Essex Property Trust Q2 2025 Earnings Report

Essex Property Trust EPS Results

• Actual EPS: $4.03
• Consensus EPS: $3.99
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $3.94

Essex Property Trust Revenue Results

• Actual Revenue: $465.84 million
• Expected Revenue: $466.47 million
• Beat/Miss: Missed by -$631.00 thousand
• YoY Revenue Growth: N/A

Essex Property Trust Announcement Details

• Quarter: Q2 2025
• Date: 7/29/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, July 30, 2025
• Conference Call Time: 12:00PM ET

Essex Property Trust (NYSE:ESS), an S&P 500 company, is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast markets. Essex currently has ownership interests in 252 apartment communities comprising approximately 62,000 apartment homes with an additional property in active development.

Essex Property Trust Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Q2 Core FFO beat: Core FFO per share exceeded the midpoint by $0.07 and full-year FFO guidance was raised by $0.10 at the midpoint to $15.91.
• Neutral Sentiment: Mixed Q2 rent growth: Blended same-store portfolio rents rose 3% overall, led by Northern California (5.6%) and Seattle (4.4%), while Los Angeles lagged at 1.3% due to elevated supply deliveries and delinquency recovery.
• Positive Sentiment: Acquisitions driving NAV accretion: About $1 billion in Northern California acquisitions yielded mid-to-high 4% returns, outpacing market cap rates in the low 4% range and boosting net asset value.
• Positive Sentiment: Strengthened liquidity: Secured a $300 million term loan at 4.1% fixed to 2030, expanded the revolver to $1.5 billion through 2030 and launched a commercial paper program, resulting in 5.5x net debt/EBITDA and $1.5 billion available liquidity.
• Neutral Sentiment: Structured finance downsizing: Pref/mez book will decline from 9% to <4% of FFO by year-end, creating a temporary $0.06 Q4 FFO headwind but reducing earnings volatility long term.

Presentation

[Operator]

Good day, and welcome to SX Property Trust Second Quarter twenty twenty five 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.

[Operator]

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, miss Angela Kleiman, president and chief executive officer for Essex Property Trash. Thank you, Ms. Kleiman. You may begin.

[Angela Kleiman, President & CEO at Essex Property Trust]

Good morning. Welcome to Essex Second Quarter Earnings Call. Barb Hak will follow with prepared remarks, and Rylan Burns is here for Q and 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 2025 highlighted by a $07 core FFO outperformance in the second quarter and an increase to same property and core FFO guidance for the year.

[Angela Kleiman, President & CEO at Essex Property Trust]

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 3.83.7% 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 5.64.4% 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.

[Angela Kleiman, President & CEO at Essex Property Trust]

In contrast, Los Angeles remains challenging with 1.3% blended rent 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.

[Angela Kleiman, President & CEO at Essex Property Trust]

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.

[Angela Kleiman, President & CEO at Essex Property Trust]

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.

[Angela Kleiman, President & CEO at Essex Property Trust]

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.

[Angela Kleiman, President & CEO at Essex Property Trust]

In comparison, Essex is generating on average yields in the mid to high 4% from approximately $1,000,000,000 of acquisitions in Northern California over the last twelve 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 select dispositions, going forward, we will continue to arbitrage our cost of capital and reallocate our portfolio to optimize the risk adjusted returns to drive NAV and core FFO per share accretion. With that, I'll turn the call over to Barb.

[Barb Pak, EVP & CFO at Essex Property Trust]

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 $07 The primary driver of the beat relates to $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.

[Barb Pak, EVP & CFO at Essex Property Trust]

In addition, the quarter benefited from lower G and A, which is timing related. Turning to our revised full year outlook. We are pleased to announce a $0.10 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.

[Barb Pak, EVP & CFO at Essex Property Trust]

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 $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 $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.

[Barb Pak, EVP & CFO at Essex Property Trust]

In addition, preferred equity redemptions are expected to be backend loaded, which is also causing a reduction in sequential core FFO. Year to date, we have received approximately $30,000,000 in redemptions and we expect an additional $175,000,000 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 structured 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 and the balance sheet.

[Barb Pak, EVP & CFO at Essex Property Trust]

During the quarter, we executed several transactions to further enhance our balance sheet flexibility. We issued a $300,000,000 delayed draw term loan, of which $150,000,000 is drawn and fixed at an attractive 4.1% rate through April 2030.

[Barb Pak, EVP & CFO at Essex Property Trust]

We also expanded our line of credit to $1,500,000,000 while extending the maturity to 02/1930, and we established a commercial paper program. As a result of these financings, we further enhanced our balance sheet strength while optimizing our cost and access to capital. With minimal refinancing needs in 2025, healthy net debt to EBITDA of 5.5 times and $1,500,000,000 in available liquidity, we are well positioned. I will now turn the call back to the operator for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Session. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We request participants to limit to one question and one follow-up.

[Operator]

Our first question comes from the line of Nick Culico with Scotiabank. Please go ahead.

