Essex Property Trust, Inc.

Good day and welcome to the Essex Property Trust fourth quarter 2025 earnings call. As a reminder, today's conference 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 Kleinman, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.

Good morning. Welcome to Essex's fourth quarter earnings call. Our pack will follow with prepared remarks, and Rylan Burns is here for Q&A. Today, I will cover highlights of our fourth quarter and full-year performance for 2025, provide our outlook for 2026, and conclude with an update on the transaction market. 2025 played out generally in line with our initial macro forecast for the U.S., with job growth moderating throughout the year. Within this environment, we achieved full year same store revenue growth at the high end and SFO per share growth above the midpoint of our guidance range. I'm particularly pleased with the well coordinated efforts between our property operations and corporate teams to drive results, especially in other income growth and improving delinquency recovery to near pre COVID levels. From a market perspective, two key factors contributed to our performance in 2025. First, Northern California outperformed expectations as a result of expansion in the technology sector, favorable migration trends, and limited housing supply. Second, rent growth across most Essex markets outperformed the U.S. average, demonstrating the significant advantage of limited housing supply, even in a soft employment environment. Turning to the fourth quarter property operations, the results were generally consistent with our expectations, with 1.9% blended base rate growth in the fourth quarter. Occupancy increased by 20 basis points sequentially to 96.3%, and concessions averaged approximately one week, which is typical for this period. Within the portfolio, Los Angeles delivered the best occupancy improvement, increasing 70 basis points sequentially, a good indication that this market continues to progress towards stabilization. As for regional performance, Northern California was our best region, followed by Seattle, then Southern California. Moving on to our 2026 outlook, consensus expectations for the broader U.S. point to slow but stable economic growth. Further, employment trends are expected to remain consistent with what we have seen recently, with major employers maintaining a cautious approach to hiring. Against this backdrop, our base case assumes the current level of demand continues in 2026. On the supply side, we forecast total new housing supply to decline by approximately 20% year-over-year. Accordingly, we anticipate steady West Coast fundamentals to deliver solid blended rent growth above the U.S. average and at a level comparable to 2025 for the assets markets to be led by Northern California, followed by Seattle and lastly Southern California. In terms of scenarios, local uncertainty continues to weigh on the economy and job growth and represents the primary driver of low end of our guidance range. This uncertainty has contributed to a measured hiring environment, which has tempered near-term acceleration in demand. On the other hand, we see a path to the high end of our guidance range if hiring trends improve modestly. Given historically low levels of new housing supply across our markets, even a small inflection in demand could have an outsized impact on fundamentals. While broader expectations call for muted hiring nationally, we believe northern regions are better positioned. activities in the technology sector remains constructive, with companies expanding office footprints and investments in artificial intelligence continually. In addition, these markets should continue to benefit from ongoing return-to-office enforcement. In summary, the favorable supply backdrop across West Coast multifamily markets, combined with the continued recovery in Northern California, reinforces our outlook for our markets to outperform over the long term. Turning to the investment market, activities in our market remains healthy with 12.6 billion of non-portfolio institutional multifamily transactions in 2025, a substantial increase of 43% compared to 2024. Improving operating fundamentals and minimal forward-looking supply deliveries led to a significant sentiment shift to the West Coast, resulting in deeper bidder pools and cap rate compression, especially in Northern California and Seattle. Generally, cap rates for the highly sought-after submarkets, which represents approximately one-third of the total deal volume, occur in the low 4% range, and cap rates for the remaining two-thirds occur in the mid-4% range. Lastly, Essex has been the largest investor in Northern California over the past two years, with the majority of our acquisitions transacted ahead of the cap rate compression, resulting in significant NAV appreciation. Looking forward to 2026, we will continue to evaluate all opportunities and allocate capital with a disciplined focus on creating shareholder value. With that, I'll turn the call over to Barb.

