Essex Property Trust's Q3 2025: Contradictions Emerge on Los Angeles Market, Structured Finance Earnings, and Economic Guidance

Guidance:

• Raised Core FFO midpoint to $15.94 after Q3 beat of $0.03.
• Reaffirming full-year midpoint for same-property revenue, expense and NOI growth.
• 2026 blended lease-rate earn-in expected to be 80–100 bps.
• Expect roughly $175M of redemptions in 2026, which could reduce 2026 Core FFO growth by ~150 bps net of reinvestment depending on timing.
• Structured finance book expected to decline toward ~$250M by 2027 as redemptions abate.
• Balance sheet: net debt/EBITDA ~5.5x and >$1.5B of available liquidity.

Business Commentary:

* Portfolio Performance and Lease Rate Growth: - Essex Property Trust reported a blended lease rate growth of 3% for the year-to-date, with specific regions performing at different rates: Northern California close to 4%, Southern California around 1.2%, and Seattle around 2%. - This growth is attributed to the competitive advantage of operating in low supply markets, with Northern California and San Francisco leading due to attractive rent-to-income ratios and demand benefits from AI-related start-ups.

• Geographic Market Variations:
• Northern California, particularly San Francisco and Santa Clara counties, had the highest rent growth year-to-date, reflecting strong demand and favorable fundamentals.

• In contrast, the Seattle region is trending at the low-end of expectations, influenced by challenging year-over-year comparisons, soft demand, and temporary supply constraints.

• Transaction Market and Investment Strategy:

• Essex's investment strategy focused on acquiring almost $1 billion of assets in Northern California, driven by high growth submarkets and achieving accretion relative to dispositions.

• The company continues to see competitive bidding for quality properties, with cap rates generally in the mid-4% range, but remains confident in its ability to drive FFO and NAV per share growth.

• Economic Outlook and Job Growth:

• Essex anticipates that the West Coast will continue to outperform the national average in terms of job growth, with Northern California expected to lead due to significant office expansions and supported by AI-related developments.
• The company remains optimistic about Los Angeles fundamentals, expecting improved pricing power with stabilized supply and infrastructure spending.

Sentiment Analysis:

Overall Tone: Positive

• Management called the quarter "solid," said Core FFO exceeded guidance and they raised the midpoint to $15.94, highlighted portfolio outperformance on the West Coast (Northern CA leading), and emphasized a "strong" balance sheet with ~5.5x net debt/EBITDA and >$1.5B liquidity.

Q&A:

• Question from Nicholas Yulico (Scotiabank Global Banking and Markets, Research Division): I wanted to see if there was any way you could break out the blended rate growth a bit in the third quarter, just for some perspective on how much L.A. and Orange County might have been a drag on those numbers?
  Response: Q3 blended lease-rate growth: Southern California ~1.2% (Los Angeles ~1.0%), Northern California ~4% (San Francisco/San Mateo ~5–6% at the high end), Seattle ~2%.

• Question from Nicholas Yulico (Scotiabank Global Banking and Markets, Research Division): In Northern California, whether you've seen any like real pickup in demand from job announcements or office activity translating into demand on the ground?
  Response: Steady strength in Northern California with an uptick in top tech job postings and an unusually high number of start-ups, driving demand for small office space and supporting rental demand.

• Question from Nicholas Joseph (Citigroup Inc., Research Division): You mentioned the '26 earn-in of estimated to be 80 to 100 basis points. I was hoping you could break that down between Northern California, Southern California and Seattle?
  Response: No exact regional split provided, but management expects Northern California to lead, Seattle to be in the middle, Southern California third; overall H2 blended lease-rate growth expected roughly in the low-2% range producing the 80–100 bps earn-in.

• Question from Nicholas Joseph (Citigroup Inc., Research Division): On the preferred book, you said 150 basis points headwind; what's the sensitivity around the timing of the potential redemptions for next year?
  Response: Most maturities occur in H1 2026; guidance assumes full redemption at maturity—short extensions (1–2 months) are the primary timing sensitivity and would slightly reduce the headwind if extended.