[Nicholas Yulico, Managing Director at Scotiabank]

Thanks. Hi, everyone. I guess, first off, just turning to Los Angeles. Can you just talk a little bit more about what drove some of the weaker blended pricing? And then also, is this since you highlighted LA County, is there also sort of a specific fire ordinance impact that's happened as maybe different than what was previously expected?

[Angela Kleiman, President & CEO at Essex Property Trust]

Hey, Nick. It's Angela here. On Los Angeles, it has underperformed relative to our expectations, and it's really a couple of different factors. It's not related to the fire ordinance. It's not a legislative concern. It's more of the supply is heavier in the first half, which of course we knew that was going to be an impact, and the delinquency recovery is taking time. And what we had hoped for was that we could make progress sooner because of the progress we made from last year to this year. But so far, first half is moving along. It's just not improving at such a great rate.

[Angela Kleiman, President & CEO at Essex Property Trust]

And then the last factor is really it's a soft demand environment. And what we're seeing this soft demand environment is actually not just Los Angeles. It's Southern California as a whole. And I just want to remind everyone that Southern California mirrors The U. S.

[Angela Kleiman, President & CEO at Essex Property Trust]

Economy, and The U. S. Economy has been soft. It's not broken, it's not you know, it doesn't have any we're not seeing cracks, but it's been soft. And so, for those reasons, Southern California as a whole, which is 40% of our portfolio, has been more of a drag.

[Angela Kleiman, President & CEO at Essex Property Trust]

And what we expect is that in the second half, the one benefit is that the supply is declining. So, supply in the first half is actually 68% of total supply in Southern California. So that is one benefit, and we certainly have seen offsets from our northern regions that has benefited our overall performance with Northern California and of course strength in Seattle.

[Nicholas Yulico, Managing Director at Scotiabank]

Thanks for that Angela. And then I guess the second question is just on Northern California. I know you gave I think you gave some numbers on how the blended rate growth trended there and market was outperforming. Maybe you could just maybe if we sort of take a step back a little bit because I know everyone tends to focus a bit on blended rate growth and there's talk about I think you said that that sort of moderates in the back half of the year. But I mean is that masking though what is perhaps sort of bigger strength not being appreciated in Northern California that even if it's not showing maybe just continued acceleration in the back half of the year that there's some other impact and benefit to the portfolio that's not fully showing up right now in terms of the increase in guidance that you gave? Thanks.

[Angela Kleiman, President & CEO at Essex Property Trust]

Hey, Nick. Yeah, that's a great question. We are seeing strength in Northern California, and what I think has been a little confusing is really two factors. One is that we had expected a solid performance from Northern California and we are seeing job postings to gradually increase, which of course it does lag from that perspective. When we look at the seasonal curve in Northern California, it's performing actually slightly better than we had expected.

[Angela Kleiman, President & CEO at Essex Property Trust]

I think what's confusing is the blended and how that is presented across our peers because everyone defines it differently. So let me just step back and explain our blended lease for a second. Our blended lease, what we try to do is provide an apples to apples for like to like for example, nine to fifteen months leases. But that doesn't represent all leases. What impacts our financials is all leases.

[Angela Kleiman, President & CEO at Essex Property Trust]

So, what's showing up that's reported is about 75% of the leases signed. If we use all leases, new lease rates would flip from 70 basis points as reported to 3.3%. I know that's a huge delta, which is why we try to shy away from doing all because there's more volatility. But that 25% makes a difference because that represents corporates, which typically has a 15% to 25% premium, and of course the short term leases, which has a higher premium. And so our blend, if we use all leases, it would be 4% versus 3%.

[Angela Kleiman, President & CEO at Essex Property Trust]

And once again, that's what hits our financials. I think the other factor that can be a little confusing is that people expect the blend to continue to accelerate throughout the year. But that would be contrary to the comment that we have achieved our seasonal peak, which is normal. July is a normal time for us to peak and therefore the rest of the year, this is normal seasonality, it's going to decelerate. And it would be unusual for the blend to actually be higher in any normal environment.

[Angela Kleiman, President & CEO at Essex Property Trust]

The one caveat is that if we see a greater strength on the macro economy, if tirings pick up in a meaningful way, for example, then yes, then we could see that. And then we could see a situation where the seasonal peak actually gets prolonged, which is not what we're currently observing. And I think we've all experienced a lot of the noise with public policy and the lack of clarity there. And so I do think companies have been more reticent in hiring and investing, which of course impacts overall growth. And that's really what we're experiencing here. But Northern California is doing just fine.

[Nicholas Yulico, Managing Director at Scotiabank]

Appreciate it. Thanks.

[Operator]

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

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Hey, good morning out there. Just to Andrew, just to go back and maybe this was all our sort of misunderstanding of the fire impact on housing. But presumably, we would have thought that LA would have seen a pickup in demand. And I know that you guys and others articulated that, hey, single family people are different than apartment people, which clearly is the case. But also, the COVID unit replacement taking this long, I mean, we're five years past.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

So are there other dynamics at work? Like is this more just the Hollywood spillover, the strikes or fallout of port workers who got laid off? Just trying to understand the dynamic because would have expected at least a little bit better, maybe not the strength of Northern Cal or Seattle, but still would have expected that the between the COVID units and just absorption, it would have been a little bit faster this year, not what seems to be slower.

