Essex Property Trust, Inc.

Good day and welcome to Essex Property Trust first quarter 2025 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 introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust, Thank you, Ms. Kleiman. You may begin.

Welcome to Essex First Quarter Earnings Call. Today, I will cover highlights from the quarter, our near-term outlook, and provide an update on the investment market. Barb Haque will follow with prepared remarks, and Rylan Burns is here for Q&A. We reported a healthy first quarter with core FFO per share exceeding the midpoint of our guidance range. Additionally, We are pleased to start the year with $345 million in acquisitions in Northern California, which were funded by dispositions in Southern California. This reallocation into higher rent growth markets and further optimization of our operating platform will enable us to generate above-market returns. Turning to operating highlights. First quarter results trended slightly ahead of plan with 2.8% blended net effective rent growth. and new lease rates improved sequentially from the fourth quarter for the same property portfolio. Two key factors contributed to our performance. First is delinquency improvement to a level close to our historical average, mostly driven by Los Angeles, where delinquency improved to 1.3% of scheduled rent compared to 3.9% for the same period last year. Second, we executed our operating strategy which contributed to a notably low turnover rate of 35% while achieving positive new lease rate growth and stable occupancy levels. Great job, Team Essex, on these accomplishments. From a regional perspective, in the first quarter, new lease rates turned positive in all three major regions, led by Northern California at 1.5%, Seattle at 1.3%, and Southern California in last place, as expected, at 20 basis points. On a more granular level, San Mateo left the same property portfolio with 4.8% and Oakland lagged with negative 1.2% in new rate growth, primarily due to elevated supply. Fortunately, Oakland has begun to demonstrate incremental improvement as supply abates and concessions moderate. Moving on to the full year outlook. With our solid performance today, under normal circumstances, Essex would consider revising our guidance upward, but lack of clarity on the U.S. and global trade policy have led to macroeconomic uncertainty, including the impact on business investment and job growth. As we navigate this complex environment, we will be nimble with our operating and investment strategy, remain focused on our objective to maximize revenues and to generate long-term accretion. Ultimately, the West Coast multifamily fundamental is well positioned for a wide range of economic outcomes. Total new housing supply delivery as a percentage of stock in 2025 is exceptionally low at only 50 basis points in the Essex markets and is expected to moderate throughout the year and to decrease further in 2026. Accordingly, rents should continue to grow even in a low job growth environment. This downside protection is a key reason why our supply-constrained markets have outperformed over multiple economic cycles. Furthermore, the cost to own versus to rent remains prohibited at over two and a half times more expensive. Overall, we remain excited about our portfolio's growth potential as our markets continue to lead in innovation, which provides a solid foundation for economic growth. Concluding with a transaction market update, Deal volume in our markets was higher in the first quarter compared to the same period last year, totaling $2.5 billion with cap rates consistently in the mid to high 4% range. With the onset of broad market volatility in early April, we have limited data points as to the impact of cap rates from ongoing policy changes. However, several deals in our markets have recently been awarded or had contingencies removed, and the valuations have remained consistent. with what we've seen over the past year. Our year-to-date transaction activity has been balance sheet neutral, where we have allocated capital into newer assets in submarkets with the best supply-demand fundamentals and rent growth potential. We look forward to more opportunities to continue our expansion and enhance accretion for our shareholders. With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with comments on our first quarter results and fill your guidance. followed by an update on investments and the balance sheet. I'm pleased to report first quarter core FFO per share exceeded the midpoint of our guidance range by 5 cents. There were three factors that led to this outperformance. First, our consolidated portfolio performed ahead of plan, primarily driven by same property revenues, which grew 3.4% compared to one year ago. This was 40 basis points ahead of plan, driven by lower delinquency and higher blended net effective rents. Second, our co-investment portfolio exceeded our forecast due to better NOI growth from our joint venture properties and higher preferred equity income. And third, interest expense came in favorable to our forecast. As for our full year outlook, we are reaffirming our same property growth and core FFO per share guidance ranges. While we have gotten off to a solid start to the year and are trending slightly ahead of plan, we felt it prudent to get further into the year before making any adjustments to our forecast given the heightened economic uncertainty that has recently developed. In regard to the cadence of same property revenue growth at the midpoint, we expect the first quarter will be the highest growth followed by the fourth quarter. The second and third quarters are expected to be our lowest year-over-year growth due to tougher delinquency comps compared to the prior year. Turning to investments, we've made progress on our growth strategy year-to-date while match funding these investments on a leverage neutral basis. While these investments are net neutral to our 2025 FFO forecast, they further position the company for long-term outperformance. We'll continue to remain disciplined as we seek further opportunities to deploy capital, utilizing the most attractive capital sources available to maximize core FFO and NAV per share growth while preserving our balance sheet strength. As it relates to the preferred equity portfolio, we received around $27 million in redemptions so far to date. One of the redemptions was on our watch list that we stopped accruing on over a year ago. Since we were fully redeemed on our investment, we realized $1 million in incremental interest income this quarter that won't repeat next quarter. As it relates to the rest of the year, we expect the remaining $125 million in redemptions will be split evenly between the third and the fourth quarters. Lastly, a few comments on the balance sheet. We are pleased to have refinanced the majority of our 2025 debt maturities earlier this year with the unsecured bond offering in February. Overall, our balance sheet remains a source of strength and has proven durable throughout all economic cycles. With minimal refinancing needs remaining in 2025, access to a variety of capital sources, and over one billion in available liquidity, we are well positioned. I will now turn the call back to the operator for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. Request participants please limit to one question and one follow-up and rejoin the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Nick Ulico with Scotiabank. Please go ahead.

