the South Bay is also one of those sort of more legacy tech or software-heavy markets where companies have been announcing corporate layoffs and had sort of less of that AI native HQ benefit that maybe San Francisco has. Why do you think the South Bay is sort of holding up so well while Seattle has maybe struggled a little bit more?

Well, I think the South bay market is a much deeper market than Seattle. And even though, keep in mind, there is some disruption that we would expect from AI. But when you look at what's happening there, so if you're talking about disruption in -- by cloud or coworker, for example. It's creating a demand and increase in usage in Agentic AI. And so you're going from one application that may be deprecated, but there's an expansion in another. And this is all happening still within the same submarket and so that's one of the foundational benefits of this market and having that concentration of all these tech companies there.

Our next question comes from the line of Linda Tsai with Jefferies.

In 2026, do you expect any year-over-year changes in tax expenses from Seattle and Washington state due to the Seattle Shield initiative and B&O surcharge?

This is Barb. I mean we have baked in a Seattle tax increase this year into our guidance in the high single-digit range. But that -- and that encompasses kind of everything that you talked about. But that's what we're assuming this year, which is a big change from what we saw in 2025, where we had a pretty meaningful reduction in taxes.

What would be the dollar amount?

I don't have that off the top of my head. I can follow up with you after.

Our next question comes from the line of John Pawlowski with Green Street.

I had a follow-up to the return to office discussion from a few questions ago. I would have thought work patterns are normalized by now. Amazon's policy has been in effect, 5 days a week. It's been in effect, I think, for a year now. Has your local team seen a real second winds of demand to start the year, either in Seattle or the Bay Area or it's more of you're hoping that the positive momentum in the market continues gradually over time?

John, our expectation is based on what we've seen actually happened on the ground. And what we have seen happening on the ground is that a company announces a return to office policy. And some employers would comply and some will not, for various reasons. And it is not until they announce enforcement that people -- all -- everyone starts to come back to the office. And that happened with Essex as well. We had announced it and left people to get used to it. And then three quarters later, we announced that we're going to check key cards, for example, and everybody came back. And so our expectation is that this is going to play out similarly. And Amazon actually announced that they're starting enforcement in January. They're doing that for a reason. And I don't think -- I don't believe that their population would behave drastically different than the norm.

Okay. And then drilling into Seattle again. Obviously, it takes a little bit of time for layoffs to get announced, severance policies, et cetera, to actually flow through the housing decisions and people moving out. So in your Seattle portfolio, are you seeing a real uptick in notices to move out? Can you share any kind of forward-looking [ blendedly ] spread expectation just given the lag between the layoff announcements and the actual decisions renters make?

Well, first of all, typically, when there's a layoff, there's the public announcement and there's the private conversations. And employees don't typically find out that they're getting laid off publicly. There's [ a human ] conversation and people typically make decisions, their housing decisions 45 days in advance of a job change event. And so our view is that the bulk of that layoff impact already has been felt in the fourth quarter and some spillover in January and less so in February. And when we look at our leasing activities and our blended renewal rate, they're not all that different from historical patterns for Seattle. So I'm not -- we're not expecting a second shoe to drop, if you will, because of the layoff announcements.

Okay. So blended spreads for the first half of this year in Seattle, do you expect not to look meaningfully different than the second half of last year?

Correct. And I would say the whole year because we're not expecting a huge difference between first half and second half in 2026. And then the one other data point I'll point to is that Seattle supply is declining by 30%. And so that will also benefit the market.

Our next question comes from the line of Rich Hightower with Barclays.

Just one from me. I just want to go back to Barb's comment in the prepared comments about the -- I guess, the conservatism baked into the idea that the structured investment redemptions would not be redeployed and that's basically what's embedded in the guidance at this point in time. I mean, I guess, how conservative is that view? And is it conservative to the point of being a little bit unrealistic based on kind of what's in the pipeline and sort of the real underlying expectations for those redemption proceeds?

Rich, it's a good question. So what makes '26 unique in terms of our redemption profile is 90% of the redemptions we expect back are tied to two assets. So they're large redemptions, which do move the needle in the guidance. And on one of them, we did stop accrual in the fourth quarter. We did a third-party valuation on it. And we're fine from a valuation perspective today. But if we keep accruing, we felt we got a bit stretched. So we did the prudent thing and we stopped accruing. And then on the other one, we're just in discussions with the sponsor at this time. And so we -- given we don't know the final outcome, we decided to not assume any redemption proceeds. There's no further downside in the guidance from these two assets. There will -- and could be upside, but we don't know until we get further along in our discussions, what that will be.

Our next question comes from the line of Alex Kim with Zelman & Associates.