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, Alex, that's a great question. And we share your view in that we didn't expect LA to just suddenly take off. But we did expect that on the occupancy side that it would run a little tighter, which is what we had forecasted. And what we are experiencing is that overall macro economy softness, which of course has an impact on LA. And of course, keep in mind, yes, we're five years since COVID, that's 2020, but LA was shut down for three years.

[Angela Kleiman, President & CEO at Essex Property Trust]

Eviction moratorium lasted three years. So we're only in the second half, the back half of the second year of this recovery and it's a huge economy. It's going to take more time. What we have not done is we have not redlined LA because there is a lot going for LA. And it is the largest economy in terms of by county with over a trillion dollars of GDP and with the infrastructure investment that's earmarked for LA for the World Cup and Olympics, the latest estimate is over $80,000,000,000 And so, we do see that the market has been stable, so that's great.

[Angela Kleiman, President & CEO at Essex Property Trust]

It's remained in that low 95% occupancy. It hasn't picked up as much as we would like. Having said that, we do see positive environment moving forward.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. And then the second question is, on your mezz platform, you guys have a long track record of making a lot of money. I know that you don't include the gains in core FFO, but you guys have created a lot of value over time. It almost sounds like you're maybe not fully exiting, but dramatically scaling back. So two part.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

One, why the decision to scale back when you have a successful track record? And two, Barb, can you just articulate the fourth quarter FFO impact? Because obviously the number is below where consensus is. So trying to understand how much of that below, the implied below is just from the debt and preferred FFO going away versus others. So one is why the dramatic scale back into the FFO impact in the fourth quarter.

[Barb Pak, EVP & CFO at Essex Property Trust]

Yeah, Alex, this is Barb. You are correct. We do have a long successful track record in this business. And we are going to remain in the business, just not to the level of scale that we got this book to. So the book got to $700,000,000 and it became 9% of our FFO back in 'twenty two-'twenty three and it creates a lot of volatility in earnings and we think it's more appropriate to have it a much smaller size.

[Barb Pak, EVP & CFO at Essex Property Trust]

We think investing the money into stabilized multifamily assets leads to better quality of cash flow and cash flow growth and NAV growth. So this will be a portion of our company, but it's going to be smaller in that 3% of our FFO going forward. And then in terms of our impact to the fourth quarter, it's about $06 because the maturities are evenly balanced between the third and the fourth quarter and they are pretty meaty, so that's what's driving that fourth quarter reduction. From a modeling perspective, you should assume that the 10% coupon we're earning on the mezz and preferred equity investments is rolling down to a five, which is where we're investing for new stabilized assets at.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

And just to be clear,

[Angela Kleiman, President & CEO at Essex Property Trust]

It's Angela here. I just want to point to you've seen us diverting or reallocating our investments very much focused on fee simple assets and in Northern California. And back to when the pref equity book was up to 9% FFO, the dynamics were completely different. We were not developing because cost was increasing higher than revenues or rent growth. That was one.

[Angela Kleiman, President & CEO at Essex Property Trust]

And in addition to that, the rent growth actually was pretty darn close long term CAGR. So it made sense to lean into PREV equity at that point and it was a great way to complement our development pipeline. So the world is very different now, and of course, we would want to shift our strategy to make sure that we're optimizing our returns whenever possible. And then the one thing I do want to complement your firm is that, just on a separate note, that I thought Piper Sandler published a really good note on the impact of AI and jobs and the developers. I thought that was a thoughtful piece, so I thought your tech team should know that.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

I'll pass that on. Thank you.

[Operator]

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

[Brad Heffern, Director at RBC Capital Markets]

Yes, thanks. Can you talk about what you're seeing for concessions in LA? Is the year over year activity higher? Or is it just more widespread on the rent side and not the concession side?

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, concessions has remained elevated relative to the rest of the portfolio for LA. So, if I compare just Q2 this year to Q2 last year, it's slightly higher. Going forward, now we're not talking about dramatically higher, we're talking about somewhere a little over a week. And so, it remained at more higher than the portfolio. It's not getting dramatically worse or better.

[Brad Heffern, Director at RBC Capital Markets]

Okay, got it. And then, Barb, you guys have the commercial paper program now. Is there a significant savings on that versus the revolver and just how do you plan to leverage that tool versus how you would historically use the revolver?

[Barb Pak, EVP & CFO at Essex Property Trust]

Yes, that's correct. It's about 70 basis points difference in borrowing costs between our line of credit and commercial paper program. Historically though, we have not utilized our line as a permanent source of capital. We've used it as a temporary bridge to permanent financing and so going forward, how we'll be using the CP program is very similar. We don't expect to have a large balance on that over long periods of time.

[Barb Pak, EVP & CFO at Essex Property Trust]

You will see it pop up when we are temporary bridging financing, but overall we don't expect to utilize it in a different way than how we've utilized our line historically.

[Brad Heffern, Director at RBC Capital Markets]

Okay, thank you.

[Operator]

Thank you. Our next question comes from the line of Eric Wolf with Citibank. Please go ahead.