Thanks, Angela. Today, I will briefly discuss 2025 results, the key components to our 2026 guidance, followed by comments on funding needs and the balance sheet. We are pleased with our fourth quarter and full year results as we were able to achieve same property revenue growth of 3.3%, which was at the high end of our most recent guidance range and 30 basis points ahead of our original projections for the year. The outperformance in the fourth quarter was driven by lower concessions, higher occupancy, and other income. Turning to the key drivers of our 2026 outlook. The components of our full year same property revenue midpoint of 2.4% is outlined on the chart on page S16.1 of the supplemental. There are three key drivers of revenue growth this year. First, as anticipated, our earn-in based on our 2025 results will contribute 85 basis points to growth. Second, our guidance assumes blended lease rate growth of 2.5% at the midpoint. As Angela noted, our outlook for market rent growth is based on tempered job growth, which is partially offset by a meaningful reduction in new supply. As such, this should allow us to achieve similar blended net effective rent growth as last year. And third, we expect 30 basis points contribution from other income. Moving to operating expenses. We forecast 3% same property expense growth at the midpoint, which is the lowest rate of expense growth we have seen in several years. There are a couple factors contributing to this outcome. First, we expect controllable expenses to increase around 2%, which reflects the continued benefits of our operating model. Second, we expect insurance costs to be down around 5% on a year-to-year basis, as the property insurance market has continued to improve over the past year. These benefits will be partially offset by increases in utilities and property taxes. As a result, same property NOI growth is forecasted to increase 2.1% at the midpoint. As for 2026 core FFO per share, we expect growth to be flat on a year-over-year basis. The drivers of our forecast are illustrated on S16.2 of the supplemental. While we expect solid top line performance and growth in net operating income, It is being offset by recent and expected redemptions within our structured finance portfolio, which are contributing to a 1.8% headwind to growth. This reduction to FFO reflects a conservative modeling approach, which excludes any redemption proceeds and minimal income from the 2026 maturities. We expect 2026 to be the final year of structured finance-related headwinds, due to the substantial reduction in the size of this book over the past several years. We are pleased to have strategically reallocated redemption proceeds into higher growth fee-simple acquisitions in Northern California, which provides better risk-adjusted returns. Lastly, a few comments on the balance sheet. We are well positioned from a funding perspective, as our free cash flow covers our dividend and all planned capital expenditures and development plans for the year. In addition, our finance team has done a great job proactively reducing our near-term maturity risk with a portion of our 2026 maturities accounted for via the bond offering we did in December. With strong credit metrics, over $1.7 billion in liquidity, and ample sources of capital available, the company is well positioned. 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'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Great. Thank you. Maybe just, I mean, there's been so much movement in the tech market in the last couple weeks. As you think about demand for your assets, especially in Northern California, I mean, what are your latest thoughts on what we should be watching in terms of, you know, where the risk is, where the growth is, and what are you seeing on the ground in terms of, you know, changes? And I guess we can, you know, ask the same question about Seattle.

Hi Jamie, thanks for your question. Northern California is in a very interesting position at this point in time because we had talked about the potential recovery and it's finally starting to take hold. So it's an exciting time for us from that perspective. And in terms of, we're watching a couple of things. I think it's fair to acknowledge that the jobs environment broadly across the U.S. has been soft. And that relates to my comment on Seattle in a second. But in Northern California, it's done fine. And we look at a couple of things. You know, job openings at the top 20 tech companies. And from that perspective, it's done well in that when we looked at 2025, it picked up above pre-COVID levels around the second quarter. But then it retreated in the fourth quarter. So it's not too inconsistent from the seasonal norm, but it is an indication that this market is not robust when it comes to jobs. But it is stable and it's doing fine. And so with that bath rub, when we look forward, we are seeing a couple of activities that gives us, you know, encouragement that this area is going to continue to improve. And when we look at, for example, VC funding in the fourth quarter, it's at the highest level for, you know, over four years, and it increased by 91%, so almost doubled quarter over quarter. And over 65% of that spending is in the Bay Area. Now, that doesn't mean that there's going to be job acceleration tomorrow, but it is a great sign of growth to come. And when we look at office absorption, another indicator, we're seeing positive absorption for the first time in all three major markets in our northern region, San Francisco, San Jose, and Seattle. So, you know, that's the backdrop. And in Seattle, I'll have to acknowledge that in the fourth quarter, it was soft. It was It performed. It did not achieve the expectations that we had planned in terms of the rent growth and the lease numbers. We had several corporate announcements in terms of layoffs. But having said that, looking forward in Seattle, we still like the fundamentals. Supply is down by 30% in that market. And other than in addition to the you know, positive office absorption. We're also seeing additional leasing activities by OpenAI. They quadrupled their space in Seattle. And so with, additionally, we have return to office tailwind in Seattle. Amazon starts enforcing return to office in January. Microsoft starts return to office in Q1. So there's a path to the high end of our range. And I just want to note that, you know, with the backdrop of the employment landscape, there is an element of unpredictability with that because it's highly influenced by public policy. And public policy so far has tempered job growth. And so that's an environment which we are in, and we do have to, you know, be sensitive to that.

Okay. Thank you for that. And then can you talk about what you're thinking on new and renewal blends for the year?

Yes, of course. So, we're assuming that our blends at this point is going to come in similar to 2025 at about 2.5%. And that's because, you know, as I mentioned earlier, we're assuming that demand is generally flat point forward. So what that means for new and renewal is that, and I'll give you a range because that's probably more relevant because different markets, you know, behave differently. So under new leases, we're assuming somewhere around flat to 2%, and under renewals, around 3% to 4% for the year. So not too different from last year.

Okay. All right. Thank you for that. Appreciate the call in.

Thank you. Our next question comes from the line of Nick Ulico with Scotiabank. Please proceed with your question.

Thanks. I guess first off, I just wanted to ask about Los Angeles. You talked about, you know, occupancy picking up there in the fourth quarter. Where is that market now in terms of where you're hoping it to be on occupancy and to be able to drive rental pricing a little bit better this year? Maybe you should talk a little bit more about how you're expecting L.A. to perform this year. Thanks.