Just a quick one for me. I wanted to talk about the delinquencies and they look to be near pre-COVID trend line. Do you anticipate further improvement even below pre-COVID norms? And could you quantify how much of a contribution is embedded into that 30 basis point tailwind from the other income bucket for your full year same-store revenue growth guidance?

Yes. This is Barb. So we are pleased with how much progress we've made on the delinquency front over the last two years. We're at 50 basis points, we're about 10 basis points off of our historical pre-COVID average so we're really close. And to Angela's earlier point, it's really tied to L.A., where eviction courts are still -- the processing times are still slightly elevated relative to pre-COVID averages. So we haven't baked any meaningful benefit in from delinquency in 2026. We've gotten the bulk of our delinquency benefit already in the prior years. We're still trying to get back there on the L.A. front. And maybe by year-end, we could, but it's not going to move the needle like it did in '25 from that perspective.

Our final question comes from the line of Omotayo Okusanya with Deutsche Bank.

I wondered if you could talk a little bit about technology initiatives you guys are still undertaking to help with things like customer satisfaction, customer retention, rent growth, operating expense management and just kind of what benefits from that are being built into your 2026 guidance?

It's a good question. From a technology perspective, we do have a variety of initiatives in our pipeline, both top line and, of course, some on the bottom line benefits. On the sales and leasing front, it's really more AI focused. And of course, on the bottom line, as it relates to expenses, there's some expense management opportunities and technology that we are implementing.

Having said that, you'll see that other income contributions from these initiatives are fantastic, but they are lumpy. And when we start something, it usually takes a year or two to really monetize the opportunity. And so I'll give you an example.

Last year, we had a nice pickup. And one of the reasons was EV parking, and that was rolled out in 2024. We captured the bulk of the benefit in '25, and there's some residual in '26, and that's a reasonable cadence.

So we are not baking anything new from this year because this year is a pilot rollout phase, and we're going to see how the pilot performs before we assess the rollout and the ultimate economic benefit for future years.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session, and we'll conclude our call today. Thank you for your interest and participation. You may now disconnect your lines.

Good day, and welcome to Essex Property Trust Third Quarter 2025 Earnings Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties.

Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC.

It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Ms. Kleiman, you may begin.

Welcome to Essex's third quarter earnings call. Barb Pak will follow with prepared remarks and Rylan Burns is here for Q&A. We are pleased to report solid results for the third quarter, highlighted by a $0.03 FFO performance and an increase to our Core FFO full year guidance.

Today, I will cover key takeaways from the quarter, a high-level outlook for 2026 and provide an update on the transaction market.

Starting with operations. Our portfolio performed well amid a backdrop of muted job growth across the U.S. and heightened policy uncertainty. Year-to-date, through the third quarter, we generated a blended lease rate growth of 3% on all leases and 2.7% on like-term leases. This is a proven example of the competitive advantage of our low supply markets. As expected, Northern California is our best-performing region and the fundamental backdrop remains favorable with forward-looking supply continuing to decline comparable to a level in the years following the great financial crisis.

Within the Bay Area, San Francisco and Santa Clara counties are generating the highest rent growth year-to-date, reflecting attractive rent to income ratios, demand benefiting from AI-related start-ups and above historical average migration trends. Our Seattle region remains healthy, but is trending at the low-end of our full year expectations, driven by a combination of challenging year-over-year comparison, soft demand and pockets of supply temporarily limiting pricing power in certain submarkets.

Finally, on Southern California. This region is generally performing in line with our expectations. As we have discussed Los Angeles has lagged primarily attributed to delinquency recovery, muted job conditions similar to the U.S. and pockets of supply on the West Side and Downtown L.A. With supply expected to drop in 2026, the infrastructure spending earmarked for Los Angeles and market occupancy improving, we see a path to pricing power.

Given the soft economic environment and policy uncertainty, we are not surprised the hiring and investment decisions have been delayed across the U.S. But we are pleased to see the West Coast once again outperforming the U.S. average, a trend we anticipate continuing.

Looking to 2026, our portfolio is well positioned relative to other U.S. markets, supported by lower levels of housing supply, attractive affordability and demand catalysts from the technology sector. Directionally, we assume Northern California to continue outperforming and to rank among the top U.S. markets as job growth in Northern California gradually gains momentum, which is supported by announcements of significant office expansions.

Next in the ranking would be the Seattle region. With total housing supply deliveries declining by almost 40% next year, we are optimistic about the market's outlook. For Southern California, we expect stable economic conditions with Los Angeles fundamentals to improve. Moving on to early building blocks. We forecast our blended lease rates for the second half of the year to land at a similar level to last year. As such, we anticipate another year of stable growth with 2026 earn-in between 80 to 100 basis points.