Thanks. First question is just in terms of the guidance, I think the original guidance for the year assumed some modest acceleration on your blended rate growth in the second half versus the first half of the year. Can you just talk about sort of the confidence level today of still achieving that, and if you didn't get that, kind of where it put you on the range for the year? Thanks.

Hey, Nick, it's Angela here. Thanks for your question. And yes, you're correct. Our original assumption includes a slight increase or incremental increase in the second half. And our current view is that relationship should remain intact. And keep in mind that we didn't revise our guidance. So what happened here is that first quarter we outperformed. And the rest of the year, and when you look at our second quarter, blended lease rate growth, it looks more incremental and it looks like maybe we had some concern. But it's really a function that the first quarter outperformed and we did not change our guidance.

Okay, thanks, Angela. And then second question is just on tech. It's something that comes up a lot from investors in terms of the impact on your portfolio. There has been some you know, headlines and concerns about the tech sector not, you know, growing jobs the way maybe they have been, you know, they may not grow going forward. Just any perspective, clearly it's not your entire portfolio, but any perspective on that and any trends you're seeing on the ground related to tech? Thanks.

Sure thing. Now, that's an important data point that we track closely. And when we look at the third-party reports, what we're seeing is that the opening jobs of the top 20 tech companies, that's the most meaningful indicator of the health of that sector, has remained steady and incrementally increasing each month. So it dropped in around November, December, but that's typically seasonally low period. But since then, every month it has increased. And that gives us an indication of the hiring to come. And if we were seeing any softness there, we would have seen either plateau or a decline, and we're not seeing that.

Thank you.

Thank you. The next question comes from Eric Wolf with Citibank. Please go ahead.

Hey, thanks. Could you just talk about your occupancy strategy in the second quarter? I think typically you push a little bit more on rate and let occupancy come down a bit. Just wondering if that's also the case this year or if you're trying to be a little bit more conservative than normal given the current environment.

Yeah, no, that's a good question and a good observation on how we think about the business. What we're seeing right now is that our occupancy strategy is consistent with our approach as we head into the peak leasing season. But it's going to be nuanced, as it should be. So for example, in April, we are pushing occupancy in Northern California. In Seattle, it's transitional. It depends on where you are, because supply in Seattle is heavier in the first half. We're talking about 60% of the delivery. And then, of course, Southern California we are not, I'm sorry, Northern California, we're pushing rent, not occupancy. Seattle is in transition and Southern California, we are still holding or focusing on occupancy, mostly because of two reasons. Southern California peaks later than Northern regions. So naturally that would mean that you start pushing rents at a later point in time. But also Southern California peaks over 60% of the supply is occurring in the first half. So that is going to ebb and flow as we see the market conditions. But once again, what we're experiencing now on the ground is consistent and the fundamentals are solid.

So I guess in aggregate, in terms of sort of the demand statistics that you look at and the important things, You look at things through sort of forward demand, whether that's renewal rate or exposure, like all of that looks relatively normal for this time of year. Basically, there's no signs like of incremental weakening since we had sort of the tariff announcements or other announcements that have come over the last month.

No, we haven't seen any signs of weakening or cracks, and the tariff announcement is has not had any impact. What we're trying to anticipate is all the different policy changes. What does that mean for the rest of the year? Which is why we've taken a more cautious approach on holding any revisions to the guidance until we have better visibility. But it's certainly not because of any concern with what we're seeing on the ground in our markets.

Got it. Thank you.

Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Hello, this is Sanket Anwar. Steve, thanks for taking my question. I had a question around blended net effective rate growth assumption that you guys have given for second quarter. And it just assumes like 20 basis points of acceleration at the midpoint. Can you help us think through that? And also, what are the new lease rates you are achieving in April? You have achieved in April and May and renewals as well.

Let me make sure I'm asking or answering your question. You're talking about our second quarter blended of 3% and how we thought about that. Okay, and then of course new lease rates. So as far as the second quarter blended lease rates guide of 3%, that is consistent with our original plan because we have not changed guidance. And so I understand that it looks like, oh, there's not that much acceleration because, you know, first quarter landed at around 2.8. But keep in mind, our first quarter guidance was 2.5. And so we had expected or planned for 50 basis points acceleration. And so the, you know, that the incremental increase, it's once again, not because we have a different view of worsening on the ground. It's really we outperformed in the first quarter and we have not changed our guidance. As far as where new lease rates are landing in April, it's consistent with plan. It's consistent with what we saw in around March. And there's nothing there that's unusual.

