Essex Property Trust - Earnings Call - Q1 2025

Executive Summary

• Core FFO per share was $3.97, up 3.7% YoY and $0.05 above the Q1 guidance midpoint, driven by stronger same-property revenue growth, better co-investment income, and lower interest expense; FY 2025 Core FFO guidance was reaffirmed.
• Same-property revenues/NOI rose 3.4%/3.3% YoY (sequential +1.6%/+0.9%); delinquency improved to 0.5% of scheduled rent vs 1.3% in Q4 and Q1 2024, supporting blended net effective rent growth of 2.8%.
• Portfolio repositioning skewed to higher-growth Northern California: $345.4M of NorCal acquisitions and a $127.0M SoCal disposition; development commenced on a 543-unit South San Francisco project; liquidity stood at ~ $1.4B; issued $400M 10-year notes at 5.375%.
• Management would have raised Core FFO absent macro/policy uncertainty (tariffs, broader volatility), but reiterated Q2 blended rate growth of 2.5–3.5% and reaffirmed FY same-property growth ranges; near-term stock catalysts: sustained delinquency normalization, NorCal outperformance, and capital recycling execution.

What Went Well and What Went Wrong

What Went Well

• Delinquency and rate trends: Same-property delinquency fell to 0.5% vs 1.3% in Q4 and Q1 2024; blended net effective rent growth was 2.8%, with new lease growth positive across all regions; management highlighted LA delinquency improvement from 3.9% to 1.3% YoY.
• Regional performance: Northern California led with San Mateo up 5.2% YoY and San Francisco up 6.6% YoY; sequential revenue growth was +1.7% in both NorCal and SoCal.
• Capital allocation and balance sheet: $345.4M NorCal buys, $127.0M SoCal sale; new $400M 2035 notes at 5.375% to address 2025 maturities; ~ $1.4B liquidity; small ATM forward issuance to support development, with discipline on pricing.

What Went Wrong

• LA remains a drag: Management cited the need for further delinquency normalization and occupancy rebuilding before gaining pricing power; the film industry remains soft; wildfire impacts did not provide a tailwind to demand as unit mix mismatched displaced households.
• Seattle expenses: Seattle saw higher operating expense pressure (YoY +7.7%), with same-property sequential NOI down 1.4% despite +1.0% revenue, reflecting supply-heavy 1H delivery cadence.
• Non-GAAP optics versus prior year: GAAP EPS declined to $3.16 from $4.25 due to prior-year non-recurring gains; Core FFO growth was positive, but headline EPS optics were negative YoY.

Transcript

Operator (participant)

Good day and welcome to Essex Property Trust First Quarter 2025 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 risk and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.

Angela Kleiman (President and CEO)

Welcome to Essex First Quarter Earnings Call. Today, I will cover highlights from the quarter, our near-term outlook, and provide an update on the investment market. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. We reported a healthy first quarter with core FFO per share exceeding the midpoint of our guidance range. Additionally, we are pleased to start the year with $345 million in acquisitions in Northern California, which were funded by dispositions in Southern California. This reallocation into higher rent growth markets and further optimization of our operating platform will enable us to generate above-market returns. Turning to operating highlights, first quarter results trended slightly ahead of plan with 2.8% blended net effective rent growth, and new lease rates improved sequentially from the fourth quarter for the same property portfolio. Two key factors contributed to our performance.

First is delinquency improvement to a level close to our historical average, mostly driven by Los Angeles, where delinquency improved to 1.3% of scheduled rent compared to 3.9% for the same period last year. Second, we executed our operating strategy, which contributed to a notably low turnover rate of 35% while achieving positive new lease rate growth and stable occupancy levels. Great job, Team Essex, on these accomplishments. From a regional perspective, in the first quarter, new lease rates turned positive in all three major regions, led by Northern California at 1.5%, Seattle at 1.3%, and Southern California in last place, as expected, at 20 basis points. On a more granular level, San Mateo led the same property portfolio with 4.8%, and Oakland lagged with -1.2% in new rate growth, primarily due to elevated supply. Fortunately, Oakland has begun to demonstrate incremental improvement as supply abates and concessions moderate.

Moving on to the full year outlook, with our solid performance today, under normal circumstances, Essex would consider revising our guidance upward. The lack of clarity on the U.S. and global trade policy has led to macroeconomic uncertainty, including the impact on business investment and job growth. As we navigate this complex environment, we will be nimble with our operating and investment strategy, remaining focused on our objective to maximize revenues and to generate long-term accretion. Ultimately, the West Coast multifamily fundamental is well-positioned for a wide range of economic outcomes. Total new housing supply delivery as a percentage of stock in 2025 is exceptionally low, at only 50 basis points in the Essex markets, and is expected to moderate throughout the year and to decrease further in 2026. Accordingly, rents should continue to grow even in a low job growth environment.

This downside protection is a key reason why our supply-constrained markets have outperformed over multiple economic cycles. Furthermore, the cost to own versus to rent remains prohibitive at over two and a half times more expensive. Overall, we remain excited about our portfolio's growth potential as our markets continue to lead in innovation, which provides a solid foundation for economic growth. Concluding with a transaction market update, deal volume in our markets was higher in the first quarter compared to the same period last year, totaling $2.5 billion, with cap rates consistently in the mid to high 4% range. With the onset of broad market volatility in early April, we have limited data points as to the impact of cap rates from ongoing policy changes.