Lastly, on our investment activity in the transaction market. Page S-16.1 of the supplemental demonstrates the value created from our capital allocation strategy since 2024. We have focused our investments in the highest growth submarkets in Northern California, acquiring almost $1 billion of assets in this region while achieving accretion relative to dispositions and improving overall age of the portfolio.

As for the transaction in that market, year-to-date volume on the West Coast is slightly above 2024, but remain below average historical levels. We continue to see a competitive bidding environment for high-quality properties in our markets, and cap rates are generally in the mid-4% range, with most of the Bay Area transactions in the low 4%. Although cap rates have compressed in Northern California, we will continue to enhance value from our operating platform and drive FFO and NAV per share growth for our shareholders.

With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with a recap of our third quarter results, followed by comments on investments and the balance sheet. Beginning with our third quarter results. We achieved a solid quarter with Core FFO per share exceeding the midpoint of our guidance range by $0.03, attributed to lower G&A and interest expense. As a result of the third quarter beat, we are pleased to raise the midpoint for Core FFO per share to $15.94. As for operations, we remain on plan and are reaffirming the full year midpoint for same-property revenue, expense and NOI growth.

Turning to the structured finance portfolio. Year-to-date, we have received $118 million in redemptions and anticipate $200 million in total proceeds for the full year. As you may recall, over the past 2 years, we have made the strategic decision to redeploy the redemption proceeds into acquisitions at better-than-market rate yields and in markets with the highest near-term rent growth potential. This strategy has resulted in better NAV growth, improved cash flow for reinvestment and higher quality of FFO earnings.

Looking ahead to 2026, we are pleased that we are in the final year of the redemption-related headwinds and the realignment of this business will be behind us. Overall, we expect roughly $175 million in additional redemptions next year. Given heavy redemptions in 2025 and expected in 2026, we anticipate this will reduce our 2026 Core FFO growth, net of reinvestment by approximately 150 basis points depending on timing of redemptions.

As we look further out to 2027 and beyond, we expect that FFO volatility from this business will abate as the size of our structured finance book will have decreased from the peak of $700 million in 2021 to around $250 million in total investments.

Lastly, a few comments on capital markets and the balance sheet. Throughout 2025, we executed several financings to further strengthen our balance sheet, increase our liquidity, diversify our capital sources and proactively address near-term maturities at attractive rates in the current market environment. With manageable maturities over the next 12 months, healthy net debt to EBITDA of 5.5x and over $1.5 billion in available liquidity, our balance sheet is strong heading into 2026.

I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question come from the line of Nick Yulico with Scotiabank.

I wanted to see if there was any way you could break out the blended rate growth a bit in the third quarter, just for some perspective on how much L.A. and Orange County might have been a drag on those numbers?

Nick, it's Angela here, thanks for your question. As expected, you called it. L.A. has been a drag, but that's not a surprise to anybody. In terms of our blended for the third quarter, Southern California came in at around 1.2% and Northern California close to 4% and Seattle right in the middle at about 2%. And to call out L.A., specifically, LA is below the 1.2% average for Southern California. L.A. is really 1%.

So that gives you the range and the magnitude, but on the high end, when we're looking at Northern California, San Francisco and San Mateo, they're in kind of that 6%, 5% range, in terms of the blended. So hopefully, that kind of gives you the bookends of the -- of our portfolio. It's a pretty wide range.

Okay. Great. And then I guess my follow-up question is just in terms of in Northern California, whether you've seen any like real pickup in demand from -- I mean, if we see again from some of the job announcements of new company formations or some of the activity on the office side in San Francisco or the broader Bay Area, just anything more you can share on how that's actually translating into demand on the ground?

Yes, that's a good question. We certainly are seeing a steady strength in the Northern region. And when we look at the top 20 tech postings, the postings have remained steady with September a slight uptick in California, mostly benefiting from the Northern region, the San Francisco, San Mateo and, of course, the Santa Clara counties. It's tough to get exact numbers because they don't show up, the BLS numbers, as we talked about, has been challenging.

What we are seeing is that, we're seeing more start-ups than we've ever seen in the past. And you could -- anecdotally, what we're seeing is that office space less than 10,000 square feet are in hot demand. And that is a new phenomenon that we've not seen in the past.

Our next question comes from the line of Eric Wolfe with Citi.

It's Nick Joseph here with Eric. You mentioned the '26 earn-in of estimated to be 80 to 100 basis points. I was hoping you could break that down between Northern California, Southern California and Seattle?

Nick, I don't have the exact breakdown in front of me. I will just point to you that we, of course, we're assuming that Northern California will lead and Southern California will rank third in terms of the major 3 regions with Seattle in the middle. But I think a helpful data point could be that if you look at our blended lease rates in the third quarter, it's comparable to the same -- to what we achieved last year -- a little bit lower than what we achieved last year.