Hey, Nick, good morning. Yeah, on L.A., what we've seen is a steady increase or improvement in occupancy. So that's good, especially, you know, we all know that the jobs environment has been quite soft. And where we are today, if you look at economic occupancy, which is the financial occupancy we report less than delinquency, In the fourth quarter, this market sits at 94.7. So we're just so close to stabilization at 95%. And compared to last quarter, I'm sorry, compared to third quarter, 94% economic. And, of course, second quarter, 93.8%. So it's been steadily improving, which is fantastic. And what we're seeing next year in 2026 is that supply decreases by 20% in this market. So we are hopeful that we will move toward this 95% stabilization sooner rather than later. But having said that, once again, you know, the timing is not so much in our control because the eviction processing timeline is what really drives our ability to move that delinquency number And so we, you know, try to take a more prudent approach on that front. But it's moving in the right direction.

Okay, thanks. And then second question is just on, you know, San Francisco and I guess the Bay Area broadly. You know, I know I think some of the strong rent growth we've seen from the market data has been helped by removing concessions from that market. And so there was a comp. issue, I think, helping, you know, the numbers. Does that become like a headwind this year in terms of us just thinking about like how San Francisco rent growth could look this year versus last year? Thanks.

Yeah. Hey, Nick. I think, you know, on the concession, the margin, it could be a result of, you know, hangover from previous supply pressures. But what we're seeing concession level in this market is not too different from historical averages, and it's not, you know, a factor when it comes to the uplift in San Francisco. It's really been more of a recovery story. We are finally at a point where San Francisco as a market is at somewhere around 9% above pre-COVID level. And if you look at, you know, where it should be, it should be somewhere around 20% above pre-COVID levels. So it's still in the recovery phase, and so it's less of a concessionary story to pick up.

Thank you. Our next question comes in line of Eric Wolf with Citi. Please proceed with your question.

Thanks. It's Nick Yusuf here with Eric. There were reports, I guess, last week about a large Southern California portfolio coming onto the market. So curious where you see buyer cap rates today in, I guess, across your markets, but maybe specific to Southern California, if there's any differences between the regions. And then just broader your thoughts on kind of external growth and capital allocation coming into this year.

Hey, Nick. Ryan here. I'll start on the comment on the portfolio in Southern California. You know, in general, I'm not going to go into details. I don't really want to comment on a live transaction. But for background, there's been approximately $11 billion of transactions in Southern California over the past two years. The majority of the transactions last year occurred in that 4.5 to 4.75 cap rate range. So this is a healthy environment where there's a lot of capital coming in. that, you know, I think they're going to do quite well. Obviously, we look at everything that comes through our market, so we will be evaluated. And if there's an opportunity to create value, you would expect us to participate there. You know, in terms of just bigger picture, you know, sorry, go ahead, Nick. Yeah.

No, no, no. Yeah. Go ahead.

You know, capital allocation, just a reminder of our broader philosophy, right? So for investment criteria, we have three things that we're looking to solve for. One, FFO per share accretion. Two, NAV per share accretion. And looking for opportunities that are better growth profiles than the rest of our portfolio. And our strategy, which is unchanged, is to allocate capital to those investments that offer the highest potential accretion relative to the cost of capital. So we are going to continue, as we've done, for this team being here the past five years and over the past 30 years, to look for those opportunities where we can drive the highest potential accretion.

Thanks. And so for that 4.5 to 4.7 you quoted, is that buyer or seller, and how wide is that spread typically?

That's buyer cap rates. Those are economic cap rates on in-place rents. Obviously, seller, it really depends on when the asset was purchased and what the tax base is involved. That's where you'll see some difference between buyer and seller cap rates in Southern California.

Got it. And then just in terms of the cap allocation, just given where the stock is trading today, how do buybacks play into the stack of opportunity, just given where you're seeing cap rates versus where the implied cap rate for the stock is?

Hey, Nick, it's a good question. And it's a, you know, it's a calculation that we go through on a regular basis. And so I want to start with everything is on the table. Buybacks, prefer equity, development, acquisition, all of the above. And when we think about buyback, we also look at, you know, the yield that we can generate from a straight acquisition or development and the growth thereof. So, you know, there's an IR consideration. Based on the stock today, which is, I don't know, in the mid-255, it's kind of a close tie across the board, if you will. And so, you know, so then we need to look at, you know, how do we create value for the company? And I just want to point to that, you know, what we've done. You know, when we directed capital deployment for Fee Simple Properties in Northern California – over the past year and a half, it's done well for us, even though our stock was trading in this range because those assets ended up generating portfolio-leading rent growth with cap rate compression. We really provided, you know, produced a lot of appreciation of these assets and shareholder value. And so we have to consider that fact. And also, you know, if you look at if we had done the buyback, say, six months ago, well, the stock has gotten cheaper. So, not as attractive. And so, there's a lot of things that we really, you know, we do consider and I hope that you realize that we do try to be very thoughtful about it. And you've seen us buy stock in, you know, big chunks when it makes sense to do so.