Makes sense. And can you give us some color on what renewals you are able to achieve Oh, renewal. Yes. Sure thing.

So, renewals, once again, very steady. In April, you know, we send out renewals and the low fours landed around high threes. So, once again, consistent with plan.

Thanks. Thank you. The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, morning out there. Angela, there are third-party data providers out there that publish information on how the different companies, different regions are doing. Do you guys participate in helping those entities get their information or are those entities merely scraping data off your website and thus you have no control over how they're aggregating their data or how it's being processed?

Hey, Alex, it's a good question. We have absolutely no control over what gets published, and we do not participate in, you know, what the third-party providers generate.

Okay. And then the second question is, you know, in Sacramento, they're debating, you know, trying to rein in CEQA to encourage development in the urban areas. Just sort of curious, your take on this AB609, if it seems like, you know, finally CEQA could be reined in and we could see some improvement in investment, or if there look to be some workarounds where, you know, CEQA will not relinquish their power and thus, you know, remain the inhibitor that they've been.

Yeah, Alex, we view that trend is a positive. It's going the right direction. I think it will take time for these policies to ultimately get to where they need to go. And I do think that the legislators recognize that regulation does not solve the housing crisis. In fact, it's been proven that regulations actually make things worse. And it's really not, you know, tenant advocacy as they think. It's really anti-growth. And so, once again, we're pleased that these conversations are being discussed. We're pleased with that California has begun to move toward a better environment and heading the right direction. We just need to see how this plays out in the end and how long it takes.

Thank you.

Thank you. Our next question comes from Austin Worshmith. with key bank capital markets. Please go ahead.

Great, thanks. Maybe just digging in a little bit to the initial assumptions. I think, you know, the 3% market rent growth was comprised of Seattle and San Diego being close to the 4% range. I'm just curious, I know it's still early, but how are kind of the respective regions or markets tracking, you know, which are tracking a little better and are any tracking a little worse at this point? Thanks.

Hey, Austin. Generally speaking, Northern California, especially Santa Clara and San Mateo counties and parts of Seattle, are leading our portfolio performance, and that's consistent with our expectations. And Southern California is softer, especially L.A. And so if we're talking about a range of possibility, you can safely say that the Submarkets I mentioned in the northern region are maybe slightly toward the higher end of our range, and southern California, particularly L.A., is toward the lower range and averaging out to be about the same spot where we will ultimately land.

And then given you guys typically tie your renewal rent growth pretty close to your view on market rent growth, and I think you referenced renewals are still coming in kind of in that mid to high 3% range. Should that be sort of an indication of how market rents are tracking maybe relative to your initial expectation?

Yeah, I think that's a fair assumption. And ultimately, if you look at our first quarter performance, which, you know, blended came in a little bit higher than expected. And that was in both cases, both renewal and new lease rates slightly higher. But it wasn't a huge acceleration, right? These were incremental benefits. And so I think in the current economy where we had originally, you know, forecast a moderating economy, it's playing out that way slightly better. And then you throw in tariffs in the mix, not sure what happens. But we do view that as far as our guidance is concerned, the downside risk is quite low.

That's helpful. Thanks, Angela.

Thank you. The next question comes from Chana Gallen with Bank of America. Please go ahead.

Thank you. Good morning to you guys, and congrats on the first quarter results. Angela, when you say you would have raised the guidance kind of barring the macro uncertainty, would you be referring to FFO or the same store revenue or both?

Hi, Yana. Yeah, it's Barb. It's really more on the FFO side, on the core FFO side. We do have a few items, like I mentioned. We got some preferred equity income this quarter. That is one time that is real to the bottom line. So that's really where we would have focused on. I think on the same story, we would have waited until more mid-year after we get further into peak leasing season.

Thank you. And then switching to transactions, just kind of curious if we should continue to expect to see some trading from Southern California to Northern California, and if you're kind of continuing to potentially review any new markets.

Hi, Ayanna. Rylan here. Yeah, we're really pleased with the execution of our first quarter transactions, and we'd love to replicate it. Obviously, we're making all of our investment decisions on an investment-by-investment basis, and it's not always easy to do, but we're pleased with our first quarter transactions, and to the extent that we can drum up additional opportunities to execute on that strategy, we will continue to pursue it.

Any comments on the new markets?

Yeah, sure. Hey, Jana. As far as the new markets are concerned, we, of course, continue to study other markets to make sure that we're making the best long-term decision. But at this point, when you look at the potential upside in our markets, especially with Northern California just starting its recovery, it's a lot more compelling than to go to markets where you have over 20% to 30% rent growth and with supply headwinds. And so for the foreseeable two to three years, it wouldn't make sense in terms of a trade, absent of, of course, a major distress that changes pricing. But based on what we're seeing right now, the majority of the upside is in our markets, and that's why we're so excited about our northern regions.

Great. Thank you so much.

Thank you. The next question comes from Jamie Feldman with Wells Fargo. Please go ahead.

