Prepared remarks
Good day, and welcome to the Essex Property Trust Second Quarter 2026 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 you to your host, Mrs. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.
Thank you for joining Essex's second quarter earnings call. Today, I will cover performance in the first half and outlook for the second half of the year, then conclude with an update on the transaction market. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to report a solid first half of 2026, highlighted by a substantial outperformance led by strong execution from our operations team in delivering results exceeding our original expectations. While national economic and employment growth have been measured, West Coast multifamily fundamentals continue to demonstrate durability with limited housing supply across our markets and affordability favoring renting. As such, we are meaningfully raising our full year expectations for same-property revenues and core FFO per share, which Barb will cover in a moment. As for regional highlights, starting with Seattle, operating conditions improved in the second quarter with 2.6% blended rent growth, representing a 340 basis point sequential increase from the first quarter. Consistent with normal seasonality, market rents reached their peak around early July and are expected to moderate through the balance of the year. Performance has been stronger on the Eastside, a benefit to our portfolio allocation, which achieved 3.2% blended rents, a considerably higher growth rate than the 1% in the urban core. We are also encouraged by recent office expansion announcements from several notable companies. These trends are consistent with prior innovation cycles and reinforce Seattle's long-term position as a leading technology market. While it will take time for these commitments to translate into meaningful hiring, they represent a positive signal for future demand. More importantly, the favorable outlook for this region is supported by declining supply deliveries, which continue to moderate. Turning to Northern California, which remains our strongest performing region and the leading multifamily market in the country, it delivered blended rent growth of 6.5% while concurrently maintaining strong occupancy. This performance is attributable to two key factors. First is the compelling supply-demand backdrop with limited housing deliveries and continued investments across the Bay Area from the technology sector propelling demand. Second, positive migration trends as talent and entrepreneurs are drawn to the unique concentration of capital and innovation. As a result, we are experiencing growing momentum of demand for housing throughout the broader region. These fundamentals have translated into pricing power and outperformance relative to our original expectations, including peak leasing momentum extending beyond typical seasonal patterns. On to Southern California. The region remains closely tied to national economic trends with job growth generally in line with the U.S. average. Against this tempered employment backdrop, limited new supply has supported relatively stable operating conditions. Accordingly, we generated 1.4% blended rent growth in the second quarter, led by Orange County, while Los Angeles lagged. Looking ahead to the second half of the year, we expect the broader economy to unfold generally consistent with our initial forecast for the year with modest job growth and continued macroeconomic and geopolitical uncertainty. While demand is highly correlated to the pace of job growth, West Coast multifamily fundamentals remain well positioned with attractive affordability for rental housing, combined with new apartment deliveries moderating across most of our markets. Lastly, on the transaction market. Investor interest in West Coast multifamily assets remains healthy with transaction volume increasing throughout the year across our markets despite a higher interest rate environment. Cap rates for institutional quality assets have generally remained in the mid-4% range, while the majority of transactions in Northern California are pricing in the low 4% range. Overall, the strength of private market valuations reinforces the value of the capital we deployed in Northern California over the past several years. We will continue to evaluate acquisitions, dispositions and other investment opportunities based on the highest relative return with a focus on maximizing growth, NAV and FFO per share accretion. With that, I'll turn the call over to Barb.