However, what we're seeing in the fourth quarter is we're on track for fourth quarter to do better than last year. So year-over-year for the second half, we're assuming that we're going to land in the same zone, somewhere in the low 2%, and that gives us the 80 to 100 basis points earn-in.

Appreciate that. And then just on the preferred book, I think you said 150 basis points headwind. What's the sensitivity around the timing of the potential redemptions for next year?

Nick, it's Barb. I mean there's a couple that are maturing in the first quarter. And if they may need an extension for 1 month or 2, that's really the sensitivity that I'm talking about. But the maturities are very much in the first half of the year. And so, what we've guided to and what I provided was assuming that they're fully redeemed at maturity. If they get extended, it might be a little bit lower.

Our next question comes from the line of Jeff Spector with Bank of America.

Great. Just a follow-up on the first question or Nick had asked, I think, is a follow-up question on jobs. I mean, it does seem like we're seeing mixed signals between AI hiring, tech layoffs. I mean, how are you thinking about this into next year, maybe even medium-term? What are you hearing from, let's say, your -- any peers, any executives that you talk to in terms of the job outlook in your region?

Yes. Jeff, that is a great question because it really goes to the heart of where is AI taking us, right, on more of a broad conversation from that perspective. So a lot of things are happening right now, which is noisy, and we are seeing recent layoff announcements, but keep in mind that large tech companies, they get most of the headlines. Broadly across the U.S. layoffs -- layoffs are occurring. So for example, UPS in Atlanta is cutting 48,000 jobs.

From what we're seeing on the ground here is that this is a normal part of the business cycle. In an environment where the macro environment is soft, business are and they should be focusing on efficiency. And so I don't think, from what we're seeing that they are AI-driven job losses. But in terms of what we think is going to happen with the conversation about AI displacing jobs and being -- becoming -- or is viewed to be a disruptor, we do think that's going to happen at some point.

AI capabilities, it's growing rapidly, and we're seeing research suggesting that most companies are experimenting with AI. So that experimentation level is very high. But the adoption, the level is low because the return on investment is still unclear. So for example, Essex where we see AI benefiting data analytics and certain repetitive tasks, but it is still in early developmental stages, and we need additional technology to interface with AI applications for utilization.

Essex have not had significant workforce reduction using AI. And so what we do expect is that the pace of disruption or job displacement will be more gradual because on the flip side, what we're seeing is, as I mentioned earlier, an unprecedented number of start-ups, small companies that because of AI, can form businesses. And that is not being picked up by BLS. But certainly, it's being picked up by the demand that we're seeing in Northern California. Does that make sense?

Yes. That's helpful. And maybe could you talk a little bit more about San Francisco specifically, let's say, downtown and we're seeing all these great articles on downtown, the city versus your suburbs. How is your portfolio benefiting from all of this?

.

Well, I think interestingly, downtown, we view Northern California generally is still in a recovery phase and giving more rents are relative to pre-COVID levels. And the suburban started recovering last year. Downtown is recovering starting this year. But when we look at relative blended rates for our markets, if I break out San Francisco, for example, year-to-date blended rate growth is 5.2%, where San Mateo is 6% and San Jose in that 4% range. And so the relativity isn't -- the dispersion isn't huge, and they're all quite strong. And when we look at announcements of new office space, it's just as concentrated in the suburban area as it is in downtown.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

This is Sanket on for Steve. Switching a bit. You guys have been very active on transaction front this year, and we just wanted to understand what are the cap rates are used on acquisitions and exclusions for those assets? And how deep is the investor pool within that market?

This is Rylan here. I'd point you to S-16.1 where we've tried to break out specifically the cap rates that we've been targeting and been successful at acquiring over the past 1.5 years, and also point you to the Essex yield, which is 40 basis points higher, which is as a result in something we've talked about, our operating platform, given our asset collection models in these markets, we're able to pull out a significant amount of controllable expense by putting them onto our platform. So that's been one of the driving factors in our acquisition strategy.

So, as Angela mentioned, cap rates have compressed. There's been a significant sentiment change as it relates to Northern California over the last year. I'd say we've been relatively early and been able to acquire significant, almost $1 billion of assets in these submarkets at that 4.8% market rate and a 5.2% yield to Essex. So we're pleased with what we've accomplished, and we're hoping to continue.

And as a follow-up to that, like are you guys evaluating share repurchases? Given where the stock price has been like -- it's been a common theme across your peers.

Sanket, that's a good question. And I think you've seen that we have a very solid track history of buying back stocks and assessing all the relative value leading to that decision. And if you look at where we are today, where we're trading today, it's much more compelling from a stock buyback perspective than it was in the third quarter.