• Question from Jeffrey Spector (BofA Securities, Research Division): How are you thinking about AI hiring versus tech layoffs into next year and the medium term; what are you hearing about the job outlook in your region?
  Response: AI is driving high experimentation but low adoption today; layoffs are part of normal business cycles and not predominantly AI-driven, while AI is enabling many new start-ups—net impact expected gradual, with Northern California benefiting most.

• Question from Jeffrey Spector (BofA Securities, Research Division): How is your portfolio benefiting from San Francisco downtown recovery versus suburbs?
  Response: Downtown recovery is underway this year while suburban recovery started earlier; year-to-date blended rate growth: San Francisco ~5.2%, San Mateo ~6%, San Jose ~4%, with demand concentrated across both downtown and suburban areas.

• Question from Sanketkumar Agrawal (Evercore ISI Institutional Equities, Research Division): What cap rates are you using on acquisitions and exclusions, and how deep is the investor pool within that market?
  Response: Recent Northern California acquisitions targeted ~4.8% market cap with ~5.2% yield to Essex (Essex yield ~40 bps higher), reflecting compressed cap rates but strong investor demand for high-quality assets.

• Question from Sanketkumar Agrawal (Evercore ISI Institutional Equities, Research Division): Are you evaluating share repurchases given current stock levels?
  Response: Share buybacks are evaluated disciplinedly; buyback math is more compelling now than in Q3 but decisions depend on relative value versus acquisitions and capital allocation priorities.

• Question from Austin Wurschmidt (KeyBanc Capital Markets Inc., Research Division): Which region drove softer-than-expected lease-rate growth versus prior quarter and is Seattle softness temporary or could persist into 2026?
  Response: Seattle drove the softness due to softer demand and lack of AI start-up tailwinds; management views it as stable rather than a red-flag market and expects improvement as supply declines ~40% in 2026.

• Question from Austin Wurschmidt (KeyBanc Capital Markets Inc., Research Division): Can Northern California sustain the ~4% blended lease-rate growth into 2026 or is some of it a temporary back-to-office lift?
  Response: The ~4% is viewed as a catch-up recovery rather than a short-lived back-to-office spike; Northern California still has upside as job postings and start-up formation support further rent recovery.

• Question from Unknown Analyst (Wells Fargo): Can we talk about your fourth quarter leasing strategy: renewals and new lease growth quarter-to-date?
  Response: Q3 strategy pushed rents in Northern CA/Seattle and toggled occupancy in Southern CA; renewals sent in Q3 averaged ~4.6% (landed ~4.3%); for Nov–Dec renewals being sent ~mid-5% expected to land in high-4s supporting Q4 improvement versus last year.

• Question from Unknown Analyst (Wells Fargo): What are new lease rates quarter-to-date?
  Response: October same-store new leases are roughly flat; gain-to-lease ~1.6%, indicating normal seasonal softness but nothing alarming.

• Question from Unknown Analyst (Wells Fargo): There was a $21M commitment to the preferred book this quarter—does that signal offsetting redemptions or a strategy change?
  Response: They are not exiting the debt/preferred business but will be selective; aim is to manage the book's size while deploying opportunistically where returns exceed fee-simple alternatives.

• Question from Alexander Goldfarb (Piper Sandler & Co., Research Division): Given attractive acquisition yields in the 4%s and your track record in DPE, would you reconsider dramatically shrinking the debt/preferred book?
  Response: Management is being selective; the book is shrinking due to heavy redemptions and compressed yields—still available opportunistically but not pursuing deals just to backfill the book.

• Question from Alexander Goldfarb (Piper Sandler & Co., Research Division): Thoughts on potential progressive wins in Seattle elections—any negative consequences for apartments or signal to rebalance exposure?
  Response: Recent rent-control-style legislation in Washington (CPI+7% cap) suggests legislators seek balance; no immediate policy proposals identified that would materially harm apartments and no immediate plan to rebalance based on the election.

