Essex Property Trust, Inc.

Good day and welcome to Essex Property Trust second 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.

Good morning. Welcome to Essex second quarter earnings call. BARPAC will follow with prepared remarks, and Rylan Burns is here for Q&A. Today, I will cover key takeaways from the quarter, our outlook for the second half of the year, and provide an update on the transaction market. We are pleased to report solid results for the first half of 2025, highlighted by a $0.07 core FFO outperformance in the second quarter. and an increase to same property and core FFO guidance for the year. Starting with operations highlights, second quarter performed on plan with 3% blended rate growth for the same store portfolio. Northern California and Seattle led with 3.8 and 3.7% blended rate growth respectively, while Southern California lagged with 2% blended rate growth, primarily because of Los Angeles. On a more granular level, the suburban markets of San Mateo and San Jose were notable outperformers with 5.6 and 4.4% blended rate growth, respectively. We attribute the outperformance to limited housing supply, increased enforcement of return to office, and likely better job growth than what has been reported by the BLS. In contrast, Los Angeles remains challenging with 1.3% blended rate growth. resulting from pockets of elevated supply deliveries coupled with legacy delinquency challenges in a soft demand environment. Despite these challenges, we have been able to generate a positive blended rate growth in every Los Angeles submarket year to date. Additionally, we are tracking several large infrastructure investments related to the World Cup and Olympics that should improve overall economic activities in this market in the next few years. Moving on to our outlook for the second half of the year, we continue to expect modest U.S. GDP and job growth, and for the West Coast, a stable job environment. Year to date, our seasonal rent curves have generally matched our expectations, and our seasonal peak for rents occurred around late July. Accordingly, our guidance for the second half of the year assumes market rents to moderate, consistent with normal seasonality. Our increase to the same store revenue guidance generally reflects the outperformance achieved to date. In terms of range of outcomes, the low end of our guidance contemplates two factors. First, a softer macro economy stemming from public policy. Second, delinquency recovery in Los Angeles slows because this area can be lumpy. As for potential factors for high end of the guidance range, First is an increase in hiring driving rent growth. We have seen a gradual positive trend in job openings in the 20 largest tech companies, and this metric has been a reliable leading indicator of demand. The second factor is a more favorable operating environment, as we are expecting an average decrease of 35% in multifamily supply deliveries in our markets in the second half of the year compared to the first. Turning to the transaction market, investor appetite for the West Coast multifamily properties remains healthy, with deal volumes slightly higher in the second quarter compared to the same period last year. And average cap rates have remained in the mid 4% for institutional quality assets. In the second quarter, we started to see a higher volume of transaction pricing in the low 4% in Northern California. In comparison, Essex is generating, on average, yields in the mid to high 4% from approximately $1 billion of acquisitions in Northern California over the last 12 months. Our team has done a terrific job investing ahead of the cap rate compression, resulting in immediate NAV accretion. Lastly, as we have maintained our disciplined capital allocation by funding the majority of these acquisitions with selective positions, Going forward, we will continue to arbitrage our cost of capital and reallocate our portfolio to optimize the risk-adjusted returns to drive NAD and core FFO per share accretion. With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with a recap of our second quarter results, followed by the components to our revised full year guidance, and conclude with an update on capital markets and the balance sheet. Beginning with our second quarter results, We achieved a solid second quarter with core FFO per share exceeding the midpoint of our guidance range by $0.07. The primary driver of the beat relates to $0.04 from better same property operations, of which half relates to higher same property revenue growth and the other half relates to lower operating expenses. The expense reduction is driven by a 9% decline in Washington property taxes as compared to 2024. In addition, the quarter benefited from lower G&A, which is timing related. Turning to our revised full year outlook, we are pleased to announce a 10 cent increase at the midpoint for core FFO per share to $15.91. Contributing to the increase are three factors. First, we are raising the midpoint for same property revenue growth by 15 basis points to 3.15%, driven by higher other income and better delinquency collections partially offset by lower occupancy. Second, we are reducing our same property expense midpoint by 50 basis points to 3.25% on account of lower property taxes, which I previously mentioned. With these revisions, we now expect same property NOI to grow 3.1% at the midpoint, a 40 basis points improvement from our original guidance. The increase in same property NOI contributed $0.07 to our full year FFO guidance raise. The third component relates to our co-investment platform as our joint venture properties are performing ahead of plan. As for our third quarter core FFO guidance, we are forecasting $3.94 at the midpoint, a $0.09 sequential decline from the second quarter, primarily related to elevated operating expenses given typical seasonality in utilities and taxes, which is partially offset by higher sequential revenues. For the third quarter, we are forecasting same property operating expense growth to increase 3% on a year-over-year basis. In addition, preferred equity redemptions are expected to be back-end loaded, which is also causing a reduction in sequential core FFO. Year-to-date, we have received approximately $30 million in redemptions, and we expect an additional $175 million in proceeds before year-end. We are pleased with the progress we have made in executing our strategy to reduce the size of the book, even though it is causing a temporary headwind to core FFO growth. At year end, we anticipate the structure finance book will be less than 4% of core FFO and continue to decline in 2026 as we anticipate being repaid on the majority of our outstanding investments over the next four quarters, after which the earnings headwind will have largely abated. Lastly, a few comments on capital markets in the balance sheet. During the quarter, we executed several transactions to further enhance our balance sheet flexibility. We issued a $300 million delayed draw term loan, of which $150 million is drawn and fixed at an attractive 4.1% rate through April of 2030. We also expanded our line of credit to $1.5 billion while extending the maturity to 2030, and we established a commercial paper program. As a result of these financings, we further enhance our balance sheet strength while optimizing our costs and access to capital. With minimal refinancing needs in 2025, healthy net debt to EBITDA of 5.5 times, and $1.5 billion in available liquidity, we are well positioned. I will now turn the call back to the operator for questions.