Absolutely. Thank you.

Thank you. Our next question comes from the line of Steve Sokwa with Evercore ISI. Please proceed with your question.

Yeah, thanks. Good morning. I think, Angela, you had mentioned that renewals would be in the three to four range for the year. I'm just curious, you know, what have you experienced thus far, kind of in the January, February, and presumably March timeframe?

Hey, Steve. Right now, our renewal is looking at around four-ish to mid-4%. for February, March. And so we're pretty much on track.

And are you doing a lot of discounting? Are you pretty much getting what you're asking for? Or is there a gap between kind of what you ask and what you achieve?

So far, the negotiation is somewhere between 30 to 50 basis points. So it's, you know, to us, that points to just a normal, stabilized environment.

Great. Thanks. And then I guess following up on the capital allocation discussion, you talked about sort of acquisitions and buybacks, but I think in the release you explicitly said you would not have any development starts. I'm just curious, you know, where would development pencil if you were to start one? And I guess what does that mean about costs having to come down or rents having to grow in order to get to a yield that makes sense to you?

Hey, Steve. This is Rylan. The We currently in our development pipeline, right, we have two land sites that we continue to work forward with, but they're not expected to start in 2026. Our team underwrote probably about 100 land sites last year, and none of them really made sense from an economic perspective. So you really need to see land sellers take a reduction in their expectation on land prices to make the numbers work today. and or you're going to have to see 10% plus rent growth for some of these deals to make economic sense. So we're closer. We have our own pipeline that we continue to work forward to, and if we can find something at a significant premium to the underlying transaction rate where we feel comfortable for the risk that we'd be taking in development, we'd happily step in. We do think there's going to be some opportunities on the development side. We're just trying to make sure we're getting the best risk-adjusted returns.

And sorry, just what would you need on that? Is that a six? Is that six and a half? Is that five and a half in your markets?

Yeah, as I said, you know, depending on the sub market in Northern California, as Angela mentioned, where, you know, the transaction market feels like it's shaking in a four and a quarter type range, something close to a six, I think would definitely be worth the risk. If we, you know, if we have clear visibility on entitlements, we knew exactly what we're going to build, felt good about the land basis. Those are the types of opportunities that we would jump at.

Great, thank you.

Thank you. Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Yeah, thanks. Another question on L.A., obviously seeing some improvements there. Can you talk about if the guidance assumes a significant improvement in performance year over year, and if not, when you expect L.A. to become more of a positive contributor?

Hey, Brad. We are assuming that LA continues to improve gradually. And so, you know, we are hopeful that by year and next year that it returns to the normal delinquency rate. Long-term for LA is a little elevated than our typical portfolio average, but that's okay. That's what we expected. So we do have that baked in. The potential upside really comes from the general jobs environment, you know, for especially with supply going down, certainly there's opportunities there with L.A.

Okay, got it. And then on the immigration front, has there been any sort of noticeable impact on demand or anything that you can see on your dashboards just from the lack of immigration?

We have not seen any direct impact from the immigration on the immigration front. I'm assuming you're talking about international immigration. What we have seen is it's generally returned to pre-COVID historical norm and activities are at a normalized level. When we look at you know, legislation that impacts, that really is like an H-1B. We certainly haven't seen any adverse impact from that. In fact, that continues to be viewed as a positive. And there's certain car vials, you know, for students and et cetera that really should not have, should not hurt our business.

Okay. Thank you.

Thank you. Our next question comes from the line of Yana Gallin. with Bank of America. Please proceed with your question.

Thank you. Good morning. This year, there's a mayoral election in LA and an election for governor in California, as well as a number of proposals that could impact real estate. I'm curious if you can kind of let us know what you're watching from a policy front that could potentially be beneficial for rental housing.

Hey, Yana. Thanks for your question. You know, it's an interesting situation here in that we've seen California slowly migrate away from these extreme liberal policies, which has been actually good for the overall economy and the voter population as well. So there's been a couple of proposals that were more on the extreme end, and we were pleased to see that those proposals actually were not successful. So that's a good indication. What we're watching on the margin, of course, is the outcome, and we don't have any more insight to the election than what's publicly available. But what we can tell from the sentiment is that the general view is people want to have a normal functioning economy, and these extreme measures have not been well-received.

Thank you. And then on the structured finance book, now that it's kind of right-sized or will be at the end of 26, just going forward, how should we think about modeling and the growth here?

Yes, Barb, that's a good question. So how you should think about it. is at the end of the year, our book value is $330 million. But what is in our guidance for 26 is $175 million that we are having income on that's hitting our numbers. And that is a three-year maturity. So there will be future redemptions, but it'll be much more manageable over the next three years. And we are looking for new opportunities to backfill. We obviously want to make sure they're the appropriate risk-adjusted returns. But it is a much more stable book than what we've had, you know, two to three years ago. So, I think if you took $175 million, that will get you a stable number going forward.

Great. Thank you.