But I do want to highlight that our transaction in the third quarter was around a 5% cap rate, and you add growth to that. It's quite compelling because stock back then was trading in kind of that low- to mid-5% range. So once again, you will see us being very disciplined in making sure that we're going to maximize the yield depending on our cost of capital and investment instrument available to us.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

So going back to the lease rate growth during the quarter versus the back half projections, I think, was around 2.7% as of last quarter. Was Southern California lower than projected? Or was it Seattle? I think as you mentioned in the prepared remarks that drove maybe pricing being a little bit softer than you had -- had you thought last quarter? And then just wondering if you think the Seattle softness, is it kind of a temporary phenomenon or could persist into 2026?

Austin, I think you make -- it's really driven by Seattle. And what we're seeing in Seattle is that the demand has coming softer. And we had expected that demand to moderate throughout the year, on a national level. And keep in mind, Seattle does not have the benefit of the AI start-ups that Northern California does. Northern California has 80% of the AI business. So Seattle is going to be more in line with the U.S. average at the current cycle. But I do want to know that the -- some of the headline news like Amazon laying off corporate employees, they have multiple locations. So it's not a Seattle-specific issue.

And when our team dug into the WARN notices, it's less than 10% of the layoffs is Seattle-specific. So this leads us to believe that this is not a market that we're seeing red flags. It's a market that's stable. It's still performing well. Certainly, it's not reaching above average CAGR growth that we had hoped, but it's still a good market. And with next year, supply going down by almost 40%, it's going to do just fine.

Appreciate the thoughts. And then just the 4% growth in blended lease rates in Northern California coupled with some of the office leasing you've referenced across the Bay Area, do you think that the region can sustain that level of growth in 2026? Or was there any specific phenomenon like back to office, that may provide a little bit of an incremental lift that maybe is less sustainable to the extent job growth remains more muted, more of a broader comment than specific to the area.

Yes. Austin, I think there are different -- in every cycle, there are different influences that drive job growth. And currently, what will happen -- what we're seeing in the Bay Area is really more of a recovery story. We're not -- we have not begun the growth story yet. And because if you look at the top 20 tech hiring companies, the postings, is still going to add and slightly below the long-term average. And so what we're seeing, that 4% forecasted is a catch-up, if you will. And this market still has a lot of legs.

Our next question comes from the line of Jamie Feldman with Wells Fargo.

This is Connor on with Jamie. Can we talk about your fourth quarter leasing strategy. Where are you seeing renewals go out for the quarter? And if you have any insight on new lease growth quarter-to-date?

Connor, yes. Our general strategy for the third quarter at the beginning, as we approach the seasonal peak is to push rents and in the Northern California and Seattle region. And then in Southern California, we toggle between rents and occupancy, subject to market conditions. And as we wrap up the third quarter we pivot to more of an occupancy or more defensive focus, especially as we saw strength early on, which, of course, taper off. And that's a normal seasonal cycle.

In terms of the renewal growth, what we're seeing is that it's been quite sticky. So in the third quarter, we sent renewals out around mid-4s, say, around 4.6% and we landed for the quarter around 4.3%. So only 30 basis points of negotiations, which is quite good. Currently, for November, December, we're sending renewals out around mid-5%. And so with negotiation, we probably will land at maybe high 4s. So this is another reason that gives us conviction that fourth quarter blended rates will be better this year than last year.

And in terms of the -- what was the third question? New lease rates? Connor, what was your third question?

Yes, it is on the new lease rates.

So new lease rates for October for the same-store, it's pretty much flat, and that's expected. Especially for this time of the season. I think a good data point I'll point you to is loss to lease because we talked about that in the past is a good gauge of the portfolio. And where we're sitting today in October, we have a gain to lease of 1.6%. So that's not exciting. But having said that, it's also nothing alarming.

So just to give you some context, pre-COVID 2019, so it gives you a sense, more of a historical range, our gain to lease was worse, it was at 2.3%. So this is so far playing out to be a normal seasonal cycle in a soft macro economy. So we're quite pleased with how the portfolio is performing.

That's super helpful. And then maybe on the preferred book. It looks like there was a $21 million commitment this quarter. Is there anything we should read into that as a way to maybe selectively offset some of the redemptions going forward? Just trying to kind of think about use of proceeds here beyond acquisitions?