However, several deals in our markets have recently been awarded or had contingencies removed, and the valuations have remained consistent with what we've seen over the past year. Our year-to-date transaction activity has been balance sheet neutral, where we have allocated capital into newer assets in submarkets with the best supply-demand fundamentals and rent growth potential. We look forward to more opportunities to continue our expansion and enhance accretion for our shareholders. With that, I'll turn the call over to Barb.

Barb Pak (EVP and CFO)

Thanks, Angela. I'll begin with comments on our first quarter results and full year guidance, followed by an update on investments and the balance sheet. I'm pleased to report first quarter core FFO per share exceeded the midpoint of our guidance range by $0.05. There were three factors that led to this outperformance. First, our consolidated portfolio performed ahead of plan, primarily driven by same property revenues, which grew 3.4% compared to one year ago. This was 40 basis points ahead of plan, driven by lower delinquency and higher blended net effective rents. Second, our co-investment portfolio exceeded our forecast due to better NOI growth from our joint venture properties and higher preferred equity income. Third, interest expense came in favorable to our forecast. As for our full year outlook, we are reaffirming our same property growth and core FFO per share guidance ranges.

While we have gotten off to a solid start to the year and are trending slightly ahead of plan, we felt it prudent to get further into the year before making any adjustments to our forecast, given the heightened economic uncertainty that has recently developed. In regard to the cadence of same property revenue growth at the midpoint, we expect the first quarter will be the highest growth, followed by the fourth quarter. The second and third quarters are expected to be our lowest year-over-year growth due to tougher delinquency comps compared to the prior year. Turning to investments, we've made progress on our growth strategy year to date while match-funding these investments on a leverage-neutral basis. While these investments are net neutral to our 2025 FFO forecast, they further position the company for long-term outperformance.

We'll continue to remain disciplined as we seek further opportunities to deploy capital, utilizing the most attractive capital sources available to maximize core FFO and NAV per share growth while preserving our balance sheet strength. As it relates to the preferred equity portfolio, we received around $27 million in redemptions so far to date. One of the redemptions was on our watch list that we stopped accruing on over a year ago. Since we were fully redeemed on our investment, we realized $1 million in incremental interest income this quarter that won't repeat next quarter. As it relates to the rest of the year, we expect the remaining $125 million in redemptions will be split evenly between the third and the fourth quarters. Lastly, a few comments on the balance sheet.

We are pleased to have refinanced the majority of our 2025 debt maturities earlier this year with the unsecured bond offering in February. Overall, our balance sheet remains a source of strength and has proven durable throughout all economic cycles. With minimal refinancing needs remaining in 2025, access to a variety of capital sources, and over $1 billion in available liquidity, we are well-positioned. I will now turn the call back to the operator for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd like to remove your question from the queue. Request participants please limit to one question and one follow-up and rejoin the queue. For participants using speaker equipment, it may be necessary to pick up your answer before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico (Managing Director)

Thanks. Your first question is just on, in terms of the guidance, I think the original guidance for the year assumed some modest acceleration on your blended rate growth in the second half versus the first half of the year. Can you just talk about sort of the confidence level today of still achieving that? If you did not get that, kind of where it put you on the range for the year? Thanks.

Angela Kleiman (President and CEO)

Hey, Nick, it's Angela here. Thanks for your question. Yes, you're correct. Our original assumption includes a slight increase or incremental increase in the second half. Our current view is that relationship should remain intact. Keep in mind that we didn't revise our guidance. What happened here is that first quarter, we outperformed. The rest of the year, and when you look at our second quarter, blended lease rate growth, it looks more incremental. It looked like maybe we had some concern. It's really a function that the first quarter outperformed, and we did not change our guidance.

Austin Wurschmidt (Senior Reit Analyst)

Okay, thanks, Angela. Second question is just on tech. It's something that comes up a lot from investors in terms of the impact on your portfolio. There has been some headlines and concerns about the tech sector not growing jobs the way maybe they have been. They may not grow going forward. Just any perspective, clearly it's not your entire portfolio, but any perspective on that and any trends you're seeing on the ground related to tech? Thanks.

Angela Kleiman (President and CEO)

Sure thing. Now, that's an important data point that we track closely. When we look at the third-party reports, what we're seeing is that the opening jobs of the top 20 tech companies, that's the most meaningful indicator of the health of that sector, has remained steady and incrementally increasing each month. It dropped in around November, December, but that's typically a seasonally low period. Since then, every month it has increased. That gives us an indication of the hiring to come. If we were seeing any softness there, we would have seen either plateau or a decline, and we're not seeing that.

Austin Wurschmidt (Senior Reit Analyst)

Thank you.

Operator (participant)

Thank you. The next question comes from Eric Wolfe with Citibank. Please go ahead.

Eric Wolfe (Director)

Hey, thanks. Could you just talk about your occupancy strategy in the second quarter? I think typically you push a little bit more on rate and let occupancy come down a bit. Just wondering if that's also the case this year or if you're trying to be a little bit more conservative than normal given the current environment.