Great. Thanks for taking the question. I want to dig deeper into LA, which sounds like it's slightly disappointing from your initial numbers. Can you just talk about what do you think is going on there? And then just thinking about the wildfire impact, any thoughts on what the what that's going to look like for occupancy rents and just kind of behavior patterns for people's housing needs since we're several months out now?

Yeah. Hey, Jamie, you know, L.A. is a huge county and it's more complicated than something we could easily dissect. But the big picture here with L.A. is that in order for us to see pricing power with L.A., two things need to happen first, starting with delinquency recovery. Delinquency level need to return to near historical average. Right now we're making great progress, but we're not there yet. I mean, delinquency at 1.3% is still well above the historical average in LA. And so, you know, that's one piece. And once you get that delinquency level, close to the long-term average, then we have occupancy. Then we can build occupancy. And after that, you can have pricing power. So that's ultimately where we see the path to improvement in LA. As far as the market is concerned, the labor market remains soft. And I think that is A lot of things happening there, and I don't think that's too dissimilar from a national level in terms of just a generally soft implementing economy. But the film industry has not yet rebounded, and we had hoped that the tax incentives that were implemented would revitalize the industry quicker, but obviously we didn't plan for it. It was just something that would have been a nice, upside for us, and it's just going to take more time.

Okay, and then in terms of the wildfires, any kind of final thoughts on impact, whether it's essential occupancy, rent growth, or just sub-markets that are more or less in demand?

Yeah, the wildfire, it's an interesting situation in that the market does have a shortage of housing, but the wildfire impacted mostly single-family homes, and these are high-end single-family homes, and a lot of the people there have other means and would want, say, a three-bedroom or larger. So the unit mix really isn't conducive to what we have offering, and nor are those types of customers would be our typical tenants. And so we really didn't expect to see a meaningful impact on either occupancy or otherwise in L.A., which is basically what has happened.

Okay. Thanks for the L.A. answer. So I guess, Rylan, you know, with the new development start, you think this is something we'll continue to see more now that you're seeing supply really drop off across the country? And then also, you know, the acquisitions that either you've underwritten or others have won, What are people underwriting in terms of growth? It seems like you've got some negative leverage deals going on right now. What's the typical outlook?

Hi, Jamie. Yeah, I'm going to address those one at a time. As it relates to our 7 South Linden, South San Francisco project, as you know, our development team underwrites, call it 100 sites a year, and it's been over five years since we found a project that meets our return hurdles such that we're getting compensated for taking that development risk. We'd like to find more because when we look out a few years in the future and we see the supply pipeline, we do think there's a really interesting opportunity here, but we need to remain disciplined. And it's just challenging to find deals that really underwrite and meet our return thresholds. But we continue to look and we're hoping to backfill for others. As it relates to the transaction market, It depends on the sub-market, and we get some color from brokers about what other participants are underwriting, and it's a wide gamut. But I would say consensus sentiment on NorCal has improved materially over the past year, and we do think that we are losing out to some deals where people are probably getting a little bit more aggressive on the rent underwriting side. So trying to be prudent and take swings where we see a fat pitch. You know, in the past month since April 2nd, we have not, you know, there's been limited data points, but the, you know, the feedback from the brokers and several deals we're tracking is that there's really been limited changes in terms of market participation. Several deals have removed contingencies or first-arm underwriting. It's been consistent with what we've seen, you know, year to date and over the past year. So we're tracking it closely and expect to be active in the second half of the year.

Okay, thank you for that. Can you quantify it all, like some of the deals you've lost out on? What kind of growth people are assuming?

You know, there's a wide range. So I don't know if I can provide specifics as to what other people that are winning deals, but obviously, you know, some of these cap rates, we're assuming that they're underwriting, you know, mid-single-digit rent growth in some of these markets.

Okay. All right, thank you.

Thank you. The next question comes from the line of Brad Heffern with RBC Capital Markets. Please go ahead.

Hey, thanks everybody. On Oakland in the prepared comments, you said it started to show improvement. I think a lot of us had sort of given up on that sub-market. I guess, do you think in the medium term that could turn into a positive contributor or what's the outlook over the next couple of years there?

Hey Brad, good question there. Yes, on Oakland, we finally see a light at the end of the tunnel. And, you know, Oakland, what we're showing is that 75% of the supply is delivering in the first half. So by mid-year, we expect Oakland to start to revert back to a more normalized market dynamic. I don't think it's going to happen overnight, but it's finally going to turn. And we waited for a long time for this, so we're pretty darn happy about it.

Yes, okay. And then I saw you dusted off the ATM this quarter. I know it's not a meaningful amount, but I guess is that supporting development? Sort of why do that now and how do you view the cost of equity right now in comparison to the opportunity set?

Yeah, this is Barb. You're correct. We did a small issuance and, you know, when we issue equity, we need to have a premium to NAV and we do need to arbitrage not only the cost of equity, but what we're pairing it up with on the investment side. And as you mentioned, I mentioned we did start the development. We do have equity needs for that. And so we felt it prudent to take a little bit, a few chips off the table and issue a small amount. But when the stock moved away from us, we stopped issuing. So we will be prudent and match fund for that development that we started. Okay. Thank you.