[Eric Wolfe, Director at Citi]

Hey, thanks. I want to return back to the guidance for blended rent growth in the back half. I mean, looks like you only lowered it a little bit from around, call it, 3% to 2.7%. And your second quarter was in line with your guidance. So I was just curious if it was more recent pricing that caused you to lower it, if you're trying to communicate something around market rent growth sort of shifting in certain markets and to whatever extent you can discuss recent trends on new and renewal leases, that would help as well. Thanks.

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, that's a good question. In terms of our view of the second half, we do have the blended decelerating. Having said that, it's also typical with the normal seasonal curve. It's just the normal seasonality of our business. So, for example, if I look at our new lease rates for the fourth quarter for the estimate, actual last year new lease rates declined down to 190 basis points.

[Angela Kleiman, President & CEO at Essex Property Trust]

And we've said that in the past where our loss to lease by year end actually become a gain to lease. Once again, not unusual. This year, the peak obviously is not as strong as last year. It's still unplanned, which means we are expecting a more modest deceleration. We don't know what that level is, but we're assuming a negative 70 basis points on new lease rates, just as an example.

[Eric Wolfe, Director at Citi]

Okay, so your original guidance expected something maybe a little bit stronger because supply is coming down and you're putting that into your assumption versus now you're forecasting something that is sort of similar to your historical pattern. Is that the right way to think about it?

[Barb Pak, EVP & CFO at Essex Property Trust]

Yeah, Eric, this is Barb. I think the other component is just LA. Didn't take off like we thought it might. It's been more anemic and so that has a bigger impact to the fourth quarter because LA seasonality is a little different than maybe the broader Northern California PNW markets. That's the other factor in the fourth quarter that changed.

[Eric Wolfe, Director at Citi]

Okay, thank you.

[Operator]

Thank you. Our next question comes from the line of Janna Kalan with Bank of America. Please go ahead.

[Jana Galan, Director at Bank of America]

Thank you, good morning. Question for Rylan, if you could provide some details on the strategy to go forward with a new joint venture focused on structured finance investments. It sounded like your preference at this point in the cycle was to buy on balance sheet, but just curious what's kind of what you're seeing on cap rates?

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Yeah, good question. Again, this goes back to Barb's comment earlier, we're strategically, we're trying to target an FFO contribution from PrefMes, that's sub-four percent of FFO. We've had a lot of partner interest in this business given our track record of success and relationships as it relates to preferred and mez. This allows us to stay in the business and really select the highest risk adjusted reward opportunities while managing that earnings volatility inherent in some of these shorter term investments.

[Jana Galan, Director at Bank of America]

Thanks, Rylan. And then Angela, thank you for all the detailed comments on the like for like blended rent spreads. But it still seems like the initial guidance there was an expectation the blended rent growth in the second half would be a little bit lower. I'm sorry, in the first half would be lower than in the second half. And then so just trying to better understand kind of if you're seeing, you know, if it's a year over year, why the blends would need to decelerate in the second half now.

[Angela Kleiman, President & CEO at Essex Property Trust]

Well, the first half blend, actually we outperformed our expectation in the first half. And it's really strength of Northern California, which is a good it's a quality beat. That's what Barb calls it. And so what we're expecting is second half just the same approach we did when we had our earnings call last quarter, which was we assume the second quarter will perform as unplanned. And therefore, right now what we're doing is we are expecting that the second half will perform unplanned as our original plan.

[Angela Kleiman, President & CEO at Essex Property Trust]

And so you may be expecting a greater rate, but it's really not going to because we're just it's really the strength of the first half driven by the first quarter.

[Jana Galan, Director at Bank of America]

I see. Thank you.

[Operator]

Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets]

Great. Thanks and good morning, everyone. Angela, appreciate all the detail on kind of the like for like leases versus all leases. I'm interested in how much of that benefit in 2Q to new lease rate growth is seasonal related and typically reverses in the back half of the year? And then, I guess, for that all lease metric, what did you expect at the outset of the year versus what you're expecting now within the revised guidance?

[Angela Kleiman, President & CEO at Essex Property Trust]

Hey, Austin, that's a good question. On the second quarter, it's about two sixty basis points higher on new leases when you look at the all versus just the like for like. So it's a big variation And the blend is which resulted in the blend of 100 basis points greater. And of course, as you mentioned, it's going to decel more. And so we are assuming that the full year blend on all these spaces to land close to three percent.

[Angela Kleiman, President & CEO at Essex Property Trust]

And original guidance, Barb, would you comment on that? I don't have one.

[Barb Pak, EVP & CFO at Essex Property Trust]

Yeah,

[Barb Pak, EVP & CFO at Essex Property Trust]

Austin, there's a couple of puts and takes there. So, in terms of our top line, we assumed 2.3% scheduled rent growth, which is factored with all this blended rent growth, that's what goes into it. Because we outperformed in the first half of the year, there is a carry forward effect that offsets the lower blends in the fourth quarter and so we're still in line with our full year forecast on that aspect of our budget.

[Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets]

That's helpful. And then I think on last quarter's call, you had talked about achieving renewals around the high 3% range for April, I think it went out a little bit higher that and clearly that metric improved through the quarter. Do you think you can continue to achieve that low to mid 4% level moving forward, or is some of the pressure you're seeing in Southern California could lead for that renewal piece to moderate?