Connor, Rylan here. As we've said, we are not getting out of this business. This is a good business, and there are interesting opportunities where we believe we'll get a premium yield to what we can buy in the fee simple side. In general, the strategy is just to make this a more manageable size relative to our total business. But if we see good opportunities, in this case, with partners that we know very well, and we're really comfortable with our position in the stack, we will continue to make investments in this book. So we're not getting out of it. It's really just trying to control the size of it and just pick the best opportunities for our shareholders.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

I just want to circle back to the debt preferred equity book. I know, Barb, you've articulated this for a while to trim the book given it has gotten too big as a percent of FFO. But in the current environment where acquisition yields are in the 4s, which is well inside of where your stock is trading and the DPE, you guys have a long successful track record with and provides better returns, and you've been good at that, would you guys consider reassessing the decision to dramatically shrink it?

Maybe 10% of FFO was too much, but it just seems like it's a good tool that you guys have to be competitive in a low cap rate world. And unfortunately, it seems to be relegated back to the -- almost up to the attic, if you will.

Alex, it's Barb. Rylan just made a good point that we're not getting out of the business. We're just being more selective. And given the redemptions are very heavy, it is shrinking. There's been a lot of capital raise that's chasing this business. And so yields have compressed. It's not risk-adjusted like we would like, and we're not going to go and do all the deals out there just to backfill this book. And so this business will ebb and flow. And right now, based off of what we know and where the environment is, it is shrinking. But it could change over time, and we -- it has evolved over time. So this is just where we are in the cycle today.

Okay. And then Angela, the New York Mayor election certainly has gotten a lot of buzz, but Seattle has got an interesting election coming up next week, with the Mayor and City Attorney that are both being challenged from the progressive side. So can you just give some thoughts on how the apartments are looking and what the consequences of both the progressives win? What that means for apartments in Seattle? And then if you think that as a result, that means divesting more Seattle, buying more on the East side? Just want to understand better the ramifications of what folks can expect from next week.

Alex, that's a good question. And we've been -- as you know, following the legislative environment as closely as possible. It is hard to predict what will happen. But this is what we know. Washington did enact rent control early this year. It was effective around May. And what was enacted was very similar to California. It was CPI plus 7%, max of 10%.

So in this environment, that signals to us that this is a -- the legislators understand the need to protect tenants from price gouging, but at the same time, they also understand that regulation -- heavy regulation is going to be counterproductive. It's going to reduce housing production and community investment, which ultimately results in higher costs all around. So given that they recently enacted rent control, we would expect naturally that this will play out for some period of time before any further changes are made.

Okay. But what about on the Mayor -- like if the Mayor of the City, Attorney changes? Do you see any negative consequence to apartments or not really?

Hard to say, we haven't heard anything that's being proposed that would give us great concern and from the ultra progressive side. And once again, my example to you is, we've got enacted, had a lot of input from all parties. So it's hard to predict, but so far, I don't -- we don't see a meaningful change right away.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

This is Derrick Metzler on for Adam Kramer. I was wondering if you could share your thoughts on SB 79. And does this impact your South San Francisco development at all? Or any other potential developments that you might have in the pipeline? And just kind of generally, do you see an impact on future development opportunities from this and kind of in combination with the recent changes to [ Sica ]?

Derrick, Rylan here. It's a good question. At a high level, we view this in several of the recent legislative changes that have occurred at the state level is good for California. We need more housing. The SB 79 specifically says that if you're within a half-mile radius of a transit stop in markets where there's greater than 15 rail stations, you can establish the ability to get higher density.

So as an illustrative example, if you go to a city and get entitlements that allow, say, 80 units to an acre, now you'd be able to get 120 units to the acre. So this should be beneficial. It's not going to benefit ourselves San Francisco deal as we're already through the entitlement period and under construction there. When we think bigger picture of what this could do to the supply landscape in California, it should help on the margin, create some more opportunities. But some mitigating factors to keep in mind.

Transit-orient development has been a focus of the state and cities for the past 20 years. The majority of our city's arena plans are concentrated along transit sites. So in other words, zoning has already become more favorable in these locations. Secondly, I think the real gating issue today on increased development are just for the returns. The majority of deals that we've underwritten last year have in-place yields around 5%, many of them sub that. So in summary, it's a long-term beneficial to California, but I don't see it taking a dramatic change in the supply outlook for our markets.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

A couple of quick ones for me. First, I was hoping you could comment on the use of concessions across the portfolio where it is today versus maybe a year ago and how it compares across the key regions, SoCal, NorCal, Seattle? And are you offering concessions on renewals?

Haendel, from concession perspective, let's see. Right now, our concession levels are comparable to the same period last year, about 1 week. And that's pretty typical for this time of the year. In terms of the breakdown across the region, Northern California is right at a week -- actually, everybody is right around a week and not a whole lot different. But keep in mind, concession is also more driven by competitive supply nearby. And so that's going to probably be more of an influence than what's happening with the macro economy. As far as -- we'll see concessions. On renewals, no, we don't -- it's de minimis, negligible on renewals. It's mostly on new leases.