Angela Kleiman (President and CEO)

Yeah, no, that's a good question and a good observation on how we think about the business. What we're seeing right now is that our occupancy strategy is consistent with our approach as we head into the peak leasing season. It is going to be nuanced as it should be. For example, in April, we are pushing occupancy in Northern California. In Seattle, it is transitional. It depends on where you are because supply in Seattle is heavier in the first half. We are talking about 60% of the delivery. Of course, in Southern California, we are not—I'm sorry, in Northern California, we are pushing rent, not occupancy. Seattle is in transition. In Southern California, we are still holding or focusing on occupancy mostly because of two reasons. Southern California peaks later than northern regions. Naturally, that would mean that you start pushing rents at a later point in time.

Also, Southern California, over 60% of the supply is occurring in the first half. That is going to ebb and flow as we see the market conditions. Once again, what we're experiencing now on the ground is consistent and the fundamentals are solid.

Eric Wolfe (Director)

I guess in aggregate, in terms of sort of the demand statistics that you look at and the important things you look at and thinking through sort of forward demand, whether that's renewal rate or exposure, all of that looks relatively normal for this time of year. Basically, there's no signs of incremental weakening since we had sort of the tariff announcements or other announcements that have come over the last month.

Angela Kleiman (President and CEO)

No, we haven't seen any signs of weakening or cracks. The tariff announcements have not had any impact. What we're trying to anticipate is all the different policy changes. What does that mean for the rest of the year? That is why we've taken a more cautious approach on holding any revisions to the guidance until we have better visibility. It is certainly not because of any concern with what we're seeing on the ground in our markets.

Eric Wolfe (Director)

Got it. Thank you.

Operator (participant)

Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa (Senior Managing Director)

Hello, this is Sankethorn versus Steve. Thanks for taking my question. I had a question around blended net effective rent growth assumption that you guys have given for second quarter. It just assumes 20 basis points of acceleration at the midpoint. Can you help us think through that? Also, what are the new lease rates you are achieving in April? You have achieved in April and May and renewals as well.

Angela Kleiman (President and CEO)

Let me make sure I'm asking or answering your question. You're talking about our second quarter blended of 3% and how we thought about that. Okay. Then, of course, new lease rates. As far as the second quarter blended lease rate guide of 3%, that is consistent with our original plan because we have not changed guidance. I understand that it looks like, oh, there's not that much acceleration because first quarter landed at around 2.8%. Keep in mind, our first quarter guidance was 2.5%. We had expected or planned for 50 basis points acceleration. The incremental increase, it's once again, not because we have a different view of what we're seeing on the ground. It's really we outperformed in the first quarter, and we have not changed our guidance.

As far as new lease rates are landing in April, it's consistent with plan. It's consistent with what we saw in around March. There's nothing there that's unusual.

Steve Sakwa (Senior Managing Director)

Makes sense. Can you give us some color around what renewals you are able to achieve in April and what you're pushing for renewal rates?

Angela Kleiman (President and CEO)

Sure thing. Renewals, once again, very steady. In April, we sent out renewals in the low fours, landed around high 3s. Once again, consistent with plan.

Steve Sakwa (Senior Managing Director)

Thanks.

Operator (participant)

Thank you. The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb (Managing Director)

Hey, morning out there. Angela, there are third-party data providers out there that publish information on how the different companies, different regions are doing. Do you guys participate in helping those entities get their information, or are those entities merely scraping data off your website and thus you have no control over how they're aggregating their data or how it's being processed?

Angela Kleiman (President and CEO)

Hey, Alex, it's a good question. We have absolutely no control over what gets published, and we do not participate in what the third-party providers generate.

Alexander Goldfarb (Managing Director)

Okay. The second question is, in Sacramento, they're debating trying to rein in CEQA to encourage development in the urban areas. Just sort of curious your take on this AB609, if it seems like finally CEQA could be reined in and we could see some improvement in investment, or if there look to be some workarounds where CEQA will not relinquish their power and thus remain the inhibitor that they've been.

Angela Kleiman (President and CEO)

Yeah, Alex, we view that trend as a positive. It's going the right direction. I think it will take time for these policies to ultimately get to where they need to go. I do think that the legislators recognize that regulation does not solve the housing crisis. In fact, it's been proven that regulations actually make things worse. It's really not tenant advocacy, as they think. It's really anti-growth. Once again, we're pleased that these conversations are being discussed. We're pleased that California has begun to move toward a better environment and heading the right direction. We just need to see how this plays out in the end and how long it takes.

Alexander Goldfarb (Managing Director)

Thank you.

Operator (participant)

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

Austin Wurschmidt (Senior Reit Analyst)

Great. Thanks. Maybe just digging in a little bit to the initial assumptions. I think the 3% market rent growth was comprised of Seattle and San Diego being close to the 4% range. I'm just curious, I know it's still early, but how are kind of the respective regions or markets tracking? Which are tracking a little better and are any tracking a little worse at this point? Thanks.

Angela Kleiman (President and CEO)

Hey, Austin. Generally speaking, the Northern California, especially Santa Clara and San Mateo counties and parts of Seattle, are leading our portfolio performance. That is consistent with our expectations. Southern California is softer, especially LA. If we're talking about a range of possibility, you can safely say that the sub-markets I mentioned in the northern region are maybe slightly toward the higher end of our range. Southern California, particularly LA, is toward the lower range and averaging out to be about the same spot where we will ultimately land.