• Question from Derrick Metzler (Morgan Stanley, Research Division): Thoughts on SB 79 and does it impact South San Francisco development or future pipeline?
  Response: SB 79 (increased density near transit) is broadly positive long-term for California housing supply but won't materially affect the San Francisco deal already entitled; zoning gains are incremental and returns remain the gating factor for development.

• Question from Haendel St. Juste (Mizuho Securities USA LLC, Research Division): Current concession levels versus a year ago and are concessions being offered on renewals?
  Response: Concessions are ~1 week, comparable to last year and typical seasonally; concessions are negligible on renewals and mostly used on new leases.

• Question from Haendel St. Juste (Mizuho Securities USA LLC, Research Division): In L.A., what's the spread between new leases and renewals and is that sustainable?
  Response: New leases in L.A. were negative (~-1.8%); renewals were positive (low- to mid-3% range); occupancy net of delinquency is above 94% and management doesn't expect further pressure on new leases into next year as supply decreases.

• Question from Julien Blouin (Goldman Sachs Group, Inc., Research Division): Could Seattle become a relative loser if AI-driven investment concentrates in other tech markets?
  Response: Seattle has a diversified industry base (Amazon, Microsoft, etc.); management does not view AI concentration elsewhere as a net negative for Seattle—expects continued growth and stability.

• Question from Julien Blouin (Goldman Sachs Group, Inc., Research Division): Contra Costa occupancy fell ~60 bps sequentially—what's happening there?
  Response: Contra Costa digested heavy supply over the past two years; sequential revenue grew but occupancy softened as part of normal supply/price adjustments and the market is recovering.

• Question from Robin Haneland (BMO Capital Markets Equity Research): Why focus recent acquisitions in Santa Clara versus buying back stock, and is rebalancing away from San Francisco on the horizon?
  Response: Santa Clara submarkets offered the highest risk-adjusted returns and underwriting showed better opportunity than current San Francisco listings; they will continue to underwrite all Northern CA opportunities and step in when unique value emerges.

• Question from Robin Haneland (BMO Capital Markets Equity Research): San Diego and Oakland are showing decelerating same-store revenue—what are new lease rates and demand trends there?
  Response: San Diego weakness is localized to supply-heavy pockets (North City/North Coast) and broad Southern CA softness; Contra Costa/Oakland have seen supply-driven fluctuations but Contra Costa showed sequential revenue improvement.

• Question from Richard Anderson (Cantor Fitzgerald & Co., Research Division): Do you expect West Coast jobs in 2026 to outperform, match, or lag the national job growth?
  Response: Management expects their West Coast markets to outperform the U.S. average: Northern CA benefiting from AI and migration, Seattle stable with upside, and Southern CA roughly in line with the U.S. but improving from troughs in L.A.

• Question from Richard Anderson (Cantor Fitzgerald & Co., Research Division): With the Olympics coming to L.A., any plan to convert units for short-term rentals or sell into Olympic-driven demand?
  Response: No plan to convert existing long-term units to short-term rentals; transaction activity outside downtown/westside remains well-bid and they will underwrite opportunities but are not converting inventory for the Olympics.

• Question from Linda Yu Tsai (Jefferies LLC, Research Division): Any employment impact from higher H-1B visa costs going forward?
  Response: Potentially a net positive—higher fees may reduce intermediaries and allow firms to hire direct, possibly increasing allocations; no meaningful negative impact expected for Essex.

• Question from Alex Kim (Zelman & Associates LLC): Can you walk through the decline in year-over-year repair and maintenance costs—due to decreased same-store turnover—and is it sustainable into Q4/2026?
  Response: Repair & maintenance is lumpy, but lower turnover, stabilized delinquency-related turnover, and procurement savings drove lower costs this year; controllable expenses remain ~3% historically and management sees no near-term change heading into 2026.

Contradiction Point 1

Los Angeles Market Performance

It highlights a shift in the company's perspective on Los Angeles' market performance, which is crucial for revenue projections and investor expectations.