[Angela Kleiman, President & CEO at Essex Property Trust]

That's an excellent question and I wish I had a crystal ball. What I can tell you that for the second quarter as a whole, we sent renewals out at about 4.3% for the whole portfolio. We landed at 4.2%. We didn't need to negotiate much, which is terrific. If you look at the components, essentially Southern California remained soft and it was an offset mostly from the northern regions.

[Angela Kleiman, President & CEO at Essex Property Trust]

As far as August, September, we're sending renewals out slightly higher in Q2, which is a good trend, so in the mid fours. The question here is how much will we need to negotiate? And we just, you know, it's just too early to tell at this point, but it is a good sign that we're sending out renewals at comparable or slightly better levels.

[Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets]

Great. Thank you.

[Operator]

Thank you. Our next question comes from the line of Jamie Feldman with Wells Fargo. Please go ahead.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Great. Thanks for taking the question. Rylan, maybe a question for you. I think some of the commentary earlier in the call talked about cap rates compressing. You guys feeling good about buying ahead of the move.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

I think you've been buying in the mid-4s, mid to high 4s. So can you talk about where cap rates are now? Are they below four, low 4s? And where do you see them heading?

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Hi, Jamie. Yeah, I would say buying market rate for the past year, we've done over almost a billion dollars in Northern California. We've been the largest buyer along the peninsula over the past year. And market cap rates on average are slightly above 4.5%, but again, on our platform, we've been hitting closer to a 5% cap rate and that was consistent with the two acquisitions we were able to source in second quarter in an off market transaction. We have seen cap rates compress, think as Northern California and San Francisco have outperformed the nation, you've seen incremental buyers step in and a lot of the deals that were recently listed in recent months have guided and in several instances traded in that low 4% range.

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

I think in the city of San Francisco, it's actually when you factor in the mansion tax, you're buying an equivalent basis of around 4%. So there are instances of deals transacting in some cases below four cap, but I would say the average now in Northern California is for the marketed deals probably in that 4.25 for a well located institutional product. So we've been able to do better over the past year and this is as you would expect as prices change, our return expectations change and our capital allocation preferences will also evolve in light of this environment. So I remain optimistic that we're going to be able to continue to source opportunities at better yields where we can generate accretion and allocate to the highest risk adjusted returns, but it has gotten more competitive in Northern California.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Okay. And I guess given your success there buying ahead of the curve, LA clearly struggling, hard to know when it gets better. I mean, any and I know you sold there and redeployed into Northern California. But any thoughts to go in the other way, get very early in the cycle and probably find better opportunities in Los Angeles or still feeling best about reallocating it in Northern California and keeping your ships there?

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Yeah, Jamie, as you would expect, as I mentioned, as these prices change, preferences change. So we underwrite everything on the West Coast and we are going to be tracking LA very closely. What I would say is that a lot of the well located submarkets in LA, maybe surprisingly to some people, still trade in that mid to high 4% range. Glendale, Pasadena, West LA, they're still very competitive markets. Downtown LA is one notable exception where there's been few transactions and cap rates are given some of the property cash flow challenges in that submarket, there's probably a little bit more variability and cap rates are higher, again, unlimited transaction activity, but we are tracking it closely and again, for the right opportunity, we would definitely be there.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Okay, great. Thank you.

[Operator]

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

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Great. Thanks for the time here, guys. Just wanted to ask about 2Q blended rate growth. I think it was exactly in line with what you had guided to a quarter ago. So just wanted to ask kind of what were the puts and takes there, right?

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Was it renewals are better, new leases worse, vice versa? In terms of specific markets, I would imagine L. A. Probably came in worse than you thought, but maybe just breaking down that, if you can quantify that at all, sort of how much worse was L. A.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Than maybe what you had thought a quarter ago? And how much better as a result were the other markets?

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, that's a good question. LA certainly underperformed. LA blended came in below 1.5%, so close to say 1.3. And we had expected that Southern California as a whole and of course with LA would be a little bit north of that 2%. So that's probably the biggest factor on the second quarter, but of course renewal came in a lot stronger.

[Angela Kleiman, President & CEO at Essex Property Trust]

But keep in mind, our strategy is not to focus just on one specific metric. And I caution on getting too hyper focused on whether it's new lease rates specifically or only renewals, because the way we run our business is we want to maximize revenues. And so our goal is to generate new lease rates in a way that can be net positive. Keep in mind, there is a cost to incurring turnover and it can be expensive. I mean, two weeks of downtime is I mean, one week of downtime is 2%.

[Angela Kleiman, President & CEO at Essex Property Trust]

And so in the current environment where we're talking about a moderate growth in overall economy, especially for Southern California, it's more beneficial to reduce turnover friction and maintain a stable occupancy. And so you'll see us toggle between renewals and new leases with being mindful of occupancies to maximize rents. And so that's why we try to point people back to look at the blend, look at the occupancy and look at our total revenues because that's the big ball that we just we're very focused on that.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

That's really helpful. Thank you. And then just as a follow-up, just capital allocation priorities, I know we've talked about acquisitions here a bit. We've talked about the sort of the mezz book business. How would you sort of stack rank your capital allocation priorities today?