Austin Wurschmidt (Senior Reit Analyst)

That's helpful. Given you guys typically tie your renewal rent growth pretty close to your view on market rent growth, and I think you referenced renewals are still coming in kind of in that mid to high 3% range. Should that be sort of an indication of how market rents are tracking maybe relative to your initial expectation?

Angela Kleiman (President and CEO)

Yeah, I think that's a fair assumption. Ultimately, if you look at our first quarter performance, which blended came in a little bit higher than expected. That was in both cases, both renewal and new lease rates, slightly higher. It was not a huge acceleration, right? These were incremental benefits. I think in the current economy where we had originally forecast a moderating economy, it's playing out that way slightly better. You throw in tariffs in the mix, not sure what happens. We do view that as far as our guidance is concerned, the downside risk is quite low.

Austin Wurschmidt (Senior Reit Analyst)

That's helpful. Thanks, Angela.

Operator (participant)

Thank you. The next question comes from John O'Reagan with Bank of America. Please go ahead.

Barb Pak (EVP and CFO)

Thank you. Good morning to you guys. Congrats on the first quarter results. Angela, when you say you would have raised the guidance kind of barring the macro uncertainty, would you be referring to FFO or the same store revenue or both?

Jana Gallen (Research Analyst)

Hi, Jana. Yeah, it's Barb. It's really more on the FFO side, on the core FFO side. We do have a few items, like I mentioned. We got some preferred equity income this quarter. That is one time that is real to the bottom line. That's really where we would have focused on. I think on same store, we would have waited until more mid-year after we get further into peak leasing season.

Thank you. Switching to transactions, just kind of curious if we should continue to expect to see some trading from Southern California to Northern California and if you're kind of continuing to potentially review any new markets.

Rylan Burns (EVP and Chief Investment Officer)

Hi, Jana. Rylan here. Yeah, we're really pleased with the execution in our first quarter transactions, and we'd love to replicate it. Obviously, we're making all of our investment decisions on an investment-by-investment basis, and it's not always easy to do. We're pleased with our first quarter transactions. To the extent that we can drum up additional opportunities to execute on that strategy, we will continue to pursue it.

Jana Gallen (Research Analyst)

Any comments on new markets?

Angela Kleiman (President and CEO)

Yeah, sure. Hey, Jana. As far as new markets are concerned, we, of course, continue to study other markets to make sure that we're making the best long-term decision. At this point, when you look at the potential upside in our markets, especially with Northern California just starting its recovery, it's a lot more compelling than to go to markets where you have over 20-30% rent growth and with supply headwinds. For the foreseeable two to three years, it wouldn't make sense in terms of a trade, absent of, of course, a major distress that changes pricing. Based on what we're seeing right now, the majority of the upside is in our markets, and that's why we're so excited about our northern regions.

Jana Gallen (Research Analyst)

Great. Thank you so much.

Operator (participant)

Thank you. The next question comes from Jamie Feldman with Wells Fargo. Please go ahead.

Jamie Feldman (Managing Director and Head of Reit Research)

Great. Thanks for taking the question. I want to dig deeper into LA, which sounds like it's slightly disappointing from your initial numbers. Can you just talk about what do you think's going on there? Just thinking about the wildfire impact, any thoughts on what that's going to look like for occupancy, rents, and just kind of behavior patterns for people's housing needs since we're several months out now?

Angela Kleiman (President and CEO)

Yeah. Hey, Jamie. LA is a huge county, and it's more complicated than something we could easily dissect. The big picture here with LA is that in order for us to see pricing power with LA, two things need to happen first. Starting with delinquency recovery. Delinquency level needs to return to near historical average. Right now, we're making great progress, but we're not there yet. I mean, delinquency at 1.3% is still well above the historical average in LA. That's one piece. Once you get that delinquency close to the long-term average, we have occupancy. We can build occupancy. After that, you can have pricing power. That's ultimately where we see the path to improvement in LA. As far as the market is concerned, the labor market remains soft. I think that is a lot of things happening there.

I do not think that is too dissimilar from a national level in terms of just a general, at least, soft implementing economy. The film industry has not yet rebounded. We had hoped that the tax incentives that were implemented would revitalize the industry quicker. Obviously, we did not plan for it. It was just something that would have been a nice upside for us. It is just going to take more time.

Jamie Feldman (Managing Director and Head of Reit Research)

Okay. In terms of the wildfires, any kind of final thoughts on impact, whether it's potential occupancy, rent growth, or just sub-markets that are more or less in demand?

Angela Kleiman (President and CEO)

Yeah. The wildfire, it's an interesting situation in that the market does have a shortage of housing, but the wildfire impacted mostly single-family homes. These are high-end single-family homes. A lot of the people there have other means and would want, say, a three-bedroom or larger. The unit mix really isn't conducive to what we have offering, nor are those types of customers our typical tenants. We really didn't expect to see a meaningful impact on either occupancy or otherwise in LA, which is basically what has happened.

Austin Wurschmidt (Senior Reit Analyst)

Okay. Thanks for the LA answer. I guess, Rylan, with the new development start, you think this is something we'll continue to see more now that you're seeing supply really drop off across the country? Also, the acquisitions that either you've underwritten or others have won. What are people underwriting in terms of growth? Seems like you got some negative leverage deals going on right now. What's the typical outlook?