Thank you. The next question comes from the line of John Kim. With BMO Capital Markets, please go ahead.

Good morning. Barb, you gave the best and worst quarters. I think first and fourth were going to be the best on same-star revenue based on delinquency comps. But I was wondering if you could provide the same metrics, best and worst quarters on blended lease growth for this year.

The first half of the year, we expect to be at around 3%, and that's the same in the second half of the year. So we don't expect too big a deviation to hit our 3% rent growth, all of us being equal. We do expect the second and third quarters will be the highest in terms of blended rent growth. So kind of the opposite from what we said on total revenue growth.

Got it. Okay. And then maybe for Ryland, can you just talk about the attractiveness of South San Francisco as a multifamily market? Will you be targeting workers in the area and therefore have a more corporate housing or higher corporate housing component to it? And how do rents in that sub-market compare to others in the peninsula?

Hi, John. Yeah, great question. We've done a lot of work, obviously, in the sub market, you know, high level, close proximity to the largest biotech hub in the world. We do know that the three existing institutional grade apartments in that sub market do draw a lot of demand from that oyster point sub market. But there's a lot of people that commute up and down the peninsula as well. So this is really targeting those types of workers, you know, a little bit higher compensation that are looking for, you know, good quality of life, nice community, easy access to the city or down to the peninsula. And so, you know, rents in this sub-market are, you know, comparable with some sub-markets you see a little bit further down. It's a higher rent market given the quality of this product, and it's a discount to some of the higher quality, uh, sub markets within San Francisco. So, uh, again, we, we feel really comfortable with where we've underwritten rents today on an untrended basis. And, uh, we do think given limited supply outlook over the next several years, there is an opportunity for that rent to move.

Will the product be different as far as, uh, more corporate housing or furnished apartments?

No, no, that is not part of our business plan.

Thank you.

Thank you. The next question comes from the line of Adam Kramer with Mortgage Stanley. Please go ahead.

Hey, guys. Thanks for the time here. Just wanted to talk a little bit about the blended rate growth kind of cadence over the course of the year. I think you guys have been really helpful in providing the disclosure and the detail here. The 20 basis points acceleration, I think I have that right from 1Q to 2Q. How does that compare to kind of typical a typical year, or how does that compare to history if we go back even pre-COVID? I don't know if you have those numbers in front of you, but just wondering, you know, kind of how does the cadence look this year compared to normal, and what might be some of the drivers here? Is there a bad debt impact here? Is there anything else that's kind of impacting the sequential cadence here?

Hey, Adam. On the sequential, I probably wouldn't get too concerned about this 20 basis points delta just because I know that the you know, it looks like it's de minimis. And once again, I just want to reiterate, it's a function of us not revising guidance for the rest of the year. It's not a commentary or concern about Q2 or thereafter. You know, if you look at our performance last year between first quarter and second quarter, obviously the spread was larger. But First quarter last year was only 2.2. So it's going to vary from quarter to quarter depending on market conditions. But I would point to encourage you to look at full year expectation. So if you look at our full year expectation of the blend at 3 at midpoint, it's not that different from what the sector is seeing in the market. And I think that's probably... a more relevant number than these, you know, quarter-by-quarter or month-by-month variations.

No, that's helpful. And I just wanted to ask, you know, about this kind of commentary around, you know, kind of not raising the guidance but feeling really good about the 1Q results. You know, maybe, I mean, a little bit of a theoretical, I guess, conceptual question here, but, you know, if you're sitting here in 90 days, You have another good 2Q, just like 1Q. What would you need to see from a macro perspective or some of these other things you track that could give you the confidence to raise at that point? What would need to be different versus where you are today after a good 1Q?

Yeah, Adam, that's a good question. Essentially, this conversation is really what are the range of possibilities? And if the conditions on the ground is consistent with what we had expected heading into the year, we certainly will have a higher level of confidence in raising. Now, here are the variabilities. So, for example, on something like tariff impact, we don't expect that to have too much of an impact on the top line, for example. Because with low supply, we don't need a lot of job growth. But if there is a significant increase in material cost, which will have a direct impact on our operating expense, we're not seeing it yet, but that outcome depends on the timing of that policy and how it gets implemented. So that's why it's so difficult to predict. You know, you saw that. I know a couple people published and noted that we pulled our macro guidance on jobs. Once again, it's very opaque on that if we're looking at the BLS data. And so, for example, you know, BLS just is not as reliable anymore. The participation has fallen. So pre-COVID... survey participation was 60% of the company. Today, it's only 30%, which is why we started looking at other sources, other third-party sources, and trying to look at job hirings. So everything would point to that the market and the fundamentals are healthy, and we certainly won't have reservations on raising, but for this pesky little thing on public policy and what that means on the expenses. which is why we wanted to just get another few months behind us to be able to set a number that we can really count on.