Thank you. Our next question comes in line of Austin Warshmit with KeyBank Capital Markets. Please proceed with your question.

Great. Thank you. Just going back to LA for a minute, are you guys sub-market stabilize and rent growth maybe approaching an inflection, or was this more of a strategic, you know, approach on your part to build occupancy back to a stabilized level and, you know, everything you're seeing is kind of specific to, you know, your portfolio?

Hey, Austin. That's a good question. It's more Essex operational strategy driven with how we are – you know, operating in L.A. But ultimately, our goal is, of course, to maximize revenues. And so in an environment where you don't have stabilized occupancy, it's just you really don't have pricing power. And so it's critical to focus on delinquency, which I think our team has done an exceptional job. and focus on building occupancy. And once we get to that 95% occupancy, stabilized economic occupancy for our portfolio, then we will have some pricing power.

Got it.

And then just going back, I mean, does that speak a little bit to the negative 2.4% new lease rate growth in the fourth quarter? And maybe what was the driver of that? Because it did seem that was a little lower than it's been in many years outside the COVID period. And have you started to see that, you know, reaccelerate into the new year, given that occupancy is now in a better position even than it was, you know, a year ago at this time?

Yeah, that's a good question. That new lease rate is driven by, you know, the weakness in Seattle and weakness in San Diego more due to supply. LA was more, you know, not as exciting. It was a little, well, it was still negative. Okay. It's all not great. I'm not front. Never mind. So, I think looking forward, there are a couple of things happening, you know, with the supply decreasing and also the environment in LA stabilizing.

It's certainly that it should start to turn. Thank you.

Our next question comes from the line of John King with BMO Capital Markets. Please proceed with your question.

Thank you. On the new lease growth rate expectations of flat to 2%, I'm wondering what your thoughts were on cadence. Last year, it peaked in the first quarter at 1%, and I'm wondering if you expect a similar dynamic this year. And as part of that, I was wondering if you could share your new lease rate growth in January.

So that's a good question. In terms of cadence, we do assume that 2026 is going to be pretty moderate. We're not expecting, say, first half to be significantly greater than second half and vice versa. And that's really driven by our view that the current job environment is going to continue just because of political uncertainty. And keep in mind, we have a midterm election in the second half, and we don't know how public policy is going to behave in light of that. So, you know, it built in some of those unknowns. As far as, you know, January numbers, I don't think it's all that productive to talk about that because December and January are always, always the worst period in our business because of seasonality. And it's not going to point to anything relevant with what's going to happen for the rest of the year.

Okay.

And Angela, in the past, meaning last year, you talked about happily trading out of Southern California or reducing Southern California and buying in Northern California. Based on Ryland's commentary about being perhaps a little bit more opportunistic and the occupancy improvement you saw in LA this quarter, is that trade still the case or are you more agnostic on markets?

Well, at this point, you know, well, let me start with our views has always been there's a price for everything. And in an environment where capital is all generally consistent, you know, throughout our markets, we certainly would want to deploy capital in a market where we believe has an elevated level of rent growth ahead of us, which is Northern California. So if you look at the current environment, if all cap rates remain generally in line, Northern California is still the more compelling place to deploy capital because it's just, you know, it's in the recovery phase. But once you start, you know, seeing a gap between among the cap rates in the different submarkets, then it's a different calculation. And so we're going to have to look at that holistically rather than just, you know, based on a specific number.

And how much should that gap be in your mind?

Well, it depends on the growth. And it really is more self-market driven. So for example, when I say Northern California, we certainly wouldn't invest in Mountain View at the same cap rate as we would invest in Oakland. And so I wish I could give you a finite number because that would make everyone's life so much easier, but it really depends on the growth rate of that specific asset, which has a lot to do with how it's managed and what's going in the sub-market. And, you know, it's just not as simple as a, you know, one data set that fits all situation.

Thank you very much.

Thank you. Our next question comes from the line of Handel St. Just with Mizuho Securities. Please proceed with your question.

Hey there. Thanks for taking my questions. A couple follow-ups from me. First, I guess I want to go back to the blends. I know you talked quite a bit about it, but I just wanted to clarify a few things. I guess IRMAC, it looks like your outlook for blended rents for the year implies a slight decel in the back half of the year, which seems pretty unlike your peers who are embedding an acceleration in the second half. So first, is that fair? And then second, can you comment on what your expectations are for market rate growth by key region for this year? Thanks.

Hey, Handel. Sure thing. And thanks for your question. I'm not sure where we're seeing a decel in the second half. Maybe we can sync up after call because we're modeling pretty much, you know, a consistent rate and what we typically assume is What we typically assume is that first quarter and fourth quarter blends are at the lowest level, and then second and third quarter blends are higher. And so they kind of, you know, offset each other. As far as the market rents by market, it's actually, you know, in an environment of low growth, it's not all that different from our blends. So last year our market rents landed at the mid-2s. and we're assuming that in 2026 market rents will be very similar. And we're assuming Northern California to be, you know, on the higher end, say, in the mid-3s to 4 range, and Seattle in the mid-2s, and Southern California in the mid-1s.