Can you break down the blended rate growth in Q3 to show the impact of L.A. and Orange County on those numbers? - Nicholas Yulico(Scotiabank Global Banking and Markets, Research Division)

2025Q3: L.A. has been a drag, but that's not a surprise. - Angela Kleiman(CEO)

What caused the weaker blended pricing in Los Angeles? Was there a fire ordinance impact? Is Northern California performing as expected? - Nicholas Yulico(Scotiabank)

2025Q2: Los Angeles underperformed relative to expectations due to heavier supply in the first half, delinquency recovery taking time, and a soft demand environment. - Angela Kleiman(CEO)

Contradiction Point 2

Earnings Expectations from Structured Finance

It involves changes in financial forecasts, specifically regarding the expected impact of structured finance earnings, which are critical indicators for investors.

What is the expected earnings cadence for the structured investment book? - Haendel St. Juste(Mizuho Securities)

2025Q3: The structured finance book is expected to decrease from $550 million to $400 million by year-end, with further decline in 2026. - Barb Pak(CFO)

Can you detail the earnings cadence of structured investments? What is the impact of California AB 15? - Haendel St. Juste(Mizuho Securities)

2025Q2: The structured finance book is expected to decrease from $550 million to $400 million by year-end, with further decline in 2026. Earnings impact from structured finance will abate after the next four quarters, removing a temporary headwind. - Barb Pak(CFO)

Contradiction Point 3

Rent Growth and Market Conditions

It involves differing perspectives on rent growth expectations and market conditions in different regions, which are crucial for understanding the company's financial outlook.

Can you break down the blended rate growth in Q3 and the impact of L.A. and Orange County on those numbers? - Nicholas Yulico(Scotiabank Global Banking and Markets, Research Division)

2025Q3: L.A. has been a drag, but that's not a surprise. Southern California came in at around 1.2%, Northern California close to 4%, and Seattle right in the middle at about 2%. L.A. specifically is below 1%. San Francisco and San Mateo are in the 6% to 5% range. - Angela Kleiman(CEO)

Why is the expected renewal rate growth lower this year despite low turnover, and what supports improved demand in the second half? - Eric Wolfe(Citibank)

2024Q4: We are assuming that the market will be flat, area by area. We've got San Francisco and San Mateo at 5.5% and 6%, respectively, just for your frame of reference. Southern California, about 2.3%. - Angela Kleiman(CEO)

Contradiction Point 4

Economic Uncertainty and Guidance

It reflects differing views on the impact of macroeconomic uncertainties on the company's guidance, which is essential for investor expectations and strategic planning.

How are you planning for next year and the medium term? What are executives sharing about the job outlook? - Jeffrey Spector (BofA Securities, Research Division)

2025Q3: We feel very good about the ability to execute on our leasing momentum that we've seen in the first 2 quarters of this year and our guidance range of $655 to $665. - Angela Kleiman(CEO)

How confident are you in achieving blended rate growth in the second half versus the first half, considering current macroeconomic uncertainty? - Nick Yulico (Scotiabank)

2025Q1: We feel very good about the ability to execute on our leasing momentum that we've seen in the first 2 quarters of this year and our guidance range of $655 to $665. - Angela Kleiman(CEO)

Contradiction Point 5

Job Outlook and Economic Conditions

It involves differing views on the job outlook and economic conditions, which are critical for understanding the demand for housing and the company's financial health.

How are you planning for next year and the medium-term? What are executives in your region saying about the job outlook? - Jeffrey Spector(BofA Securities, Research Division)

2025Q3: AI capabilities are growing rapidly, but adoption is low due to unclear ROI. Essex is well-positioned to benefit as AI capabilities become more pervasive in the workplace. - Angela Kleiman(CEO)

Are there potential shifts in investment focus due to regulatory and growth dynamics? - Rich Anderson(Wedbush Securities)

2024Q4: We are seeing, obviously, very low turnover, but we are still seeing good job growth, particularly in our Northern regions, which is driving demand. - Angela Kleiman(CEO)