Got you. Got you. Appreciate the color. And then my second question, I guess, it's on L.A. and the new versus renewal spreads you're seeing there. I think you mentioned the blends in L.A. were around 1%. So assuming renewals are low single-digit positive, that would imply new leases are negative and a pretty decent spread there. So again, I'm curious on if you could set some color on what that spread is on the new versus renewals in L.A.? And if that's a sustainable spread and if you think that maybe perhaps renewals could come under pressure?

Yes. So renewals are negative. Once again, but that's not unusual for this time of the year. So they say -- we're about, say, 100 basis points in the negative for Southern California. I'm sorry, I said -- I mean new leases. New leases are negative. Yes. And L.A. is much wider in that. L.A. is closer to 1.8%, so closer to say, negative 2% on new leases. Renewal, they're sitting around mid-3% in September for Southern California and L.A. is in the low-3% range. So not too different. Renewals are pretty consistent across the board, generally speaking.

New lease, it's hard to say whether it's going to come under pressure. I mean it's, of course, going to follow our market rents ultimately end of next year. And that has a lot of factors. It's job growth, that's where supply is going to be. And what we're seeing right now with supply decreasing and occupancy stabilizing in L.A., we wouldn't expect more pressure on new leases next year versus this year. And so just to give you an example, occupancy, net of delinquency right now sitting at above 94%, which is great.

In September, it was still below 94%. It was 93.9%. So it's been steadily increasing. So that tells us that this market is stable. And there is underlying fundamentals to support the stability and potentially growth.

Our next question comes from the line of Julien Blouin with Goldman Sachs.

In Seattle, you talked about the fact that Seattle doesn't really benefit from the AI tailwinds the way SF does. But I was wondering, do you think it could actually end up being a relative loser within the tech markets if investment in talent within tech sort of continues to flow towards AI. Do you see any impact from that?

Well, I think the Seattle economy has a good stable group of industries anchoring it. And so I don't see that AI being ultimately a negative to not just Seattle, but any other economy, because you can make the same argument for parts of Southern California or other areas outside of California where there's AI presence. We do view that AI will be net additive and the economy in Seattle will continue to grow. You've got Amazon there, which is huge. Microsoft is very solid and quite a few other ones. So we don't see AI as a net negative for Seattle.

Got it. And then maybe just a quick one on Contra Costa where occupancy fell about 60 bps sequentially in the third quarter. Can you just give us a sense of what you're seeing in that market?

Yes. Contra Costa, I mean, that market is going to ebb and flow, and it's been digesting a huge amount of supply over the past 2 years. And so we've -- we pushed rents because we saw some strength there. And then, of course, ultimately, sometimes that comes in at the expense of occupancy, but we did see sequential revenue growth there, which was a good indicator that the market is doing fine.

Our next question comes from the line of Robin Hanlin with BMO Capital Markets.

[ You leaned into ] Santa Clara acquisitions as of late. Can you elaborate on the long-term potential in these markets versus buying back your stock today? And also curious is rebalancing your exposure to the city of San Francisco is on the horizon?

Robin, Rylan here. I mean if you look at that 16.1% and where we've been able to source deals in that initial yield layered in with what we think the micro market supply outlook and the potential for rent growth there. As Angela mentioned earlier this year, we think that was definitely the highest risk-adjusted return opportunity available to us. As we've said in recent days with the stock falling off, that math is being reevaluated. But we feel really confident and excited about the acquisitions that we have been able to acquire in there. And again, the micro market fundamentals in terms of the supply outlook for the foreseeable future.

I think your second part of your question was San Francisco. We have underwritten every institutional deal that's come to market in San Francisco. There have not been a lot of them. And what we generally found is that the cap rates there have been even more aggressive, the competitive bidding has been made the relative value opportunity for us to create value on the buy in San Francisco is really not emerged relative to what we -- where we were able to purchase along the Peninsula with similar fundamental outlook. So we will continue to underwrite everything in Northern California and step in if we see a unique opportunity.

And then we noticed that San Diego and Oakland, seeing decelerating same-store revenue. Can you maybe supplement us with new lease rates in the markets? And then color on how demand is trending in those two?

Yes. So San Diego, we've had supply concentration in pockets of North City and North Coast submarkets that directly competes with our portfolio, although that is starting to abate. So that's good. And of course, it's San Diego is influenced by a general soft demand in Southern California and the U.S., and that's -- those are the key drivers of the weakness.

Similarly, on Contra Costa as well, we've had much heavier supply in Contra Costa for several years. But that market has been recovering. Although we don't have -- we actually have sequential improvements in revenues for Contra Costa. So it's just San Diego where we don't have sequential growth in gross revenues.