Great. Thanks, Angela.

Thank you. The next question comes from the line of Michael Goldsmith with UBS. Please go ahead.

Good afternoon. Thanks a lot for taking my questions. In the prepared remarks, you said that ultimately the West Coast multifamily fundamentals are well positioned for a wide range of economic outcomes. Why do you think that? And do you see it better than other markets such as the East Coast or the Sunbelt? Thanks.

Yeah, that's a great question. One of the reasons for that comment is that the downside risk is lower in our markets. and it's primarily because of supply. And when you have supply, and you can see even within the quarter-to-quarter movements, well, it's temporary. Fortunately, with our low-supply environment, even if you have a large number that's coming, it only takes us typically a quarter or two to get through it. So in an overall low-supply environment, you don't need that much job, which means we're not as reliant on the broad economy and the performance thereof. Relative to the East Coast, obviously we're looking at it from afar, so our peers will have better clarity on that, but New York seems particularly strong because it also has a similar low supply environment. Sunbelt is a little bit harder to sort out, right, because you have a much higher supply. And what that means is the job growth there is required in order for you to have pricing power. And so it's not a view that we don't like the Sunbelt. It's just a view that this current environment, it needs a better... macroeconomic performance, whereas we don't need that out here in the West Coast. The other anecdotal that I'll share with you is that we had talked about this return to office and I had said, you know, we were in the seventh inning and that there's not going to be, oh shoot, extra innings. Barb's looking at me because I kept calling overtime and that's the wrong analogy. In any event, So, I would have to modify that in that we actually potentially could have more upside because my comment didn't anticipate companies changing their policy and we recently learned that Google has changed their remote policy. They originally had grandfathered remote workers and they basically said, no, that is no longer available and remote workers that have been grandfathered are getting eliminated and hiring is occurring in our markets. And that, of course, doesn't show up in the Bayless or anywhere else as a new job ad. So, frankly, at the end of the day, now we're looking at that there's more upside potential in our West Coast market relative to downside.

Thanks for that. And as a follow-up, have you seen any changes in migration for international residents or Any changes in migration trends from domestic markets? Thank you.

Yeah, this is Barb. No, we haven't seen any noticeable changes. We do track our international residents within our portfolio, and it's less than 2%, so we have a small number of residents, but it's remained consistent. New move-ins are consistent with prior years, and so No impact. What I would say on the migration front, what we've noticed is San Francisco and San Mateo have actually turned positive from domestic migration perspective in the last few months. And I think that goes to what Angela was talking about. The Northern California region is performing slightly better than planned. I think that all kind of triangulates.

Thank you very much.

Thank you. The next question comes from the line of Wes Colliday with BED. Please go ahead.

Hey, good morning, everyone. Looking at the development schedule, you have about 44 million of other projects. Do you expect to start any of those, and where are they located?

Hey, Wes. This is Rylan here. Yes, we have a couple other projects in the pipeline. I'd say they're still a couple years away, but... They are in Northern California and the Pacific Northwest. So in the markets that we have the highest conviction in future rent growth.

Okay. And then looking at the JV, the Westco joint venture has some debt maturing within the next two years. Will any of that occur this year?

Hi, Wes. It's Barb. No, none of that is expected to occur this year. Some will occur in 26 and then the rest in 27.

Okay. Thanks, everyone.

Thank you. The next question comes from the line of Handel St. Just with Mizuho Securities. Please go ahead. Hey, guys. Good morning out there.

A couple quick questions from me. First one's on the, looks like the Mesbook asset you assumed full managerial control of in Oakland this past quarter. I guess, I'm assuming that's a fancy way of saying you you bought the asset or exercise an option. So maybe you can add some color on the events that led to this. Was this something that was previously contemplated? And perhaps some color on the underwriting cap rate or IRR on that. Thank you.

Hi, Handel. It's Barb. Yeah, so this was the asset where in the fourth quarter we paid off the senior mortgage because the sponsor was going to default and we effectively stepped in and took back the property. We had stopped accruing on our preferred equity investment back in 2022 and impaired the property in 23. So we've got a long history. As we talked about, Oakland has been a market that suffered for quite some time. We do see light at the end of the tunnel, though, as Angela said, on the supply side. So how we came up with the valuation, though, is we did a third-party assessment on it. Our value at $95 million is around $390 a door, and it's about 30% below replacement costs today. The yield is low. It's in the mid-threes, but that's because we have assumed three months of concessions. And once those concessions burn off, we'll be closer to a 5% cap rate.

Okay, that's helpful. And then one more maybe on the conversation on capital recycling, selling some assets out of SoCal into NoCal, given the better growth option outlook that you mentioned. I guess I'm curious how much more appetite there could be for that, how much more exposure perhaps you would want in NoCal, and how do you think about Seattle as another option for being investing capital?