[Adam Kramer, VP - Equity Research at Morgan Stanley]

I know development, right, is back as well. I know you started the project last quarter. So maybe just stack rank the different opportunities in terms of capital allocation here.

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Hi, this is Ryland here. I would still put fee simple acquisitions relative to our cost of capital and the risks inherent in development as probably our top priority. We are underwriting a lot of development land sites but the economics continue to remain challenging, so you need to find the few opportunities. And then again, finance book, there's been a lot of capital raised to invest in that PrefMes space over the past several years, I think it's really important that we remain disciplined at this point in light of those capitals. The one deal we did this quarter is we really liked the submarket of South San Francisco, we really like the economics of this deal and as importantly as we've got a great development partner on this project as well that's going to stand behind the project.

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Again, you just have to be really selective in these types of environments, but we still think there's value to be on the acquisition opportunity to answer your question most directly.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Great, thanks everyone.

[Operator]

Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please go ahead.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Thank you. I'm not sure if you addressed this, but your guidance for blended implies 2.7% in the second half of the year. I was wondering if you could split that out between the third and fourth quarter. I think you implied there's some seasonality in there. And how are you thinking about earn in for 2026?

[Barb Pak, EVP & CFO at Essex Property Trust]

Hi, John, it's Barb. Yeah, in the third quarter, our blended, what's baked in our guidance is a little bit lower than the second quarter, but not too much lower. It's really the fourth quarter where we expect the blended to be closer to 2% versus being at 3% now. So that's really the detail that we're expecting is really in the fourth quarter of the year. And what was your second question? Sorry.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

I guess that sort of answers it. But how are we thinking about earn in for '26?

[Angela Kleiman, President & CEO at Essex Property Trust]

Well, earn in is way too early and it's not because we don't want to give it out. It's because we don't it's too early to see the rate of deceleration. And it could be a more moderate, in which case we'll have better earn in. It could be more extreme. We don't really see that, but it's possible given the economy is a little bit unclear these days.

[Angela Kleiman, President & CEO at Essex Property Trust]

It also could just be flat because we are anticipating lower supply deliveries and Northern California continues to remain strong. So the range of outcome is still wide enough that it's not going to be useful to try to predict it today.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Angela, you mentioned a couple of times public policy and its impact on the economy. I was wondering in LA specifically if you've seen an impact from immigration policy on your portfolio? I mean, maybe not directly, but indirectly as it just creates softer demand and more options, more housing options for some of your tenants.

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, that's a complicated topic, but as it relates to the actual impact on the demand side, we're not seeing a direct impact from the immigration policy. The softness of the demand is really more of the general economy. Do we have tariffs today? No, we don't. Is it 100%?

[Angela Kleiman, President & CEO at Essex Property Trust]

Now it's 12%. And it's confusing, right? So if you're a business and you're trying to make decisions whether you want to grow your business or hire people, it's hard to do. And so I think that it's a broader economy. As far as what we would expect on the immigration of some of these other policy impact probably more on the labor side and it will depend on the severity of the policy and the duration.

[Angela Kleiman, President & CEO at Essex Property Trust]

And so, at this point, we haven't seen a material impact across the board, but if the intensity continues and we end up with a labor shortage, I think that is going to be an issue for The U. S. As a whole. I don't think it's a specific LA issue.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Very helpful. Thank you.

[Operator]

Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho Securities. Please go ahead.

[Haendel St. Juste, MD & Senior REIT Analyst at Mizuho Financial Group]

Hey, good morning out there. Thanks for taking the question. First is more of a follow-up. I wanted to get some more color and clarity on the expected cadence of earnings from the structured investment book. Sounds like you're expecting the majority of repayments in the next three, four quarters.

[Haendel St. Juste, MD & Senior REIT Analyst at Mizuho Financial Group]

You mentioned $02 of repayment headwinds in 3Q, I think another $06 in 4Q. So I was hoping, one, that those numbers are actually accurate. And secondly, a sense of what that headwind could look like in 'twenty six as you right size the book. Thanks.

[Barb Pak, EVP & CFO at Essex Property Trust]

Yeah, this is Barb. From a modeling perspective, let me just try to walk you through the size of the book and then I think that might help you get there. So right now at the end of the second quarter, our total book value in the structured finance investments is $550,000,000 that includes the mezz investments that we have. And by the end of the year, assuming we don't do any new investments that haven't already been disclosed, the book is expected to be around $400,000,000 And then as we look to 2026, given the maturities that we have, we expect the book will be 200 to $250,000,000 by the end of the year. Although the redemptions are front end loaded in the first two quarters.

[Barb Pak, EVP & CFO at Essex Property Trust]

And so from modeling perspective, you'd want take the book down and then take the coupon from a 10% that we're earning on the investments down to a 5%. So that should give you enough cover. We haven't modeled out 26 yet. We haven't started our budget process yet, but that should hopefully help you get into the correct zone.