Our next question comes from the line of Rich Anderson with Cantor Fitzgerald.

So Jeff Spector asked a question about jobs and he said he understood the answer, and I didn't. So let me see if I can sort of ask it a different way. What is your view when you think of West Coast jobs in 2026 versus national jobs in 2026? When you keep in mind perhaps a blessing and curse impact on jobs from AI, entertainment in L.A., Seattle kind of being somewhere in the middle with Amazon. Do you think that your markets from a job growth perspective alone will outperform the nation, in line with the nation, maybe below the nation? What is your view on jobs going into 2026, if you have one right now?

Rich, our view with respect to jobs is that we should outperform the U.S. average. The question here is magnitude. And that as we would all expect, is going to be influenced by the macro economy. But what we're seeing is Northern California has of course the AI benefit that is a catalyst, it's also in a recovery phase. And so we are seeing positive immigration, which is not the historical norm. So that's going to benefit Northern California.

Seattle is anchored by the broad tech economy and which has gone through its massive pivoting and lay off about 1.5 years ago. So it's stable with upside. And in Southern California is going to perform similar to the U.S., albeit with more professional services, it should do better. But more importantly, fundamentals in L.A., we see has troughed or near the bottom. And so while we don't know how long it's going to take to recover, we do see that there should be more upside than downside in that market. So hopefully, that gives you a better breakdown that you're looking for.

That's great. I appreciate that. Second question, thinking about perhaps moving some of your investment incrementally more from Southern California to Northern California. Obviously, much talked about with the Olympics coming to L.A. perhaps housing for athletes. I wonder if there'll be an opportunity to sell in front of the Olympics now? I'm thinking -- I'm thinking in 1996 in Atlanta when there was sort of this wave of housing and then there was a hangover effect after the Olympics. That was a little disruptive. Atlanta obviously became a great market eventually.

But do you want to be there for a year after the Olympics in bulk? I'm wondering if you're thinking about your business as an option for the Olympic Committee, as a mechanism to move more product, maybe a little bit quicker out of that area and into other areas of your portfolio?

Rich, Rylan here. Interesting question. As we mentioned, we are fundamentally a little bit more positive on the L.A. market going into next year as the supply is coming down. And we do see some near-term catalysts as it relates to the Olympics. We do not plan to convert any of our existing leases into short-term rentals to take advantage to the extent that, that was your question, that's pretty difficult to do with existing tenants hoping to stay in and be able to enjoy the Olympics and the World Cup in our units.

Just speaking broadly on the transaction market, outside of downtown L.A. and the West side, the tri-cities to the north, these are still well bid markets with lots of transactions occurring in that 4.5% or 4.75% type range. We saw a deal closed last quarter, Marina del Rey, that was a sub-4.5% cap rate. So there is still a lot of capital interest in the broader L.A. market, with downtown being a notable exception, as it's still challenged with the operating performance. I think we'll see more transaction opportunities in downtown L.A in the next year. And as we do with all of our markets, we're underwriting everything and looking to take advantage of any mispriced opportunities.

[Operator Instructions] Our next question comes from the line of Linda Tsai with Jefferies.

It hasn't really come up on the call, but are you hearing of any impact on employment outlook as it relates to the higher cost of HB1 (sic) [ H-1B ] visas going forward?

Linda, we actually -- what we're hearing is that it potentially could be a net positive because the intention of this legislation is really to minimize the middleman, some of these H-1B, consulting firms like Deloitte for example. And what this will allow the large companies that can actually pay the fee, to just go direct instead of having to pay a consulting fee and then still having -- incurring other costs. And potentially, what we're hearing is that they can actually get a better or increased allocation, which would ultimately be good. So we don't expect a meaningful impact to Essex and it may actually become a net benefit.

Our next question comes from the line of Alex Kim with Zelman & Associates.

Just a quick one for me. Could you walk through the decline in year-over-year repair and maintenance costs and -- can that be attributed to the continued decrease of same-store turnover? And is it sustainable into Q4 and 2026 and beyond?

Yes. This is Barb. Repair and maintenance is lumpy and it does vary from quarter-to-quarter and even from year-to-year. I think we have done a good job on trying to control our costs via our procurement programs. We are seeing a little bit lower turnover and the delinquency turnover that we had incurred the last few years has been much more stable this year. So it's a combination of a variety of things. Too early to talk about 2026. We're still in the midst of our budget process, so more to follow.

What I would say, though, overall controllable expenses. We've done a good job keeping those around 3% for many years. And I don't see anything on the horizon that's going to change that heading into 2026.

And this does conclude today's question-and-answer session. And also, this does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.