Rylan Burns (EVP and Chief Investment Officer)

Hi, Jamie. Yeah, I'm going to address those one at a time. As it relates to our Seven South Linden South San Francisco project, as you know, our development team underwrites, call it 100 sites a year. It's been over five years since we found a project that meets our return hurdles such that we're getting compensated for taking that development risk. We'd like to find more because when we look out a few years in the future and we see the supply pipeline, we do think there's a really interesting opportunity here. We need to remain disciplined. It's just challenging to find deals that really underwrite and meet our return thresholds. We continue to look, and we're hoping to backfill for others.

As it relates to the transaction market, it depends on the sub-market, and we get some color from brokers about what other participants are underwriting. It is a wide gamut. I would say consensus sentiment on NorCal has improved materially over the past year. We do think that we are losing out to some deals where people are probably getting a little bit more aggressive on the rent underwriting side. Trying to be prudent and take swings where we see a fat pitch. In the past month since April second, we have not, there's been limited data points, but the feedback from the brokers and several deals we're tracking is that there's really been limited changes in terms of market participation. Several deals have removed contingencies or first-arm underwriting. It has been consistent with what we've seen year to date and over the past year.

We're tracking it closely and expect to be active in the second half of the year.

Jamie Feldman (Managing Director and Head of Reit Research)

Okay. Thank you for that. Can you quantify it all, like some of the deals you've lost out on? What kind of growth people are assuming?

Rylan Burns (EVP and Chief Investment Officer)

There's a wide range. I don't know if I can provide specifics as to what other people that are winning deals. Obviously, some of these cap rates, we're assuming that they're underwriting mid-single-digit rent growth in some of these markets.

Jamie Feldman (Managing Director and Head of Reit Research)

Okay. All right. Thank you.

Operator (participant)

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

Brad Heffern (Director)

Hey. Thanks, everybody. On Oakland in the prepared comments, you said it started to show improvement. I think a lot of us had sort of given up on that sub-market. I guess, do you think in the medium term that could turn into a positive contributor, or what's the outlook over the next couple of years there?

Angela Kleiman (President and CEO)

Hey, Brad. Good question there. Yes. On Oakland, we finally see a light at the end of the tunnel. In Oakland, what we are showing is that 75% of the supply is delivering in the first half. By mid-year, we expect Oakland to start to revert back to a more normalized market dynamic. I do not think it is going to happen overnight, but it is finally going to turn. We waited for a long time for this. We are pretty darn happy about it.

Brad Heffern (Director)

Yep. Okay. I saw you dusted off the ATM this quarter. I know it's not a meaningful amount, but I guess, is that supporting development? Sort of why do that now? How do you view the cost of equity right now in comparison to the opportunity set?

Barb Pak (EVP and CFO)

Yeah. This is Barb. You're correct. We did a small issuance. When we issue equity, we need to have a premium to NAV. We do need to arbitrage not only the cost of equity, but what we're pairing it up with on the investment side. As you mentioned, we did start the development. We do have equity needs for that. We felt it prudent to take a little bit of a few chips off the table and issue a small amount. When the stock moved away from us, we stopped issuing. We will be prudent and match fund for that development that we started.

Brad Heffern (Director)

Okay. Thank you.

Operator (participant)

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

John Kim (Managing Director)

Good morning. Barb, you gave the best and worst quarters. I think first and fourth were going to be the best on same-store revenue based on delinquency comps. I was wondering if you could provide the same metrics, best and worst quarters on blended lease growth for this year.

Barb Pak (EVP and CFO)

The first half of the year, we expect to be at around 3%. And that's the same in the second half of the year. We don't expect too big a deviation to hit our 3% rent growth, almost being equal. We do expect the second and third quarters will be the highest in terms of blended rent growth. Kind of the opposite from what we said on total revenue growth.

John Kim (Managing Director)

Got it. Okay. Maybe for Rylan, can you just talk about the attractiveness of South San Francisco as a multifamily market? Will you be targeting workers in the area and therefore have a more corporate housing or higher corporate housing component to it? How do rents in that sub-market compare to others in the peninsula?

Rylan Burns (EVP and Chief Investment Officer)

Hi, John. Yeah. Great question. We've done a lot of work, obviously, in the sub-market. High-level, close proximity to the largest biotech hub in the world. We do know that the three existing institutional-grade apartments in that sub-market do draw a lot of demand from that Oyster Point sub-market. There are a lot of people that commute up and down the peninsula as well. This is really targeting those types of workers, a little bit higher compensation that are looking for good quality of life, nice community, easy access to the city, or down to the peninsula. Rents in this sub-market are comparable with some sub-markets you see a little bit further down. It's a higher rent market given the quality of this product. It's a discount to some of the higher quality sub-markets within San Francisco.

We feel really comfortable with where we've underwritten rents today on an untrended basis. We do think, given limited supply outlook over the next several years, there is an opportunity for that rent to move.

John Kim (Managing Director)

Will the product be different as far as more corporate housing or furnished apartments?

Rylan Burns (EVP and Chief Investment Officer)

No. No, that is not part of our business plan.

Okay. Thank you.