[Haendel St. Juste, MD & Senior REIT Analyst at Mizuho Financial Group]

No, that is very helpful. Appreciate that Barb. And just one more. Angela, I guess I was curious on your thoughts. Last month the California State Assembly passed and Governor Newsom signed a bill that appears, I guess aimed at what they say, catalyzing new housing through exemption to CEQA, the law of the land in California since 1970.

[Haendel St. Juste, MD & Senior REIT Analyst at Mizuho Financial Group]

So I guess I'm curious what your initial thoughts are on this repeal of CEQA and what you think it could mean for long term capital flows, asset pricing, development, rents, etcetera. Thanks.

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, we actually view CEQA to be net positive. It's a great example of California moving toward a more reasonable or in other words a more moderate political environment. And as far as the impact to supply and the development business, Rylan can provide more color.

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Yeah, Haendel. In the near term, we really expect this is going have limited impact. I'd remind you that in the past several years, the state legislature passed several reforms to encourage development and over the past three years, permits are down anywhere from 40% to 50% in our sub markets, so really had limited impact so far. I acknowledge that CEPA reform is significant given its history and how it has been used in the past and delay and sometimes prevent projects from occurring, but to take an example from our development underwriting, we've underwritten approximately 100 development deals over the past year, 80% of those had entitlements, so there was no CEQA risk to begin with. And the vast majority of those, the economics really just don't make sense, I'd call it an untrended return on costs, sub 5% on the majority of those projects.

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

We think the economics are going to continue to be a limiting factor as it relates to supply in California and so limited near term impact.

[Haendel St. Juste, MD & Senior REIT Analyst at Mizuho Financial Group]

Appreciate the thoughts. Thank you.

[Operator]

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

[Ami Probandt, Equity Research Analyst - REITs at UBS Group]

Hi, thank you. This is Amy on for Michael. I was wondering if you have seen any changes in demand in Northern California or Seattle, if renters are being more price sensitive, any changes in foot traffic or conversions or reasons for move out?

[Angela Kleiman, President & CEO at Essex Property Trust]

So we have seen a steady demand in Northern California and Seattle, And we've not seen any softness as it relates to, you know, whether it's traffic or otherwise. I think primarily because especially Northern California, we are still sitting in one of the best affordability positions that we have been from for the history of the company because rents are just starting to recover and income has grown consistently over the past five years. So, it's still catching up. And as far as Seattle is concerned, the demand remains steady. It's a higher supply market, therefore the demand is more influenced by the supply landscape than anything else.

[Angela Kleiman, President & CEO at Essex Property Trust]

And what we're seeing is that we're seeing the demand delivery or the demand pressure to shift in the second quarter or in the second half to our favor. In the first half, the supply delivery was about 60% of total supply and second half is 40%. So, definitely no cracks. The underlying strength continues to rank solid in our northern regions.

[Ami Probandt, Equity Research Analyst - REITs at UBS Group]

Great, thank you. That's all for me.

[Operator]

Thank you. Our next question comes from the line of Wes Golladay with Baird. Please go ahead.

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

Hey, good morning, everyone. I just want to go back to Los Angeles or LA County. How do you see a recovery playing out? I think you mentioned supply would be down, but what about the lease up pressure from that supply?

[Angela Kleiman, President & CEO at Essex Property Trust]

Well, the lease up pressure, it typically lasts depending on the magnitude around, say, six to nine months on average. And so, with the supplies abating, that lease pressure is actually going to improve. And what you'll see is the concessions will start to improve better and kind of end up in that maybe half a week versus closer to a week range over time. So that's one good metric to look at. And the other influencing factor with LA is with other economies you could tell or you could see what are the puts and takes.

[Angela Kleiman, President & CEO at Essex Property Trust]

For example, California, of course there's that technology and artificial intelligence benefit that has been quite steady. In Southern California, particularly LA, there's been a huge amount of infrastructure spending announced that is specific to LA. And that $80,000,000,000 will be a meaningful injection into that economy and driving demand, driving people to that market to build and to do business there.

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

Got it. Thank you.

[Operator]

Thank you. Our next question comes from Rich Hightower with Barclays. Please go ahead.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Hi, good morning out there everybody. Obviously, covered a lot of ground today, but just one question on bad debt. So it looks like on balance, you're kind of down to that 50 basis point number, which I think is roughly in line with history. But obviously, trends are still a little bit worse than expected in LA specifically. So does that sort of imply that we're better than expected elsewhere in the portfolio from a bad debt perspective? What do you expect from here?

[Barb Pak, EVP & CFO at Essex Property Trust]

Hi Rich, it's Barb. Yeah, your memory is pretty good. We are about 10 basis points off of our long term historical average with LA being worse than our average and then being offset by slightly better in NORCAL and PNW. But overall, our guidance assumes we're at this level for the rest of the year. Could we do better?

[Barb Pak, EVP & CFO at Essex Property Trust]

Yes, that would just be the higher end of our guidance.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Great, okay, that's all for me, thanks.

[Operator]

Thank you. Our next question comes from the line of John Pawlowski with Green Street Capital Advisors. Please go ahead.

