Essex Property Trust 2026 Q2 Earnings Call

Thank you for joining Essex 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. We are meaningfully raising our full-year expectations for same property revenues and Core FFO per share, which Barb will cover in a moment. For regional highlights, starting with Seattle.

Operating conditions improved in the second quarter with 2.6% blended rent growth, representing a 340 basis points 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. 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. 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 one-time 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 5.4 times, 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.

Hey, Steve. Thanks for your question. It's Angela here. Happy to. Maybe I'll start from the blends. I think that's a good data point. July blends are coming in similar to the second quarter. I think things are moving along as planned and our fundamentals remain sound. Just for context, where July is coming in this year, it's slightly better than the same period last year. If you want to compare from a year-over-year perspective, it's interesting how things are trending. 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.