Operator (participant)

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

Adam Kramer (VP and Equity Research)

Hey, guys. Thanks for the time here. Just wanted to talk a little bit about the blended rate growth kind of cadence over the course of the year. I think you guys have been really helpful in providing the disclosure and the detail here. The 20 basis points acceleration, I think I have that right from 1Q to 2Q. How does that compare to kind of a typical year? Or how does that compare to history if we go back even pre-COVID? I do not know if you have those numbers in front of you. Just wondering kind of how does the cadence look this year compared to normal? What might be some of the drivers here? Is there a bad debt impact here? Is there anything else that is kind of impacting the sequential cadence here?

Angela Kleiman (President and CEO)

Hey, Adam. On the sequential, I probably wouldn't get too concerned about this 20 basis points delta just because I know that it looks like it's de minimis. Once again, I just want to reiterate, it's a function of us not revising guidance for the rest of the year. It's not a commentary or concern about Q2 or thereafter. If you look at our performance last year between first quarter and second quarter, obviously, the spread was larger. First quarter last year was only 2.2. It's going to vary from quarter to quarter depending on market conditions. I would point to encourage you to look at full-year expectation. If you look at our full-year expectation of the blended three at midpoint, it's not that different from what the sector is seeing in the market.

I think that's probably a more relevant number than these quarter-by-quarter, month-by-month variations.

Adam Kramer (VP and Equity Research)

No, that's helpful. I just wanted to ask about this kind of commentary around kind of not raising the guidance but feeling really good about the 1Q results. Maybe, I mean, a little bit of a theoretical, I guess, conceptual question here. If you're sitting here in 90 days, right, you have another good 2Q, just like 1Q. What would you need to see from a macro perspective or some of these other things you track that could kind of give you the confidence to kind of raise at that point? What would kind of need to be different versus where you are today after a good 1Q?

Angela Kleiman (President and CEO)

Yeah. Adam, that's a good question. Essentially, this conversation is really what are the range of possibilities? If the conditions on the ground are consistent with what we had expected heading into the year, we certainly will have a higher level of confidence in raising. Here are the variabilities. For example, on something like tariff impact, we do not expect that to have too much of an impact on the top line, for example, because with low supply, we do not need a lot of job growth. If there is a significant increase in material cost, which will have a direct impact on our operating expense, we are not seeing it yet. That outcome depends on the timing of that policy and how it gets implemented. That is why it is so difficult to predict. You saw that.

I know a couple of people published and noted that we pulled our macro guidance on jobs. Once again, it's very opaque on that if we're looking at the BLS data. For example, BLS just is not as reliable anymore. The participation has fallen. Pre-COVID, survey participation was 60% of the company. Today, it's only 30%, which is why we started looking at other sources, other third-party sources, and trying to look at job hirings. Everything would point to that the market and the fundamentals are healthy. We certainly won't have reservations on raising, but for this pesky little thing on public policy and what that means on the expenses, which is why we wanted to just get another few months behind us to be able to set a number that we can really count on.

Adam Kramer (VP and Equity Research)

Great. Thanks, Angela.

Operator (participant)

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

Michael Goldsmith (Us Reits Analyst)

Good afternoon. Thanks a lot for taking my questions. In the prepared remarks, you said that ultimately, the West Coast multi-family fundamentals are well-positioned for a wide range of economic outcomes. Why do you think that? Do you see it better than other markets such as the East Coast or the Sunbelt? Thanks.

Angela Kleiman (President and CEO)

Yeah. That's a great question. One of the reasons for that comment is that the downside risk is lower in our markets. It's primarily because of supply. When you have supply, and you can see even within the quarter-to-quarter movements, it's temporary. Fortunately, with our low-supply environment, even if you have a large number that's coming, it only takes us typically a quarter or two to get through it. In an overall low-supply environment, you do not need that much job growth, which means we're not as reliant on the broad economy and the performance thereof. Relative to the East Coast, obviously, we're looking at it from afar. Our peers will have better clarity on that. New York seems particularly strong because it also has a similar low-supply environment.

Sunbelt is a little bit harder to sort out, right, because you have a much higher supply. What that means is the job growth there is required in order for you to have pricing power. It is not a view that we do not like the Sunbelt. It is just the view that this current environment, it needs a better macroeconomic performance, whereas we do not need that out here on the West Coast. The other anecdotal that I will share with you is that we had talked about this return to office. I had said we were in the seventh inning and that there is not going to be, oh, shoot, extra innings. I do not know. Barb is looking at me because I kept calling overtime. That is the wrong analogy.

In any event, I would have to modify that in that we actually potentially could have more upside because my comment did not anticipate companies changing their policy. We recently learned that Google has changed their remote policy. They originally had grandfathered remote workers. They have said, they basically said, "No, that is no longer available." Remote workers that have been grandfathered are getting eliminated. Hiring is occurring in our markets. That, of course, does not show up in the BLS or anywhere else as a new job ad. Frankly, at the end of the day, now we are looking at that there is more upside potential in our West Coast market relative to downside.

Michael Goldsmith (Us Reits Analyst)

Thanks for that. As a follow-up, have you seen any changes in migration for international residents or any changes in migration trends from domestic markets? Thank you.

Barb Pak (EVP and CFO)

Yeah. This is Barb. No, we haven't seen any noticeable changes. We do track our international residents within our portfolio. And it's less than 2%. So we have a small number of residents. But it's remained consistent. New movements are consistent with prior years. No impact. What I would say on the migration front, what we've noticed is San Francisco and San Mateo have actually turned positive from a domestic migration perspective in the last few months. I think that goes to what Angela was talking about. The Northern California region is performing slightly better than planned. I think that all kind of triangulates.