Thanks, Angela. Today, I will recap our second quarter results, discuss key updates to our revised full year guidance and conclude with comments on the balance sheet. Starting with our second quarter results: we achieved another solid quarter with core FFO per share exceeding the midpoint of our guidance range by $0.10. The outperformance was primarily driven by operations with same-property NOI accounting for $0.05 and non-same-property NOI contributing an additional $0.03. As for the favorable variance within our same-property portfolio, it was comprised of revenue growth, which was 20 basis points ahead of plan. In addition, operating expenses came in lower than expected, which was driven by $0.03 of favorable property taxes, mainly due to successful Prop 8 appeals that are one-time in nature. The benefit from our non-same-property portfolio was largely attributable to prior year acquisitions in Northern California, which continue to perform ahead of plan due to strong rent growth in this region. Turning to our updated full year guidance, we are pleased to announce a $0.20 increase to the midpoint of core FFO per share, representing a 1.3% increase at the midpoint. Better operating performance within our portfolio is the key driver of the increase. As it relates to our same-property portfolio, we are raising the midpoint of NOI growth by 70 basis points to 2.8%. The increase is a result of a 40 basis point improvement in revenue growth, which is driven by higher scheduled rent, occupancy and other income. In addition, we are lowering the midpoint of operating expense growth by 25 basis points, primarily reflecting the property tax savings previously discussed. Altogether, higher same-property growth contributed $0.12 to the full year increase. The balance of the increase to our guidance largely reflects better-than-expected performance within our non-same-property portfolio, as previously discussed. As for our third quarter core FFO guidance, we are forecasting $3.99 per share at the midpoint. The $0.09 sequential decline from the second quarter primarily reflects higher operating expenses, including normal seasonal increases in utilities and California property taxes as well as increased controllable spending during the second half of the year. As I mentioned last quarter, controllable expenses were lower than expected in the first quarter, which was timing related. And as such, we expect these expenses to be $0.09 higher in the second half of the year than the first half. Concluding with the balance sheet, we remain in a strong financial position with net debt-to-EBITDA of 5.4x, minimal debt maturities over the next 12 months, over $1 billion of available liquidity and access to multiple sources of capital. As such, we have ample flexibility to fund our commitments and capitalize on opportunities that support long-term growth. I will now turn the call back to the operator for questions.
Questions and answers
Thank you. We'll now be conducting a question-and-answer session. To allow us to address as many participants as possible, please limit yourself to one question and one follow-up, and if time permits, you may requeue to add any additional questions.
Could you maybe just elaborate a little bit on some of the July trends that you're seeing? It feels like the market certainly improved quite dramatically from maybe the start of the second quarter to the end of the second quarter. And then I'm just curious how kind of spreads and renewals are trending in July and perhaps August?
Steve, thanks for your question. From the blend, I think that's a good data point. July blends are coming in similar to the second quarter. I think things are moving along as planned and our fundamentals remain sound. For context, where July is coming in this year, it's slightly better than the same period last year. If you compare year-over-year, last year we had a very strong first half and then a pretty significant drop in the second half. We're definitely not seeing that so far this year, and we are assuming that this year the first half and second half are quite similar.
Yes. I guess that's kind of the issue is that you're not seeing the drop-off and the market has been very strong. So I think maybe it would sort of imply that there should be more momentum into the back half of the year, but yet you're not really assuming that or maybe projecting that within guidance. So is there something holding you back on that? Or is that just conservatism on your part at this point in the year?
Yes, that's a good question, Steve. It's a little bit of both. We are not anticipating a significant drop-off. Our base case is that we're going to land right at that 2.5% blended midpoint. We do have a range, which would point to a better performance. But what we're seeing on the ground is that Northern California momentum remains strong; we actually haven't peaked yet, and that's excellent. Having said that, the broad U.S. economy is slower this year than last year, and we are tethered to that, especially Southern California, including L.A. A good data point is job growth for the first half of this year is quite a bit slower than the same period last year. For those reasons and with the geopolitical uncertainty that remains, if we were 100% Northern California, our numbers would be much more robust. But given that 40% of our footprint is still in Southern California, and it is tied to the broader economy, we needed to factor some of these uncertainties in. At the end of the day, Southern California, while a lag for the West Coast, is still a solid long-term market, generating 1.4% blended rent growth with occupancy above 95%; it outperforms most major metros in the U.S.
On new lease spreads, we were kind of surprised to see the new lease number so much lower than 2Q '25, just given all the strength in NorCal. You kind of covered it a little bit with your commentary about the broader economy, but I'm just wondering about the dynamic of lower new lease spreads year-over-year, but higher renewals and what's kind of driving that pricing decision?
Brad, thanks for your question. There's quite a bit of variation by region. In Northern California, we're definitely seeing very strong new lease spreads. Southern California is not seeing that kind of strength. Seattle is somewhere in the middle. Overall, the composition of our portfolio — Southern California plus Seattle is 60% — helps explain the aggregate result. What we are seeing this year is that renewals continue to be quite strong and are coming in around the 5% range. With new leases, we're expecting the trend of lower new lease spreads to continue and elevated renewals to continue.
Okay. And Barb, two things on the preferred book. You had close to $90 million in redemptions in the quarter, but the balance is only down about $40 million sequentially. Can you reconcile that? And then also give your broader perspective on how the current balance should evolve in the coming quarters?
