Essex Property Trust, Inc.

Good day and welcome to Essex Property Trust's third 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 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.

Welcome to Essex's third quarter earnings call. Our pack will follow with prepared remarks and Ryland Burns is here for Q&A. We are pleased to report solid results for the third quarter, highlighted by a $0.03 FFO outperformance, and an increase to our core FFO full-year guidance. Today, I will cover key takeaways from the quarter, my high-level outlook for 2026, and provide an update on the transaction markets. Starting with operations, our portfolio performed well amid a backdrop of muted job growth across the U.S. and heightened policy uncertainty. Year-to-date through the third quarter, we generated a blended lease rate growth of 3% on all leases, and 2.7% unlike term leases. This is a proven example of the competitive advantage of our low supply markets. As expected, Northern California is our best performing region and the fundamental backdrop remains favorable with forward-looking supply continuing to decline, comparable to a level in the years following the Great Financial Crisis. Within the Bay Area, San Francisco and Santa Clara counties are generating the highest rent growth year to date, reflecting attractive rent-to-income ratios, demand benefiting from AI-related startups, and above-historical average migration trends. Our Seattle region remains healthy, but is trending at the low end of our full-year expectations, driven by a combination of challenging year-over-year comparison, soft demand, and pockets of supply temporarily limiting pricing power, in certain submarkets. Finally, on Southern California, this region is generally performing in line with our expectations. As we have discussed, Los Angeles has lagged primarily attributed to delinquency recovering, muted job conditions similar to the US, and pockets of supply on the west side and downtown LA. With supply expected to drop in 2026, the infrastructure spending earmarked for Los Angeles and market occupancy improving, we see a path to pricing power. Given the soft economic environment and policy uncertainty, we are not surprised that the hiring and investment decisions have been delayed across the U.S. But we are pleased to see the West Coast once again outperforming the U.S. average, a trend we anticipate continuing. Looking to 2026, our portfolio is well positioned relative to other U.S. markets. supported by low levels of housing supply, attractive affordability, and demand catalysts from the technology sector. Directionally, we assume Northern California to continue outperforming and rank among the top U.S. markets, as job growth in Northern California gradually gains momentum, which is supported by announcements of significant office expansions. Next in the ranking would be the Seattle region. With total housing supply deliveries declining by almost 40% next year, we are optimistic about the market's outlook. For Southern California, we expect stable economic conditions with Los Angeles fundamentals to improve. Moving on to early building blocks. We forecast our blended lease rates for the second half of the year to land at a similar level to last year. As such, we anticipate another year of stable growth with 2026 earn-in between 80 to 100 basis points. Lastly, on our investment activity in the transaction market. Page S16.1 of the supplemental demonstrates the value created from our capital allocation strategy since 2024. We have focused our investments on the highest growth submarkets in Northern California, acquiring almost a billion dollars of assets in this region, while achieving accretion relative to dispositions and improving overall age of the portfolio. As for the transaction market, year-to-date volume on the West Coast is slightly above 2024, but remain below average historical levels. We continue to see a competitive bidding environment for high-quality properties in our markets, and cap rates are generally in the mid-4% range, with most of the Bay Area transactions in the low 4%. Although cap rates have compressed in Northern California, We will continue to enhance value from our operating platform and drive FFO and NAV for share growth for our shareholders. With that, I'll turn the call over to Barb.

Thanks, Angela. I'll begin with a recap of our third quarter results, followed by comments on investments and the balance sheet. Beginning with our third quarter results, we achieved a solid quarter with core FFO per share exceeding the midpoint of our guidance range by 3 cents. attributed to lower G&A and interest expense. As a result of the third quarter beat, we are pleased to raise the midpoint for core FFO per share to $15.94. As for operations, we remain on plan and are reaffirming the full year midpoint for same property revenue, expense, and NOI growth. Turning to the structure finance portfolio. Year-to-date, we have received $118 million in redemptions, and anticipate $200 million in total proceeds for the full year. As you may recall, over the past two years, we have made the strategic decision to redeploy the redemption proceeds into acquisitions at better than market rate yields and in markets with the highest near-term rent growth potential. This strategy has resulted in better NEV growth, improved cash flow for reinvestment, and higher quality of FFO earnings. Looking ahead to 2026, We are pleased that we are in the final year of the redemption-related headwinds, and the realignment of this business will be behind us. Overall, we expect roughly $175 million in additional redemptions next year. Given heavy redemptions in 2025 and expected in 2026, we anticipate this will reduce our 2026 core FFO growth net of reinvestment by approximately 150 basis points depending on timing of redemptions. As we look further out to 2027 and beyond, we expect that FFO volatility from this business will abate as the size of our structure finance book will have decreased from the peak of $700 million in 2021 to around $250 million in total investments. Lastly, a few comments on capital markets and the balance sheet. Throughout 2025, we executed several financings to further strengthen our balance sheet. increase our liquidity, diversify our capital sources, and proactively address near-term maturities at attractive rates in the current market environment. With manageable maturities over the next 12 months, healthy net debt to EBITDA 5.5 times, and over $1.5 billion in available liquidity, our balance sheet is strong heading into 2026. I will now turn the call back to the operator for questions.