Essex Property Trust, Inc. ($ESS)

We are cautiously optimistic that we're going to see the political will to really try to reinvigorate our downtown NOA and clean it up and make sure people feel safe and that the businesses can come back and -- and so LA 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 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 -- Kevin is a good operator and a high-quality portfolio, 2,000 is in 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's a lot of capital, private capital that wants exposure to the high quality of life communities in Southern California. And I think as Canon 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 just in the 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.

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 add value that is still generally -- 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 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 in Seattle and gotten a lot of attention recently because I think Starbucks was looking to move and maybe they haven't to 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 ability to raise rents in Seattle. At this point, what we have seen is when we look at turn 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 will Gouging and in a environment, it's a win-win for everybody, both the landlord and also for the tenants.

Okay. Another large or big news item was the announced merger between 2 of your peers, AvalonBay in Equity Residential, leaving you as the only coastal multifamily REIT left. Actually, they own into the 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 close

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 there are going to be, I guess, more bigger -- but I don't expect that to have any impact on operations. I mean we run an incredibly efficient operating model. We operate 910 properties and 12 properties, it's 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 it's 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 frame were smaller mid-cap REITs outperform. And so I don't know if it'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 end of the call 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 the ad staff, you have to add infrastructure. And so just purely still 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 2 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 lives frothy? What's your view on that? SP999 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's also a rotation from 1 industry to the other. So in the recent past, multifamily has not been a favorable 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 the real estate with us, and they tend to have a 7, 10 or even longer investment horizon 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? 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 Seattle.

Those are our base cases. Now there are specific sub pockets and every asset is underwritten individually based on the individual characteristics of where we're seeing competitive demand drivers. So in some cases, that will be flexed up and down. I would say on the private side and then 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 if 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 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 positive trade outs and a 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 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 years.

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

Yes. This is a recent California law changes in several 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 I would -- 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 million 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.

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 passed after this year. But how should investors think about that program going forward?

Yes. We remain committed to the business is 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 1 of you answer and then if the other 2 agree or disagree and in Okay. So what -- this could be told as the disaster. 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 cover.

Anyone I agree.

We don't agree on everything, bu.

This 1 I'll direct to bar. 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.

What's 1 metric. This probably goes to part as well. But what's 1 metric investors should watch most closely in the second half of the year for ASX. .

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 stack to 2%, even though that's a decrease, it's still a lot of supply.

Ryland, are private market buyers too bullish or public market investors to 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 like for the past years. Eventually, that will shift. And I think that flows back into really great wealth compounding returned vehicles like assets.

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

Thank you for joining the ASX presentation SP-4 Thank you.