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

Good day, and welcome to the Essex Property Trust Third 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 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.

Thank you for joining Essex's third quarter earnings call. Today, I'll cover our operating performance for the quarter, considerations heading into next year and conclude with a transaction market update. Our path will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase for same-property revenue growth and core FFO per share. This outperformance has been primarily driven by Northern California, which has exceeded expectations. As such, we are now anticipating full year blended rent growth of around 2.9%, close to the high end of our guidance range. Moving on to regional highlights, beginning with Seattle. This market has gradually recovered from a soft start to the year. Blended rent growth turned positive in the second quarter and remained positive in the third quarter, generating 2.1% growth. This improvement has been led by the E side, benefiting our portfolio allocation in the region. Turning to Northern California, which continues to lead the nation in multifamily performance. We achieved blended rent growth of 7.3%, which was elevated by a strong leasing season with an extended peak that continued through September. As for Southern California, operating conditions remain stable, with Orange County and San Diego reading the performance across this region. Our blended rent growth of 90 basis points in the third quarter was in line with plan. Looking ahead to 2027, the outlook for the broader U.S. economy and labor market remains uncertain. Even against this backdrop, West Coast multifamily fundamentals offer a compelling case for continued growth above the U.S. average with encouraging green shoots supporting the potential for further momentum. Total housing deliveries are expected to remain at a historical low of approximately 40 basis points of total housing stock positioning our markets comfortably to generate rent growth within a modest job growth environment. At the same time, technology sector innovation continues to attract investments and drive economic activities supporting our expectation for job and income growth above the national average. Together with favorable rental affordability, these fundamentals provide a solid foundation for the next several years concluding with an update on the investment market, West Coast transaction volume for institutional quality assets in the third quarter was generally consistent with same period last year. Recent increases in the treasury rates is still being factored into the transaction market. We will not be a surprise if fourth quarter volume declines as buyers and sellers adjust to the new rate environment. Although historically, our data shows that rate moves have less impact on pricing and cap rates in markets with strong rental fundamentals. Lastly, I'm pleased to announce that yesterday, we closed on an acquisition of a 474 unit community built in 2022, located in the East Bay in Northern California, priced over $200 million and well below replacement cost, this asset is expected to generate a mid-5% yield. It is another example of our investment team's deo acumen in a competitive environment leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day 1. Essex remains disciplined in focusing our capital allocation strategy to maximize FFO and NAV per share growth. We continue to be well positioned to capitalize on market volatility with our efficient operating platform and strong balance sheet. With that, I'll turn the call over to Barb.

Thanks, Angela. Today, we'll cover our third quarter results, discuss updates for our full year guidance and conclude with comments on the balance sheet. Beginning with our third quarter results. We reported core FFO per share of $4, representing a $0.01 beat to the midpoint of our guidance range. The primary driver relates to better same-property revenues, which grew 3% on a year-over-year basis, led by the continued solid performance of our Northern California portfolio. Turning to our full year outlook. Revenues continue to exceed our expectations, and as such, we are raising the midpoint of same-property revenue growth by 10 basis points to 2.9%, driven by better scheduled rent growth. As for operating expenses, we remain on plan and are reaffirming our full year midpoint. Our expense guidance reflects higher controllable spend in the fourth quarter, which we have previously discussed. Taken together, we are raising the midpoint of same-property NOI growth by 20 basis points to 3%, representing sector-leading growth as we conclude 2026. The strong operating results led to a $0.02 increase in our core FFO midpoint. Finally, a few comments on the balance sheet amid the current interest rate environment. Our total debt maturities for 2027 at pro rata share are around $575 million, of which the lion's share is the $350 million in bonds that mature in May. This represents a very manageable amount of maturities next year given the size of our balance sheet. Further, we are well positioned as it relates to our floating rate exposure, which is around 12% on a pro rata basis of which just over 40% is tied to the SIMA index, which floats at a cheaper rate than SOFR. Lastly, over the course of 2026, we have been proactively hedging our floating rate exposure by executing approximately $600 million of swaps at pro rata share at an all-in fixed rate of 4.9% to replace swaps that expire over the next 6 months. While we will feel the effects of higher interest rates next year, we are favorably positioned relative to the peer group in a higher rate environment, with net debt to EBITDA of 5.4x and well over $1 billion of available liquidity, we have ample flexibility to meet our commitments, navigate the current rate environment and pursue opportunities that support long-term FFO and NAV per share growth. I will now turn the call back to the operator for questions.