Got it. That's helpful. And I guess to your point on the blend, maybe it's not decel, but certainly there's not an acceleration required in the back half of the year like your peers. Second question, I wanted to talk a little bit about Southern California, but ex-LA. Obviously, we know LA is going to be a big challenge near term, but curious how you're thinking about the prospects for Orange County and San Diego near term. And then maybe sprinkling a question on LA, how you would think of LA growth over the next few years? You mentioned cap rates generally being kind of in that, you know, sub-5-ish range, but curious how you think an IRR for an L.A. portfolio would look like. Thanks.

Hey, Handalia. Good questions. No, Ryland will take a talk about the cap rates. In terms of Southern California, we're assuming that L.A. and, I mean, sorry, if San Diego and Orange County perform similar to this year, it's really more driven by the fact that we view the job growth to be generally constant in supply From what we see in San Diego, it's about at the same level, and Orange County is slightly elevated but not in such a huge magnitude that it's going to, you know, drive a significant movement. So stable, not very exciting, but kind of more of the same for Orange County and San Diego.

And, Hand, I'll jump in on the IRR expectations. I think where we've seen a lot of transactions in Southern California with our growth expectations in these markets, you know, we've seen market clearing trades, I would say, in the low seven IRR type range. Again, you know, wide variety depending on the asset and the business plan for some of these assets. But we think we've been, you know, been able to achieve much better returns in our submarket selection in Northern California. So that's where we've really been focused. Now, if any of those assumptions were to change as it relates to the going in cap rate, the business plan on a specific asset, and or the growth rates, then we'd see us, you know, change our capital allocation priorities. But that's where it's been trending in 2025, I'd say.

Thank you, guys.

Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, good morning out there. Two questions. First, Angela, you guys have, you outlined, you know, what you expect advocacy costs in your guidance, although it's not part of core FFO, it's just part of Navy FFO. But given that advocacy is sort of a recurring part of operating assets and real estate in California, wouldn't these expenses just be a normal part of the business? Like not, it's core to the business of being in California, no different than you know, insurance costs, you know, earthquake costs or any of that in California or weather costs, et cetera. So, just curious about that because I would think, especially as people are contemplating that other portfolio in Southern California, the, you know, the regulatory costs are part of the calculus of how they look at whether or not to invest.

Hi, Alex. It's Barb.

So, in terms of The advocacy costs or the political costs that we had, we had $2 million in 2025. We have not specifically outlined what the costs will be in 2026. We've provided a number, but it does include other legal fees that are outside of our normal core operations. So we don't expect there to be significant advocacy costs in 2026. There will be a small amount, but we don't see them as necessarily reoccurring. They can be lumpy from year to year. When we have a big ballot measure, we're not expecting a lot on the advocacy front in 2026.

Okay. And then, Rylan, just in looking at deal flow, it seems like 2021 was a, you know, banner year for, you know, ultra low rate deals that, you know, may not have hit their pro forma and maybe, you know, have it coming back for debt maturities or restructuring, you know, in the next year or two. Do you see a lot of these deals coming to the market to trade, or as you guys take a look at these deals that are having issues, most of them seem to be resolved internally between the existing sponsor and the lenders? I'm just trying to figure out if the 2021 vintage is going to create opportunity for you guys, or if it's going to be one of these where most of the stuff gets resolved on its own.

Hey, Alex. I think you're correct in that, you know, there were a lot of deals on pretty low cap rates in 2021, and most of them were funded, you know, with five-year debt as typical. So, in theory, there should be a lot of deals coming to market that have lost that attractive debt rate there. However, as you also acknowledge, you know, there is a lot of debt capital out there looking to deploy in the multifamily space. So, I think there's been a lot of deals being done between lenders and sponsors. And we really have not seen any indications of distressed sales coming to our market. The other thing to keep in mind is that Southern California in particular has done fairly well relative to the rest of the country over the past five years. So NOIs are up and they've created value in many cases. So I'm not anticipating a significant onslaught of distress in 26 for the reasons you mentioned earlier. one, general, you know, really favorable lending environment, and then two, you know, performance is done okay.

Thank you.

Thank you. Our next question comes from the line of Wes Galladay with Baird. Please proceed with your question.

Hey, yeah. Good morning, everyone. This quarter, you took control of an asset in Los Angeles tied to the preferred portfolio. Can you talk about when you expect that asset to stabilize if it hasn't, and was it much of a drag on earnings this year?

Hey, Wes. This is Ryland here. Yeah, this is a unique asset. We expect this to stabilize in the mid-five range. There was no impact to the economics last year. We just took management of it at the end of last year. Going in, it's probably a low to mid-four cap. The previous sponsor had a unique business model where a certain portion of the units were rented as fully furnished short-term rentals, which had not done well, elevated delinquency, and a little bit higher controllable expenses. So putting it onto our platform with no assumption of significant rent growth on that asset, we are very confident we're going to be able to get this to a mid-five by the end of the year.