Michael Goldsmith (Us Reits Analyst)

Thank you very much.

Operator (participant)

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

Wes Golladay (Senior Research Analyst)

Hey, good morning, everyone. Looking at the development schedule, you have about $44 million of other projects. Do you expect to start any of those? Where are they located?

Rylan Burns (EVP and Chief Investment Officer)

Hey, Wes. This is Rylan here. Yes, we have a couple of other projects in the pipeline. I'd say they're still a couple of years away. They are in Northern California and the Pacific Northwest, in the markets that we have the highest conviction in future rent growth.

Wes Golladay (Senior Research Analyst)

Okay. Looking at the JV, the West Coast joint venture has some debt maturing within the next two years. Will any of that occur this year?

Barb Pak (EVP and CFO)

Hi, Wes. It's Barb. No, none of that is expected to occur this year. Some will occur in 2026 and then the rest in 2027.

Wes Golladay (Senior Research Analyst)

Okay. Thanks, everyone.

Operator (participant)

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

Haendel St.Juste (Managing Director and Senior Reit Analyst)

Hey, guys. Good morning out there. A couple of quick questions for me. First one's on the looks like the Mesbuck asset you assumed full managerial control of in Oakland this past quarter. I guess I'm assuming that's a fancy way of saying you bought the asset or exercised an option. Maybe you can add some color on the events that led to this. Was this something that was previously contemplated? Perhaps some color on the underwriting cap rate or IRR on that. Thank you.

Barb Pak (EVP and CFO)

Hi, Haendel. It's Barb. Yeah. This was the asset where in the fourth quarter, we paid off the senior mortgage because the sponsor was going to default. We effectively stepped in and took back the property. We had stopped accruing on our preferred equity investment back in 2022 and impaired the property in 2023. We've got a long history. As we talked about, Oakland has been a market that suffered for quite some time. We do see light at the end of the tunnel, though, as Angela said, on the supply side. How we came up with the valuation, though, is we did a third-party assessment on it. Our value at $95 million is around $390 a door and is about 30% below replacement costs today. The yield is low. It's in the mid-threes. That is because we have assumed three months of concessions.

Once those concessions burn off, we'll be closer to a 5% cap rate.

Haendel St.Juste (Managing Director and Senior Reit Analyst)

Okay. That's helpful. Then one more maybe on the conversation around capital recycling, selling some assets out of SoCal into NoCal given the better growth option outlook that you mentioned. I guess I'm curious how much more appetite there could be for that, how much more exposure perhaps you would want in NoCal, and how do you think about Seattle as another option for reinvesting capital?

Rylan Burns (EVP and Chief Investment Officer)

Hey, Haendel. This is Rylan. I mean, as we've been saying over the past couple of years, we feel pretty good about the rent fundamentals in those northern regions. We'd obviously like to skew the portfolio to capture that. Realistically, there's only limited transaction volume that you're able to participate in and/or generate on our own. We'd like to move that up by a couple of percentage points if we could, all else equal. It goes back to the broader picture of us not doing deals just to do deals. This has to be FFO accretive over the long run. We're really focused on driving more durable and improving cash flows for our shareholders. We are out there working to create that opportunity for us.

In the current environment, given really cap rate parity across the vast majority of our markets, we think that trade makes a lot of sense. We are going to continue to actively pursue the increase in those markets that you mentioned.

Haendel St.Juste (Managing Director and Senior Reit Analyst)

Thanks. Appreciate that. Actually, if I could squeeze in one more, just curious on the lost-to-lease and maybe concession activity across some of your major markets. We'd love to get an update. Thank you.

Angela Kleiman (President and CEO)

Sure thing. It's Angela here. On the concession market, we've seen terrific improvement between fourth quarter to the first quarter. Fourth quarter, we're about one week. In the first quarter, we're about half of that. April level compared to March is pretty darn consistent. As far as the lost-to-lease is concerned, it also has continued to improve. Just to give you an example for April, current lost-to-lease is about 40 basis points better than last year's level in April.

Operator (participant)

Thank you.

Rylan Burns (EVP and Chief Investment Officer)

Thank you.

Operator (participant)

The next question comes from the line of Rich Anderson with Wedbush Securities. Please go ahead.

Rich Anderson (Managing Director)

Thanks. Good morning. Got the negative 0.3% GDP growth for the first quarter. We're one quarter away to at least a definitional recession should that turn negative as well. You mentioned how West Coast does better in tougher times because of low supply. Can you prove that? I mean, have you looked back at recessions and note that there's a very clear win in the West Coast, whether it's multifamily or anything? Investing in the West Coast is the place to be if we are in a recession. Is that something you can provide or share?

Angela Kleiman (President and CEO)

Yeah. Rich, what is the data that's available to all of us is the long-term rent growth. If you look at the West Coast markets, and of course, every major region has a slight nuance. The northern region, the long-term CAGR is higher than Southern California. For example, in Southern California, it mirrors the U.S. with a slightly higher level. Those are CAGRs that's available and proven out. What I also want to mention as it relates to the potential recession in this year that's being talked about, tech, which is an important component to our portfolio, that industry has already retrenched. It went through the major layoffs back in early 2023, late 2022. It has already repositioned and it's ready. If you look at, for example, the 2008 recession, for example, or even during COVID, tech continued to hire.