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

I guess just maybe starting out with the blended rate growth. I think historically, you don't typically see an acceleration in the new lease rate growth in the third quarter versus the second quarter. But at the same time, you also have like Northern California as a region being very strong right now and sort of -- it seems like it's strengthening in the third-party data year-to-date. So I guess I'm just wondering, maybe you can just talk about like what -- maybe what new lease rate growth looked like in Northern California versus the other regions in the third quarter?

Nick, it's Angelo here, and thanks for your question. And you're absolutely right. Typically, sequential growth in blends from second to third quarter is not -- or do you typically see a deceleration because we're just -- it's just normal seasonality for this business. And in fact, Northern California has bucked that trend and we have seen a slight increase on new lease rates increasing. So new lease rates from second quarter to third quarter actually improved by 20 basis points. That is unusual. But then again, this market has had tremendous momentum as it starts its recovery. And this is a good sign. But if we look at our blends, this year compared to last year sequentially. This year is doing better overall, not just in Northern California. So I'll give you an example. Seattle lastly, new lease rates actually declined by over 700 basis points. This year, it's only about 120 basis points. So all other markets are doing just fine with, of course, Northern California leading the charge.

Okay. And then secondly, in terms of L.A., I know you're getting sort of closer to that 95% financial occupancy you've talked about. How should we think about the other components needed to help drive some better rental rate improvement in that market?

Yes. Nick, good question on L.A. Certainly, it's a market that we've been monitoring very closely. A couple of things, I think, have we're seeing green shoots in L.A., although these things will take time, but supply continues to decrease. So over the past 2 years, supply has decreased by over 40% in the LA market. And -- even though there's been layoff announcements related to entertainment industry, it's no longer meaningful. It's a small portion of the economy with less than 100,000 jobs in the past couple of years. . So there's some noise there. There certainly isn't anything that we are concerned about. But what we've been really focusing on is the defense and aerospace green shoots. And that industry is expected to grow faster in GDP over the next 10 years than the rest of the economy and it's estimated to surpass over $1.5 trillion in the next 10 years. And 1/3 of that funding is allocated to Southern California. So it's great that there's a catalyst for demand growth to come in this market. And certainly, it's the first we've seen in a long while in terms of a major industry taking its foothold in this market.

Our next question is from Steve Sakwa with Evercore ISI.

Here. Maybe just kind of following up on the last line of questioning. I know we saw in the fourth quarter to go here, and I'm sure you're focused maybe more on just overall blended rate growth and not any 1 component, but I guess it does feel like new rent growth this year will probably be slightly weaker than the new lease growth, I guess, posted last year with renewals obviously better this year. As you kind of like look forward, is there a path to new lease growth accelerating next year in a, let's call it, a mixed or challenged job market given that you've got low supply? Or I guess what gets new lease growth to really accelerate kind of moving into '27?

Steve, thanks for your question. And it's a good point that you made to not get overly focused on a particular metric like new lease growth because we are focused on the blends, and we have to be because that's ultimately what flows to the bottom line. So as I've said in the past, we can actually fabricate or even generate a fantastic news rate growth. All we have to do is pull back on occupancy or pull back on renewals, but that is not going to maximize total revenues either. So -- and then just keep in mind, new lease rates when you leave our unit vacant, 1 week cost you 2%. So we're not going to run our business focusing on pushing new lease rate growth. That does not mean that the market fundamentals are not sound and were not improving. And if we look at new lease rate growth this year compared to last year at the same time, it certainly has done much better. And so once again, I point to the sequential number. Last year, new lease rate growth sequentially went down about 40 basis points for the entire company as a whole. This year, sequentially, new lease rates is only down 120 basis points. So that would tell me that we actually have improvements in the lease rate growth, and that's continuing. In terms of the overall outlook, Steve. On the jobs, for example, that's really what's going to drive new lease rate growth is that when we look at by region, of course, Northern California remains very strong with great momentum there. But Seattle, interestingly, is starting to show some positive trends. And when we track the top 20 tech openings, Seattle, for the first time, has reached its pre-covid average in job openings in the first time in the last 2 years. And with the office expansion announcements that occurred last year, we -- and supply deliveries continue to decline, we do anticipate that Seattle will have a nice rebound around towards the end of next year. And L.A. remains stable. It's gradually improving with green shoots with the defense sector and supply decrease as well. So I think all our markets are -- should actually do better than last year. If nothing else, look at our earnings, it's quite a bit better this year compared to last year.

