Essex Property Trust, Inc. (ESS) Earnings Call Transcript & Summary

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.