Essex Property Trust, Inc 2026 Q3 Earnings Call

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 risk 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 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 3rd 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. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase in our full-year growth outlook 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 2nd quarter and remained positive in the 3rd quarter, generating 2.1% growth. This improvement has been led by the East 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 leading the performance across this region.

Our blended rent growth of 90 basis points in the 3rd 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 3rd quarter was generally consistent with same period last year. Recent increases in the Treasury rates is still being factored into the transaction market. It would not be a surprise if 4th 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 deal acumen in a competitive environment, leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day one. Essex remains disciplined in focusing our capital allocation strategy to maximize SFO 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 3rd quarter results, discuss updates to our full-year guidance, and conclude with comments on the balance sheet. Beginning with our 3rd quarter results, we reported core FFO per share of $4, representing a 1-cent 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 expectations, and as such, we are raising the midpoint of same-property revenue growth by 1%. 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 4th 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 2-cent 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 SIFMA 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 5.4 times, 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.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Nick Yulico with Scotiabank.

Thanks. I guess just maybe starting out with, you know, the blended rate growth. You know, I think historically you don't typically see an acceleration in the new lease rate growth in the 3rd quarter versus the 2nd quarter.

But at the same time, you also have like Northern California as a region being very strong right now and sort of seems like it's strengthening in the 3rd-party data year-to-date. So, I guess I'm just wondering, maybe you could just talk about like what, you know, maybe what new lease rate growth looked like in, you know, Northern California versus the other regions. in the 3rd quarter? Thanks.

Hey, Nick, it's Angela here, and thanks for your question. And you're absolutely right. Typically, you know, sequential growth in blends from 2nd to the 3rd quarter is not— or 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 are— we have seen a slight increase on new lease rates. Increasing. So new lease rates from 2nd quarter to 3rd 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, and this is a good sign, but, you know, if we look at our blends, this year compared to last year sequentially, this year is, is doing better overall, not just in Northern California. So I'll give you an example. Seattle last year sequentially, new lease rates actually declined by over 700 basis points. This year, it's only about 120 basis points. So all our other markets are doing just fine with, of course, Northern California leading the charge.

Okay. Thanks. Thanks for that, Angela. And then secondly, in terms of LA, you know, I know you're getting sort of closer to that 95% financial occupancy you've talked about. What, you know, how should we think about the other components needed to, you know, help drive some better rental rate improvement in that market? Thanks. Yeah, Nick, good question on LA.

Certainly it's a market that we've been monitoring very closely. A couple of things I think have have— we're seeing green shoots in LA, although, you know, 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 markets. And, uh, Even though there's been layoff announcements related to entertainment industry, it's no longer meaningful. It's, it's a small portion of the economy with, you know, less than 100,000 jobs in the past couple of years. So there's some noise there, but 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 a third 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 a foothold in this market. Our next question is from Steve Sakwa with Evercore ISI. Thanks. I guess good morning out there. Maybe just kind of following up on the last line of questioning. You know, I know we still have the 4th quarter to go here, and I'm sure you're focused maybe more on just overall blended rate growth and not any one component, but, you know, 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 place call it a mixed or challenged job market, given that you've got low supply? Or I guess, you know, what, what gets new lease growth to really accelerate kind of moving into '27?