Well, because you just teed me up for my next follow-up question, which is could you talk about the earn-in as we sit here today for next year and maybe where are renewals going out kind of for the fourth quarter and into, I guess, early part of '27?

Yes. The renewals are going out in the mid-4% range in the fourth quarter. And so it's unplanned, and it's actually a little bit stronger than what we had originally hoped. Now that means that asking is actually higher. Just -- I know that you guys wrote a piece and you were looking at asking rents. And so asking rents are higher they're in the mid -- low to mid-5s. And we anticipate that we'll land around mid-4s on the renewal side and the actual renewal.

Our next question is from Brad Heffern with RBC Capital Markets. .

Is there any update you can give on where October spreads are trending? Obviously, I'm sure you're seeing the normal seasonal follow-up, but I know you also had the longer than normal leasing season. So I'm wondering if that's playing into it at all.

Yes. On the October spreads, it's -- let me take a -- it's generally in line with plan. It's obviously starting to taper off. Keep in mind, we are now hitting our seasonal low here. And Northern California is leading the pack. And on the new and renewal in Northern California and a new is well north of 10% and with everybody else on the new side, starting in the negative territory as it should be in October.

Okay. Got it. And then can you just go through concessions by market and how those have changed, if they've changed?

They're happy to. So conceptions by market. So overall, let me just start with portfolio average. So we have data here. So concessions third quarter compared to last year compared to this year, not a whole lot different. So third quarter last year, portfolio averaged around 6 days this year, a little bit more -- a few days more around 10 days, nothing to get excited about. Heading into the fourth quarter, we're around a week, so similar to last year's levels. And if we're talking about by market, let me see, so Northern California, effectively no concessions. PNW is less than a week in Southern California over a week. So once again, these are all normal and very stable levels. .

Our next question is from Eric Wolfe with Citi. .

I might have missed this in your answer to Steve's question, but did you say that the earn-in is still around 150 basis points. I just wanted to confirm that.

I didn't finish my answer. So our earn-in which we originally published at around 150 basis points about a month ago, we are assuming a slightly higher earn-in, probably an additional 5 to 10 basis points. And just for context, last year, it was about 85 basis points. So it's certainly much better this year.

Yes, makes sense. And then just second question. You mentioned some positive indicators in Seattle that could inflect late next year. I think you said late next year, so I want to confirm that. But there's also been some news around Microsoft trying to buy out 60,000 employees. Does that impact your thoughts on near-term fundamentals? Or do you think all the other sort of positive indicators that you're seeing will sort of more than offset that.

Yes, that's a good question. Yes, we saw the Microsoft announcement. But what we've been looking at and tracking very closely is also the unemployment and continuing claims for the market, and it has remained well below the long-term average. So this tells us that layoff has been absorbed very quickly or they've been rehired -- and more importantly, with this market, employees are doing what they're supposed to do, which is moving business units, to reallocating their resources to higher profit businesses. And so once again, this doesn't really concern us too much. When we look at everything else, all the other fundamental data points point to a healthy environment. The one comment I will add is that, remember, when Amazon had all this layoff announcements well they ended up rehiring a lot of the layoff employees. So there's going to be that continued movement, but it hasn't been in such a way that it's disrupted normal market functions.

Our next question is from Alexander Goldfarb with Piper Sandler.

Two questions for you. The first question, Angela, Aerospace and defense certainly has been getting a lot of attention in 25-plus years in REIT-land never really received this amount of attention. As we think about Southern Cal, especially SpaceX and the other companies that are down there, is this more just like sort of cocktail conversation or are your communities seeing actual evidence where increased hiring is actually showing up to rent apartments in your Southern Cal. That's my first question, then I have a second. .