Okay. Thank you. That's all for me.

Thank you. Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.

Good morning. Thanks for taking my questions. First question is on the legislative front. Are you seeing anything that may be related to the so-called junk fees or ethics ability to continue to grow non-rental income?

Hey, Michael. We have looked at our practices as it relates to other fees, and we've also utilized consultants to make sure that our practices are in compliance. And so, we don't expect that to be, you know, to have a meaningful impact to our business.

Thanks for that. And then, just as a follow-up, have you seen any changes in the pace of move-ins from outside of Essex's core markets?

Would you repeat that question? Sorry.

Have you seen any change in the pace of move-ins from, you know, into the active-move market from outside markets, the pace of move-ins into the market?

Gotcha, gotcha. Sorry. Good question. We have seen an increase in the in-migration trends, especially in our northern region. But, you know, I do want to caution you on the in-migration numbers in that, This is really driven more probably by return to office. It's not driven by robust job hiring environment. And so, you know, but so far it's showing positive, and it's been a nice little tailwind for us.

Great. Thank you very much. Good luck in 2026.

Thank you. Thank you. Our next question comes from the line of Julian Bowen with Goldman Sachs. Please proceed with your question.

Yeah, thank you for taking my question. I just want to go back to Seattle. You mentioned the, you know, return to office plans for Amazon and Microsoft. But then, you know, on the other hand, both of those companies have announced corporate layoffs there by the thousands over the past six months. I guess, what is your sense of how that push and pull will sort of play out this year? Can the RTO benefit really outweigh, you know, the continued layoffs we've seen?

Yeah, that's a good question. And that's really, you know, as far as, you know, how we judge or how we decide on our setting our guidance, right? What does that mean? How long does it take? What we've seen with Seattle in particular is that it moves quickly. So, yes, there's layoffs offset by return office, but Seattle also is having a 30% reduction in supply. And so, you know, absent of, say, additional job growth, for example, this market should fare just fine, if not slightly better than last year. But it's going to do just fine. But secondly, you know, when we look at the layoffs, we do dig into the reason for the layoffs because that really matters. So when we look at the reasons for layoffs from the large companies, including Amazon, The reasons cited are they're either eliminating non-profitable businesses, you know, for example, Amazon Fresh pivoting to Whole Foods, or they're expanding. They're investing to expand into new business units or expand the business. And so the layoffs are not because of distress. And that's actually a good reason for layoffs. And additional data points to that, of course, the increased office absorption and increase in office leasing activity. All these data points together point to that this is still a good, vibrant market to be in.

Thank you. No, that's very helpful. Maybe digging into the South Bay as well, just in light of the fears that are out there around sort of AI-native companies disrupting legacy tech and software. You know, on the face of it, the South Bay is also one of those sort of more legacy tech or software-heavy markets where companies have been announcing corporate layoffs and has sort of less of that AI-native HQ benefit that maybe San Francisco has. Why do you think the South Bay is sort of holding up so well while Seattle has maybe struggled a little bit more?

Well, I think the South Bay market is a much deeper market than Seattle. And even though, keep in mind, there is some disruption that we would expect from AI. But when you look at what's happening there, You know, so if you're talking about disruption, you know, by cloud or coworker, for example, it's creating a demand and increase in usage in agentic AI. And so you're going from one, you know, application that may be deprecated, but there's an expansion in another. And this is all happening still within the same sub-market. And so that's one of the foundational benefits of this market and having that concentration of all these tech companies there.

Got it. Thank you very much.

Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Thanks for taking my question. In 2026, do you expect any year-over-year changes in tax expenses from Seattle and Washington State due to the Seattle Shield Initiative and B&O surcharge?

Yeah, this is Barb.

I mean, we have baked in a Seattle tax increase this year into our guidance in the high single-digit range, but that And that encompasses kind of everything that you talked about, but that's what we're assuming this year, which is a big change from what we saw in 2025 where we had a pretty meaningful reduction in taxes.

What would be the dollar amount?

I don't have that off the top of my head. I can follow up with you after. Thank you.

Thank you. Our next question comes from the line of John Palowski with Green Street. Please proceed with your question.

Thanks. I had a follow-up to the return to office discussion from a few questions ago. I would have thought work patterns are normalized by now. Amazon's policy has been in effect five days a week. It's been in effect, I think, for a year now. Is your local team seeing a real second wind of demand to start the year, either in Seattle or the Bay Area, or it's more of you're hoping that the positive momentum in the market continues gradually over time?

Hey, John. You know, our expectation is based on what we've seen actually happen on the ground. And what we have seen happening on the ground is that a company announces a return-to-off policy. And some employers would comply and some will not for various reasons. And it is not until they announce enforcement that people, everyone starts to come back to the office. And that happened with Essex as well. We had announced it, let people to get used to it. And then, you know, three quarters later, we announced that we're going to check key cards, for example, and everybody came back. And so our expectation is that this is going to play out similarly. And Amazon actually announced that they're starting enforcement in January. They're doing that for a reason. And I don't think, I don't believe that their population would behave drastically different than the norm.