Yes, good question. The redemptions this quarter: two were in the preferred equity book amounting to $40 million, and one was a mezzanine investment, which sits in notes and other receivables on the balance sheet. So it's in two different buckets on the balance sheet and income statement, which is why you didn't see the preferred line drop by the full $90 million. We have one other small redemption in the third quarter, which was factored into our guidance originally, but it's offset by a new investment that we made. The book value we're accruing on is $100 million, and I think that's a good run rate to use going forward for guidance purposes unless we do more investments. At this point, $100 million seems like a good run rate.
I think you mentioned a moment ago that you're still expecting a 2.5% blended rate growth for the year. Apologies if I misheard that. But could you just talk about what drove the increase in your same-store revenue guidance, what the various components of the change were?
Yes. To confirm, we are expecting for the full year to land at 2.5%. I mentioned the first half and second half are quite similar; the first half is coming in around 2.6%, which would imply the second half comes in at about 2.4%, so not a huge variation.
And then in terms of the 40 basis point improvement to our same-store revenue growth, scheduled rent and other income each contribute 15 basis points to growth, and the other 10 basis points is from higher occupancy.
Got it. That's helpful. And then you spent some time talking about Seattle as well as Northern California. If you compare those markets, is it obvious that Northern California has seen stronger demand and absorbed supply earlier, which is why you're seeing more pricing power? Or when you look at traffic and other demand indicators, is Northern California simply showing stronger demand right now?
A couple of things. Northern California started with lower supply relative to Seattle; that base difference is beneficial to Northern California. Demand historically starts in Northern California — it's the center of the innovation engine — and then it expands to Seattle. We are seeing expansion announcements to Seattle, but it takes time: companies announce expansions, then build out office space, and then hiring follows. So there's always a lag.
Angela, if I could continue the Seattle discussion, two questions: one, do you think the Eastside has the potential to put up numbers like we're seeing in Northern California? And two, from being out in the market, it seems like CBD is waking up with office demand coming back because of space availability on the Eastside. Do you think we could be surprised by CBD as well over the next 12 months?
Alex, it's possible for Seattle, especially the Eastside, to perform at a similar level as Northern California because it has the jobs tailwind and supply is abating. However, Seattle historically produces more supply, so it needs more jobs to generate meaningful pricing power. We've seen this pattern before. Regarding the CBD, that's trickier. The CBD historically has a higher percentage of total supply for the market, and large employers are spread throughout the Seattle metro, not concentrated in the CBD. I do think a recovery is possible for the CBD, but I'm not sure it would reach the magnitude we're seeing in Northern California.
Okay. And Barb, just a second question: I saw the RealPage litigation, but there was another litigation settlement as well. What was that? Was that also related to RealPage, or what was that?
Alex, I'll cover the litigation. We settled a separate dispute that has nothing to do with RealPage. This litigation had been ongoing for nearly four years. After protracted litigation and considering the cost to defend, we decided it was in our best interest to resolve the matter. Because the settlement is still subject to court approval, we've been advised to refrain from discussing additional details. I can tell you we don't have anything else of this magnitude.
Congratulations on a great quarter. Following up on your comments that Northern California rents have not yet peaked this leasing season: I wanted to confirm, is that also the case for Seattle and Southern California markets?
Good question. No, that is not the case for Seattle and Southern California. Seattle peaked consistent with typical seasonality in early July, and we are expecting and seeing moderation for the rest of the year. Southern California is harder to describe as having a meaningful peak; technically it peaked early, but it's a very flat curve. The soft economy and muted job growth are key drivers. Southern California is moving along and not doing much of anything this year.
And then looking at the supply outlook for 2027, it seems very favorable, especially in some slower markets like Seattle. Any early comments you'd like to make on the supply you see and how competitive it is where you operate?
Yes. Supply will continue to trend lower in 2027 versus 2026, and the backdrop is already very favorable and will get more so. Given what we've seen on the ground and permits over the last several years, this isn't surprising. We won't need a lot of incremental job growth next year just to cover the supply. In terms of where the supply is, it is within our metros; it doesn't necessarily have to be next to our properties, but it is competitive within our submarkets. Overall, the supply picture continues to look good for the West Coast in our markets for the foreseeable future.
In terms of the guidance for the year on same-store revenue growth, could you give a feel for what's assumed for the different regions? In particular, for Northern California, I think you're up about 4% year-over-year in the first half. Is that a similar number for the whole year or does it get better in the back half?
