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.