Hey, Andel, this is Ryland. I mean, as we've been saying over the past couple of years, we feel the Pretty good about the rent fundamentals in those northern regions. So we'd obviously like to skew the portfolio to capture that. Realistically, there's only limited transaction volume that you're able to participate in and or generate on our own. So we'd like to move that up by a couple percentage points if we could all else equal. But it goes back to the broader picture of us not doing deals just to do deals. This has to be FFO creative over the long run. We're really focused on driving more durable and improving cash flows. for our shareholders. So we are out there, you know, working to create that opportunity for us. And in the current environment, given really cap rate parity across the vast majority of our markets, we think that trade makes a lot of sense. So we're going to continue to actively pursue to increase in those markets that you mentioned.

Thanks, appreciate that. Actually, if I could squeeze in one more, just curious on the loss to lease and maybe concession activity across some of your major markets. I'd love to get an update. Thank you.

Sure thing. So it's Angela here. On the concession market, we've seen terrific improvement between fourth quarter to the first quarter. So fourth quarter, we're about one week. And in the first quarter, we're about half of that. And so, you know, April level compared to March is pretty darn consistent. And as far as the loss release is concerned, it also has continued to improve. So just to give you an example, for April, current loss release is about 40 basis points better than last year's level in April.

Thank you. Thank you. The next question comes from the line of Rich Anderson with Red Bull Securities. Please go ahead.

Thanks. Good morning. So got the negative 0.3% GDP growth for the first quarter, so we're one quarter away to at least a definitional recession, should that turn negative as well. You mentioned how West Coast is better in tougher times because of low supply. But can you prove that? I mean, have you looked back at and note that there's a very clear win in the West Coast, whether it's multifamily or anything. But, you know, investing in the West Coast is the place to be if we're in a recession. Is that something you can provide or share?

Yeah. So, Rich, what is the data that's available to all of us is the long-term rent growth. And So if you look at the West Coast markets, and of course every major region has a slight nuance, but the northern region, the long-term CAGR is higher than Southern California. For example, in Southern California, it mirrors the U.S. with a slightly higher level. And so those are CAGRs that's available and proven out. But what I also want to mention as it relates to the potential recession in this year that's being talked about, you know, tech, which is an important component to our portfolio, that industry has already retrenched. And it went through the major layoffs, you know, back in early 2023, late 2022. And so it's already repositioned and it's ready. And if you look at, for example, you know, the 08 recession, for example, or even during COVID, tech continued to hire. So we do view that that's a good anchor for our portfolio and it's been proven through multiple cycles.

Okay, great. That's a great call. Thanks, Angela. And then maybe for Rylan, you know, the trade from Southern California, Northern California, you guys are, you know, sort of once removed from downtown, that's the model. But at what point do you, you know, start to look at some of the, you know, improving conditions in downtown San Francisco and start to maybe dance a little bit more there than, you know, you do? Is that something that's on the radar? Are you sticking to your sort of guns outside of downtown? Thanks.

Hey, Rich. When you say at what point, we've consistently been underwriting all the product that transacts through our market, and that includes some of the urban areas that you're referring to. We've only seen a handful of trades in San Francisco in particular as it relates to the Northern California market over the past year or so, and it felt like a lot of that upside was already priced in. Those were transacting at pretty low cap rates. So we've seen better relative value in the peninsula, but As I said, we're going to be looking all up and down our markets, urban, suburban, and trying to make the best risk-adjusted return investments.

Okay, fair enough. Thanks very much.

Thank you. The next question comes from the line of Julian Bluen with Goldman Sachs. Please go ahead.

Thank you for taking my question. Maybe digging in again in Los Angeles, I appreciate the comments you gave, Angela, around what needs to happen for LA pricing power to improve. But is there a scenario where things actually weaken from here, maybe due to tariffs, just given the importance of the ports to the local economy and employment in the region?

Hey. Probably, as far as the tariff is concerned, it's probably going to be an impact national-wide on all the markets and more on the cost side than on the top line on the revenue side. And it won't be an LA-specific situation just because our tenant base really isn't port-driven and, frankly, the ports are so automated that it's not a... we don't expect the employment thereof to have a huge impact on the performance. Now, as far as the tariff impact, what we would expect as LA-specific, the potential offset or benefit is the improvement in delinquency. And so at least it has that to balance the net impact. And what we're seeing right now as far as, you know, the impact on consumers, for example, if we thought that the tariffs would have a negative impact, we're certainly not seeing that because the overall portfolio delinquency has remained steady. And so people are paying. And we're not seeing the consumer weakness that you would have thought if we're in a recessionary environment, for example.

Okay, thank you.

Thank you. The next question comes from the line of Rich Hightower with Barclays. Please go ahead.

Good morning out on the West Coast, guys. I'm going to revisit, I think, an oft-asked question on this call, but just so... you can confirm or disconfirm the way that I'm thinking about the blended lease growth numbers for the first quarter and the second quarter. You know, you've done a good job, I think, of sort of stating that, you know, the fact that you did not increase guidance doesn't really indicate anything about what you're actually seeing on the ground. It's really just more of a kind of a general risk overlay based on all the other things we've been talking about on this call. So is that... Is that effectively true where, you know, normally you did better in the first quarter than you thought? You're not seeing weakness on the ground, which would imply, you know, some sort of increase related to the second quarter. And so that's really kind of the way that we all should be thinking about it at this point.