Nick, in terms of the various regions: Northern California continues to improve relative to where we are today through the back half given the rent growth we're seeing. That will be offset by slower growth in Southern California, given the moderation there. I think Seattle stays pretty much on par.
Okay. And then a reminder on how to think about this: you said Northern California blended rents were up over 6% in the quarter. Market data shows a wide range, sometimes high single digit or even over 10% in San Francisco specifically. If that type of rent growth continues, how long does it take to translate into same-store revenue growth going from 4% to a higher number, like 6% or more?
That's a good question. Our lease turns are relatively quick, so it doesn't take a long time for rent growth to translate into the bottom line, which is one benefit of the multifamily business. If you're asking how long the tailwind lasts: turnover rates are a good indicator of how quickly we can capture market rent growth. Turnover or retention rates are still very high, particularly in Northern California. Keep in mind, California's AB 1482 extends some rent protections, which can prolong the recovery, but to us that's not problematic.
I think at NAREIT you used the word stabilization or stability in Southern California. It's a different market versus Northern California and Seattle. Could you give an update: would you still use that word stabilization or a different way to frame what's happening fundamentals-wise there and where that market is in recovery?
We would still frame Southern California as a stable market. Blended lease rates are 1.4% and occupancy is above 95%. This is not a fragile or broken market; it's performing as you'd expect in a slower economic environment.
Okay, helpful. And flipping to Seattle: on the prior call you talked about positive lease growth in March that continued into April. How did Seattle trend for new or blended through the second quarter? Supply there is supposed to decline meaningfully this year and into next. What's the outlook for Seattle specifically?
We had said blended rates flipped positive in March, and it continued to increase through June, and then with the peak now it's starting to taper down. To give you a high level: March blended lease rate for Seattle was 1.4% and by June it was 2.8% — over a 140 basis point increase. Now it is moderating as we would expect.
I was hoping to get more granular on Southern California submarkets. There's been a lot of capital raised and certain industrial calls are more enthusiastic about demand drivers like aerospace and defense. Can you give more color on whether you're seeing green shoots in any submarkets or how you're thinking ahead?
Happy to. Southern California remains generally stable. Orange County is leading, and San Diego is starting to turn for the better as it works through the bulk of the supply, which is a good sign. Los Angeles County continues to drag; it hit a trough in 2023 when economic occupancy was about 91% and since then it's improved to roughly 93% to 94% economic occupancy and has remained steady. We are seeing green shoots from companies like Anduril and some aerospace and defense activity, but it's relatively new and too early to quantify the magnitude.
Okay. Similarly with capital raised in Northern California, are you seeing people more interested in buying homes now that they have more capital? It seems like it's helping push rents. Any consumer behavior you're seeing given wealth creation from recent stock moves and fundraising?
Good point. Affordability still favors renting even though we've increased rents; much of our rent increases are recovery increases and Northern California has a lot of catching up to do versus pre-COVID levels. More importantly, the cost to own a home is exponentially higher than renting, so it's difficult for renters to transition to buyers. We have not seen move-outs driven by people buying homes in our portfolio.
Just wanted to go back to guidance. Given the 2.4% back half assumed lease rate growth versus roughly 2% last year, is it fair to say scheduled rent should accelerate in the back half and the earn-in for 2027 should be higher than the 85 basis points you had heading into this year?
That is possible, but it's too early to predict. We need to see the rate of deceleration. We're not assuming a significant drop-off, but we need a couple more months of data to better pinpoint earn-in. Building blocks for 2027: supply is getting lower, affordability tailwinds continue, and our preferred equity headwind is now behind us. Those are positive factors, but we need to observe how the next few months play out to be more definitive.
When you roll up differing trends across regions, is the portfolio operating at a loss or gain to lease today? And where does that stand across each of the three regions?
We do have a loss to lease overall, mostly driven by Northern California. Southern California has a gain to lease, and Seattle is in the middle with a slight gain to lease.
Could you give some color around the magnitude for each region?
Northern California is closer to around 6% loss to lease, Southern California is in the low 2s (gain to lease), and Seattle is about 70 basis points (gain to lease).
I wanted to ask about the change in pricing strategy. In the past, you were a little more agnostic on pushing renewals as hard as peers because you looked to optimize occupancy and get better pricing on new leases. Now, as you're pushing renewal rates higher, will that suppress new lease rates going forward? Why has this changed?