Okay. Alex, thanks for your question. I think the difference with respect to the aerospace defense now versus what's been discussed in the past is that now there's actually been commitments or investments earmarked that's been published. And so $1.5 trillion is an eye-popping number and have a stated that 1/3 of it allocated in Southern California is as far as we're concerned, really terrific indication of where that industry is headed. As far as having SpaceX headquarter in the L.A. region and of course, Anduril in the Long Beach area, having 2 major industry giants taking -- having a footprint in those markets are also good, very good indication for that market. Now having said that, once again, these are relatively new, and money is just getting allocated. Companies are just starting to hire. And so it would be too early, way too early to see that translate to job growth. It's just never happened that quickly, that announcement and then the immediate job hire. It always takes time for feasible to find the right talent, find the right office space for them and grow that business.

Okay. And then the second question is on Seattle. I don't know if you saw the article, but there was a recent business survey local businesses not too happy with the way Seattle is going, thinking about leaving, what have you, obviously, the Microsoft news, but can you just break down the market because you talk about strength from the East side, weakness in the CBD, where you have less exposure, there's obviously the political overhangs and just trying to understand the market if Seattle retains its economic engine or if there are disruptions where it may be a bifurcated market even next year and therefore, the hopeful growth that many of us think about is coming may not actually occur because of other dynamics in the market, whether it's a split between East side and CBD or where companies are allocating they're hiring there versus Bay Area or elsewhere?

Yes. That's a good question on Seattle, Alex. What we see is certainly Eastside has been a beneficiary of some of those migrations from -- not just from downtown Seattle, but from other markets as well. And we do see that continuing because certainly, no employers are making noises about leaving the e-side, I think that article really relates to the concern about the legislation and I think when legislation becomes business unfriendly and discourages housing, I think that's a concern for all of us. And I do think that it's a good starting point to have a conversation with the legislation with Seattle and the city of Seattle. I'm hopeful that they'll take note. I know in the past, when these conversations occurred, they were adjustments and both sides were the table trying to work things out. And so I'm hopeful that, that will occur once again. But ultimately, with Eastside being the beneficiary, I think Essex is in a solid position. But don't forget, keep in mind, the other overhang in downtown Seattle has been supplied and supply is starting to abate. So at least there will be some relief on that end.

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

Just wondering if you can go over our latest thoughts around capital allocation. You mentioned the recent Oakland acquisition was in the mid-5s, how do you kind of weigh that relative to share buybacks? And also curious if you're seeing increased opportunities in lending or preferred equity? .

This is Rylan here. Just starting with the capital allocation strategy. What we're really trying to do, consistent with the past is source the highest risk-adjusted returns paired with the lowest cost of capital to drive NAV and FFO per share, so you mentioned several potential investment opportunities that we've done this year. When we think about our menu of options from acquisitions, development, preferred equity, reinvestments, stock buybacks, debt paydown, we've allocated to 5 of those 6 in 2026. So we're going to remain nimble. Our strategy is not going to change, and we're just going to -- when we see an opportunity to create NAV and FFO per share, that's where we're going to lean in. As it relates to the most recent question about the deal that we just announced yesterday, again, this is really consistent with what we're doing for the past several years, where we've been allocating acquisition capital into newer assets where we can drive efficiencies from our operating model in markets where we have conviction of growth. As you mentioned and Angela mentioned, this is a mid-5 initial yield, and we believe the East Bay is in the path of growth. We've seen this before in previous cycles where you see really strong rent growth in the tight housing market in San Francisco and the Peninsula that's moving into Oakland and down Selter Milapitas, and we believe this is coming with a high level of conviction in the East Bay. We're really comfortable with basis in this property. And most importantly, we think we can create value. We've got 2 communities nearby, so we can take costs out, improve the retail leasing. So this is, I think, a nice win for our investors. But bigger picture, as we think about capital allocation, all that whole menu is on the table for us, and we're going to continue to lean in where we can drive the most value for our shareholders.

And then just with the increased volatility in rates, curious if you are seeing kind of more opportunities on that lending side. .