Okay. And then drilling into Seattle again, obviously it takes a little bit of time for a layoff to get announced, severance policies, et cetera, to actually flow through the housing decisions and people moving out. So in your Seattle portfolio, are you seeing a real uptick in notices to move out? Can you share any kind of forward-looking, blendedly spread expectation, just given the lag between the layoff announcements and the actual decisions renters make?

Well, first of all, typically when there's a layoff, there's the public announcement and there's the private conversations. And in You know, employees don't typically find out that they're getting laid off publicly. There's usually a conversation, and people typically make decisions, their housing decisions, 45 days in advance of a job change event. And so our view is that the bulk of that layoff impact already has been felt in the fourth quarter, and some, you know, spilled over in January and less so in February. And when we look at our leasing activities and our – blended renewal rates, they're not all that different from historical patterns for Seattle. So we're not expecting a second shoe to drop, if you will, because of the layoff announcements.

Okay, so blended spreads for the first half of this year in Seattle, you'd expect not to look meaningfully different than the second half of last year?

Correct, correct. And I would say the whole year, you know, because we're not expecting a huge difference between first half and second half in 2026. And then the one other, you know, data point I'll point to is that Seattle supply is declining by 30%. And so that will also mean Okay, great.

Thanks for the time.

Thank you. Our next question comes from the line of Rich Hightower with Barclays. Please proceed with your question.

Hey, good morning out there, guys. Just one from me. I just want to go back to Barb's comment in the prepared comments about the I guess the conservatism baked into the idea that the structured investment redemptions would not be redeployed, and that's basically what's embedded into guidance at this point in time. I mean, I guess how conservative is that view, and is it conservative to the point of being a little bit unrealistic based on kind of what's in the pipeline and sort of the real underlying expectations for those redemption proceeds? Thanks.

Yeah, Rich, it's a good question. So what makes 26 unique in terms of our redemption profile is 90% of the redemptions we expect back are tied to two assets. So there are large redemptions which do move the needle in the guidance. And on one of them, we did stop accrual in the fourth quarter. We did a third-party valuation on it. And we're fine from a valuation perspective today, but if we keep accruing, we felt we got a bit stretched. So we did the prudent thing and we stopped accruing. And then on the other one, we're just in discussions with the sponsor at this time, and so we, given we don't know the final outcome, we decided to not assume any redemption proceeds. There's no further downside in the guidance from these two assets. There will and could be upside, but we don't know until we get further along in our discussions what that will be.

Perfect. Okay. Thanks, Barb.

Thank you. Our next question comes from the line of Alex Kim with Zellman & Associates. Please proceed with your question.

Hey, good morning out there. Just a quick one for me. I wanted to talk about the delinquencies, and they look to be near pre-COVID trend line. Do you anticipate further improvement even below pre-COVID norms? And could you quantify how much of a contribution is embedded into that 30 basis point tailwind from the other income bucket for your full year of same-star revenue growth guidance?

Yeah, this is Barb. So, you know, we are pleased with how much progress we've made on the delinquency front over the last two years. We're at 50 basis points. We're about 10 basis points off of our historical pre-COVID average. So we're really close. And to Angela's earlier point, it's really tied to L.A., where eviction courts are still – the processing times are still slightly elevated relative to pre-COVID averages – So we haven't baked any meaningful benefit in from delinquency in 2026. We've gotten the bulk of our delinquency benefit already in the prior years. We're still trying to get back there on the L.A. front, and maybe by year end we could, but it's not going to move the needle like it did in 25 from that perspective.

All right. Thanks for the time.

Thank you. Our final question comes from the line of Omotayo Okasanya with Deutsche Bank. Please proceed with your question.

Hi, yes, good morning out there. I wondered if you could talk a little bit about technology initiatives you guys are still undertaking to help with things like customer satisfaction, customer retention, you know, rent growth, operating expense management, and just kind of what benefits from that are being built into your 2026 guidance.

Hi. That's a good question. From a technology perspective, we do have a variety of initiatives in our pipeline, both top line and, of course, some on the bottom line benefits. On the sales and leasing front, it's really more AI-focused and, of course, on On the bottom line, as it relates to expenses, there's some expense management opportunities and technology that we are implementing. Having said that, you'll see that other income contributions from these initiatives are fantastic, but they are lumpy. And when we start something, it usually takes a year or two to, you know, to really monetize the opportunity. And so I'll give an example. You know, last year we had a nice pickup, and one of the reasons was EV parking, and that was rolled out in 2024. We, you know, captured the bulk of the benefit in 25, and there's some residual in 26, and that's a reasonable cadence. So we are not baking anything new here. from this year because this year is a pilot rollout phase, and we're going to see how the pilot performs before we assess the rollout and the ultimate economic benefit for future years.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session, and we'll conclude our call today. Thank you for your interest and participation. You may now disconnect.