John, we have not changed our operating philosophy. The goal has always been to maximize revenues. We're agnostic on where revenue comes from — new leases, renewals, or occupancy. Depending on the market, we may favor occupancy for obvious reasons. Regarding preferring renewals over pushing new lease rates: the cost of turnover is high. In an environment where we can't push rents above certain thresholds, we're better off focusing on renewals and keeping new lease rates flat to avoid turnover costs. Ultimately, our strategy is to maximize revenues, not to target any specific rental rate metric.
Okay. And then another point: you made a couple of preferred investments in your West Coast joint ventures. In the past you said redemptions would be used to buy fee-simple assets. Has that philosophy changed? Or is it because it was in a joint venture that you reinvested into preferred?
John, our overall philosophy hasn't changed. We've made a lot of money in this business over the past several decades. It's synergistic with our development and investment businesses. We have strategically resized this book to reduce earnings volatility and remain highly selective. When we see the best risk-adjusted returns, we'll step in. That's what we've done recently and earlier this year. We'll remain opportunistic and put dollars to work where it creates value for shareholders.
So there's not a stated strategy to reduce the preferred investment book?
As Barb mentioned, it's down to $100 million, which we think is a very manageable size, and we could grow that if we see the right opportunities.
Given the strengthening rent growth in Northern California, are we getting close to the point where developments start to look more attractive? If not, what conditions need to change for development to look attractive again?
Ami, development economics have improved over the past year as rent growth has outpaced cost growth. Our philosophy is to ensure we're compensated for development risk. The South San Francisco deal is trending very favorably relative to our initial underwriting and is ahead of schedule. We're advancing another project down the Peninsula and continue to underwrite land and development sites. To answer bluntly: yes, the economics have improved.
For those deals, what yields would you be targeting approximately?
We have said publicly that we target anywhere from a 100 to 150 basis point spread to where we can buy. For stabilized yields, historically we expect to stabilize closer to 6% on these deals.
This is Mike on with Haendel at Mizuho. What has the retention rate been in your San Francisco portfolio? Are you seeing a higher retention rate given the stronger new market rent growth pricing? Also, where are renewals being sent out and executed for August and September, and how much of your third quarter renewals in terms of visibility have been executed so far?
Our retention rate in San Francisco has been elevated relative to the other regions and has been that way for some time. We expect to maintain that high retention rate, especially in an environment where market rent is moving quickly. That results in a longer tailwind. For August and September, we're sending renewals out in the high 5% range, and we expect negotiations to be around 50 basis points, so they will land in the low 5% range. August renewals are done and we're halfway through September.
Our next question comes from the line of Peter Abramowitz with Deutsche Bank. Peter, your line is muted on my end. We can't hear you. All right. It looks like we lost him. Our next question comes from the line of Ann Chan with Green Street.
I believe you have three properties with ground leases expiring in 2027 or 2028. Could you give a sense of whether we should expect either a large step-up on ground rent at those properties in conjunction with an extension of the ground lease? Or if you sell the properties, do you expect a very high cap rate?
These are ongoing negotiations with ground holders. In many instances, we'd like to find a way to renew, but it comes back to whether it creates value and at what rate. It's still early; conversations are ongoing. It's a very small percentage of our portfolio.
Second question: on the JV disposition in San Jose, can you share the cap rate on the sale and some color on the decision to sell versus consolidating the property?
This was a mid-4% cap rate, sub 4.5%. The joint venture had debt maturing, which caused us to evaluate the property and valuation. We saw very strong interest in the asset and decided with our partner that we could generate better risk-adjusted returns by redeploying elsewhere, so we sold the asset and are pleased with execution.
One question about Seattle. One of your peers called out tech layoffs as a specific driver of softer pricing for the first half of the year. I know it's not something you discussed much on the call. Has that had any impact in your Seattle portfolio or Northern California? Any color would be helpful.
It could depend on location relative to peers, and I don't know exactly what they're seeing. On our end, we're not seeing tech layoffs as a primary reason for softness. Many tech announcements are not in our markets. When we look at top tech job openings, they have remained steady with incremental increases throughout the year, and we're close to long-term averages despite layoff headlines. We think the broader economy has a larger influence on other markets except Northern California.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Goodbye.