Yes. I'd say it's still a little bit too early. I think the market is still adjusting to the move in rates that we've seen in September. But as the financing market gets a little bit tighter, that should create more opportunities for us on the preferred equity book as well as on the acquisition side. So it's still early. I think buyers and sellers are still adjusting. I think you've heard the public commentary in terms of bid-ask spreads widening. I think that's fair on the West Coast as well. So we're, again, underwriting everything, trying to create opportunities. And I do think it's going to be -- will create additional options for us in the near future.

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

Just with respect to the mid-4% renewal rate growth that you highlighted on achieved rates in the fourth quarter, I mean, are you guys more focused on building occupancy today ahead of next year? And I'd be curious where occupancy has trended subsequent to quarter end? Or is the move from the 5.3% renewal rate growth you achieved in the third quarter, the mid-4s. Is there some other factor that's causing you to pull back a little bit?

Austin, it's Angela here. Thanks for your question. And so we typically favor occupancy heading into our seasonal slow in the fourth quarter. And so you'll see us continue to deploy that strategy. With the caveat in certain pockets of Northern California work, we're continuing to see strong momentum. That, of course, will allow us to continue to favor rents and we'll see how long that lasts, but we certainly will try to maximize that momentum as much as possible. .

And then as far as where occupancy sits today.

Occupancy today is 96.3%, I think. -- yes 96.3%.

Helpful. And then just last one for me on the expense side. It looks like the guidance implies a fairly big pickup late in the year. Anything specific that's driving the increase? And then any considerations for expenses ahead of next year?

Austin, it's Barb. As we've said the last several quarters, we did expect a second half increase in our controllable expense spend. It is just timing on when we -- we're going to finish up some of the projects that we had going on this year. So that is what's really driving the Q4 expense increase of about 5% on a year-over-year basis. It's really driven by that controllable side, which has been light year-to-date. So no change from our original plan this year. And as we look to 2027, we're still working through the budget process. But as I look at things today, when I look at the key categories that we publish on [ S-10 ], I don't see too many deviations in year-over-year growth from what we expect in 2026. With the exception of property taxes. We did have some favorable profit appeals this year, which allowed our property taxes to be only 60 basis points increase on a year-over-year basis. I would assume that, that's going to be more in line with our historical average of 3% to 4% next year. So that's the one line that I think has a little more pressure than the other lines.

Our next question is from Jamie Feldman with Wells Fargo .

Great. I guess as we're thinking about next year, can you quantify how to think about the earnings impact from the JV swap resets, including the $496 million moving from $2.7 million to $5.3 million and then the remaining $128 million. How do we think about the rate and timing when we're building out our models for next year?

Yes, Jamie, this is Barb. It's a good question. So we do have 3 swaps maturing within the joint venture portfolio one December 1 of this year and then two at the end of March next year. We have executed new swaps for 80% of that at an all-in fixed rate of 5.3%. And while our rate is going up, it's obviously a byproduct of the market on sec-specific issues as rates are higher. What I can tell you is if we waited to hedge and we didn't hedge, our rate would even be higher today in the high 5s. So we feel good that we do have a better than market rate going into next year. The impact to our interest expense from the swaps that we have executed at pro rata share will lead to a $0.09 increase to interest expense in the joint venture portfolio. And as you mentioned, there is a 20% is not hedged, and that is going to be floating at this time, and that will add a couple more pennies to interest expense, depending on what silver rate you assume and we'll enter the market, if we see an opportunistic window to hedge that, we might. But right now, it doesn't make sense to hedge that. So all in, $0.10 to $0.12 increase next year on interest expense from the swaps at Coratta share.

Okay. And then the term loan, I don't think that's hedged either. Are you kind of making an interest rate bet overall? Or it just was cost prohibitive or you just felt like you could be patient on it.

Yes. The term we did in September. Once again, we don't have a lot of variable rate exposure. Really, our exposure to SOFR is 7% at pro rata share. So it's very low on a total basis and that does include the $275 million term loan that we just did. When we close that terminal and we look to go swap it, it didn't make sense. It was very prohibitive. We're paying up for a lot of interest rate increases that may or may not happen. We'll monitor the market and look to see if there's a window that makes more sense. But at the time, it didn't and it still doesn't today.