Yeah, I think that's an excellent summary. And, you know, when I mentioned some of these statistics, for example, April lost lease, it's actually better. than the same period last year, driven by Northern California. And when we look at occupancy, it's compared to, you know, sequentially, it dipped a little bit, but it's also, that's driven by Seattle, because it was unusually high last year. It was 97.4%. So once again, we're not seeing any cracks on the fundamentals. and the business is in good shape.

Okay, that is very helpful. And then maybe a new topic that we haven't talked about on the call, but just on turnover, you know, 35% in the first quarter which, you know, was probably normal for the way you guys run the business. But if I'm comparing it to EQR's extraordinarily low, you know, 8% number for the first quarter, that's an enormous delta. And so maybe just help those of us who are not in the apartment business day-to-day understand what sort of decision-making, you know, goes into how you run revenue management in that context. Just given the huge delta there that I think is just something that – you know, stood out to me.

Hey, Rich, I think some of the confusion may be definitional. And so, you know, even, for example, how we look at blended lease rates is slightly, is defined differently than some of our peers. And, you know, on lease rates, we look at nine to 15 months, like for like, and our EQR, for example, they use all leases. What that means, you could have short-term leases, and that's going to change the numbers. That's why I encourage people to look at full-year and relative basis. So I do know that the definition is different on the turnover statistic as well. But as far as for our portfolio, 35% is a little bit lower than typical historical average. It's usually, you know, closer to the high 30 to maybe to 40% range. And right now it's really a function of us. The goal is, as I said in the past, is to maximize revenues. And we want to make sure that we are renewing in such a way that we can have and generate positive new lease rates whenever possible. And so if we look at our blended, we have a really solid blended number in the first quarter of 2.8%. So turnover ultimately is an output number. It's not a strategy that is used to form an execution plan.

That is very helpful. Thank you, Angela.

Thank you. The next question comes from the line of David Siga with Green Street. Please go ahead.

Hi, thank you. I want to get your thoughts on Washington State's rent control proposal and if you could kind of relate how California's similar rent control has impacted your operations and investment decisions over the last several years as kind of a guide for thinking about the Washington state proposal.

Yeah, sure thing. Obviously, you know, legislation generally is not something that helps multifamily or housing costs. It doesn't achieve what the intention is or the misguided notion that it's going to somehow allow cost of housing to be cheaper. So it's too bad that Washington is taking this route. Having said that, this rent cap of CPA plus seven max at 10 is similar to what we've seen in California. So we're obviously accustomed to operating in this environment. And so We'll want, obviously, a little more time to assess the details to make sure we understand the full impact. Having said that, when California passed AB 1482, it did not have a meaningful impact to our business because Essex had a self-imposed 10% rent cap for many decades. I mean, I think it's since I've been here and well before I joined the company. And so that has not impacted our performance. So, you know, at this level, it's really an anti-gouging. And so it's, you know, we certainly don't expect an impact to our business. It's really just the intention of the legislature, legislation. I don't think it's going to create the desired results that the legislatures want.

Great. Thank you. And then just finally on bad debt, you've made a lot of good progress on that. And I'm just curious what the timeline would be to finally reach full normalization. Would that be by the end of this year or probably more in 26?

Hi, David. It's Barb. Yeah, we're at 50 basis points in the first quarter. Our long-term average is around 40. So we're not that far off from it. But yeah, I think by year end, it's a realistic possibility.

Great, thank you.

Thank you. The next question comes from Alex Kim with Zellman and Associates. Please go ahead.

Great, thanks. Morning out there. I wanted to ask about kind of the lower turnover that you've enjoyed for this quarter as well. I'm just curious, is this a primary driver to the lower repair and maintenance expense as well? part of that. Have your expectations for this expense bucket changed for the full year at all?

No, this is Barb. The R&M cost is lumpy from quarter to quarter. It really depends on what happened in the prior year, what projects were being completed, and things of that nature. So the R&M cost, we still expect to be up 2.5% to 3% for the full year. The first quarter was just an easy comp that drove that, nothing to do with the turnover.

Got it. That's helpful to note. And then just sticking with the expense side, if I remember correctly, you renew your insurance policy in December, and it looks like insurance costs still remain slightly higher on a year-over-year basis from 1Q24. Could you talk through, you know, the expectation for being roughly down 2% for the full year, and then, again, if there's been a change for insurance expectations?

Yeah, you have a good memory. Insurance is still down 2% for the full year. There is other stuff in that line, primarily related to tenant litigation, and that was a little bit more elevated this quarter relative to the first quarter of 24, which drove that number up 5%. That tenant litigation is lumpy, and when we settle claims, it can be lumpy. So we do still expect the insurance premiums to still be down on a year-over-year basis.

Got it. Thanks for taking the questions.

Thank you. Thank you. Ladies and gentlemen, that ends our question and answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.