[John Pawlowski, Managing Director at Green Street Advisors, LLC]

Hey, good morning. Angela, can you provide details around your comment that you believe the Bay Area job growth is better than what the BLS is reporting? Because the jobs data, just in terms of non farm jobs, both from an absolute growth rate and momentum, it's actually been better in SoCal relative to NorCal. So just curious why you play devil's advocate against the BLS numbers.

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah, hey, actually it's based on data. So this is not Angela's feeling index here when it comes to the BLS data. It's become less reliable because participation rate has fallen. Pre COVID, the participation rate was about 60%, and today the participation is only about half of that, about 30%. And so BLS data is just not a good indication of what's really going on in the ground.

[Angela Kleiman, President & CEO at Essex Property Trust]

But a perfect example is that the BLS shows it's actually the Northern California region produced the worst jobs year to date. It's negative 70 basis points. You contrast that with it's actually our best rent growth market. It's extreme and that's not possible without job growth.

[John Pawlowski, Managing Director at Green Street Advisors, LLC]

Understood. I understand BLS data is far from perfect. Just curious if there's other indicators you look at aside of rent growth that suggests that the job growth is really gaining momentum in the Bay Area.

[Angela Kleiman, President & CEO at Essex Property Trust]

Yes, yes. A a good data we use, which is a third party vendor, is we track the job openings of the top 20 technology companies. And we have seen once again not acceleration, but just a gradual steady increase. And we're now pretty darn close to pre COVID levels, which is a good sign. Because what that means is as these companies backfill the job openings, the open positions remain high, which means they are still incrementally growing.

[Angela Kleiman, President & CEO at Essex Property Trust]

So we're not in that robust frothy period, but it's definitely a great start as far as we're concerned.

[John Pawlowski, Managing Director at Green Street Advisors, LLC]

Okay. And then last one for me, Rylan. Can you give us a sense where the new preferred equity investment and the new JV sits in the capital stack and how much total leverage is on this is going to be on this development project? I'm worried and skeptical the borrower can afford 13.5% interest on the loan.

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

John, I would say typically our underwriting standards were typically started around the 60% loan to cost and willing to go up to 85%, assuming a full accrual stack. So we're not going above that 85% position in this deal. Our underwriting numbers too, right? So we'll take the developers underwriting, then we'll recast the land value to what we think is an appropriate value for this market. So I think we have a fairly conservative approach as it relates to development underwriting.

[John Pawlowski, Managing Director at Green Street Advisors, LLC]

So the total loan to cost on this project will be in the 80 ish percent range?

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Sorry, please repeat the question.

[John Pawlowski, Managing Director at Green Street Advisors, LLC]

Yeah, preferred equity investment plus any other debt on the property, the total loan to cost on the development will be somewhere in the 70% to 80% range. Is that fair?

[Rylan Burns, EVP & Chief Investment Officer at Essex Property Trust]

Yes, that's in the ballpark.

[John Pawlowski, Managing Director at Green Street Advisors, LLC]

Okay. Thank you.

[Operator]

Thank you. Our final question for today's call comes from Alex Kim from Zelman and Associates. Please go ahead.

[Alexander Kim, Equity Research Senior Associate at Zelman & Associates]

Hey. Morning out there. Thanks for taking my question. Just we saw the spread between renewals and new move ins widen again this quarter and previously there might have been some expectations for market rents to converge with renewals. Just curious what you think this might mean from a market demand perspective, and then do you expect this spread to tighten moving forward?

[Angela Kleiman, President & CEO at Essex Property Trust]

Yeah. Normally hey, Alex. Normally, you would see a wide range between renewal lease and rates in an environment if market rents continue to accelerate. So, if that happens next year, then that spread is going to remain wide. If market rents performs closer to say the long term CAGR between 3% to 4%, then those two metrics will likely converge.

[Angela Kleiman, President & CEO at Essex Property Trust]

And with the caveat that LA will be different because we have other influences impacting LA.

[Alexander Kim, Equity Research Senior Associate at Zelman & Associates]

Got it. Okay. No, that's all for me. Thank you.

[Operator]

Thank you. Ladies and gentlemen, the conference of Essex Second Quarter Earnings Call has concluded. Thank you for joining the call. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Angela Kleiman, President & CEO
• Barb Pak, EVP & CFO
• Rylan Burns, EVP & Chief Investment Officer

Analysts

• Nicholas Yulico, Managing Director at Scotiabank
• Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies
• Brad Heffern, Director at RBC Capital Markets
• Eric Wolfe, Director at Citi
• Jana Galan, Director at Bank of America
• Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets
• Jamie Feldman, MD & Head - REIT Research at Wells Fargo
• Adam Kramer, VP - Equity Research at Morgan Stanley
• John Kim, MD - U.S. Real Estate at BMO Capital Markets
• Haendel St. Juste, MD & Senior REIT Analyst at Mizuho Financial Group
• Ami Probandt, Equity Research Analyst - REITs at UBS Group
• Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co
• Rich Hightower, MD - U.S. REIT Research at Barclays
• John Pawlowski, Managing Director at Green Street Advisors, LLC
• Alexander Kim, Equity Research Senior Associate at Zelman & Associates