We do view that that's a good anchor for our portfolio. And it's been proven through multiple cycles.

Rich Anderson (Managing Director)

Okay. Great. That's great color. Thanks, Angela. Maybe for Rylan, the trade from Southern California to Northern California, you guys are sort of once removed from downtowns. That's the model. At what point do you start to look at some of the improving conditions in downtown San Francisco and start to maybe dance a little bit more there than you do? Is that something that's on the radar or are you sticking to your sort of guns outside of downtowns? Thanks.

Rylan Burns (EVP and Chief Investment Officer)

Hey, Rich. When you say at what point, we've consistently been underwriting all the product that transacts through our market. That includes some of the urban areas that you're referring to. We've only seen a handful of trades in San Francisco in particular as it relates to the Northern California market over the past year or so. It felt like a lot of that upside was already priced in. Those were transacting at pretty low cap rates. We've seen better relative value in the peninsula. As I said, we're going to be looking all up and down our markets, urban, suburban, and trying to make the best risk-adjusted return investments.

Rich Anderson (Managing Director)

Okay. Fair enough. Thanks very much.

Operator (participant)

Thank you. The next question comes from the line of Julian Blouin with Goldman Sachs. Please go ahead.

Julien Blouin (VP)

Thank you for taking my question. Maybe digging in again in Los Angeles. I appreciate the comments you gave, Angela, around what needs to happen for LA pricing power to improve. Is there a scenario where things actually weaken from here, maybe due to tariffs, just given the importance of the ports to the local economy and employment in the region?

Angela Kleiman (President and CEO)

Hey, probably as far as the tariffs are concerned, it's probably going to be an impact nationwide on all the markets and more on the cost side than on the top line on the revenue side. It will not be an LA-specific situation just because our tenant base really isn't port-driven. Frankly, the ports are so automated that we do not expect the employment thereof to have a huge impact on performance. Now, as far as the tariff impact, what we would expect that is LA-specific, the potential offset or benefit is the improvement in delinquency. At least it has that to balance the net impact. What we are seeing right now as far as the impact on consumers, for example, if we thought that the tariffs would have a negative impact, we are certainly not seeing that because the overall portfolio delinquency has remained steady.

People are paying. We are not seeing the consumer weakness that you would have thought if we are in a recessionary environment, for example.

Haendel St.Juste (Managing Director and Senior Reit Analyst)

Okay. Thank you.

Operator (participant)

Thank you. The next question comes from the line of Rich Hightower with Barclays. Please go ahead.

Rich Hightower (Managing Director and Us Reit Analyst)

Good morning. Out on the West Coast, guys. I'm going to revisit, I think, an oft-asked question on this call. Just so you can confirm or disconfirm the way that I'm thinking about the blended lease growth numbers for the first quarter and the second quarter, you've done a good job, I think, of sort of stating that the fact that you did not increase guidance does not really indicate anything about what you're actually seeing on the ground. It is really just more of a kind of a general risk overlay based on all the other things we've been talking about on this call. Is that effectively true where normally you did better in the first quarter than you thought? You're not seeing weakness on the ground, which would imply some sort of increase related to the second quarter.

That is really kind of the way that we all should be thinking about it at this point.

Angela Kleiman (President and CEO)

Yeah. I think that's an excellent summary. And when I mentioned some of these statistics, for example, April lost-to-lease, it's actually better than the same period last year driven by Northern California. And when we look at occupancy, it compared to sequentially, it dipped a little bit. But it's also that's driven by Seattle because it was unusually high last year. It was 97.4%. So once again, we're not seeing any cracks on the fundamentals. And the business is in good shape.

Rich Hightower (Managing Director and Us Reit Analyst)

Okay. That is very helpful. Maybe a new topic that we have not talked about on the call, just on turnover, 35% in the first quarter, which was probably normal for the way you guys run the business. If I am comparing it to EQR's extraordinarily low 8% number for the first quarter, that is an enormous delta. Maybe just help those of us who are not in the apartment business day-to-day understand what sort of decision-making goes into how you run revenue management in that context. Just given the huge delta there, that is just something that stood out to me.

Angela Kleiman (President and CEO)

Hey, Rich. I think some of the confusion may be definitional. Even, for example, how we look at blended lease rates is defined differently than some of our peers. On lease rates, we look at nine-15 months like for like. EQR, for example, they use all leases. What that means is you could have short-term leases, and that's going to change the numbers. That's why I encourage people to look at full-year and relative basis. I do know that the definition is different on the turnover statistic as well. As far as for our portfolio, 35% is a little bit lower than typical historical average. It's usually closer to the high 30-40% range. Right now, it's really a function of us. The goal is, as I stated in the past, to maximize revenues.

We want to make sure that we are renewing in such a way that we can have and generate positive new lease rates whenever possible. If we look at our blended, we have a really solid blended number in the first quarter of 2.8%. Turnover ultimately is an output number. It is not a strategy that is used to form an execution plan.

Rich Hightower (Managing Director and Us Reit Analyst)

That is very helpful. Thank you, Angela.

Operator (participant)

Thank you. The next question comes from the line of David Segall with Green Street. Please go ahead.

David Segall (Senior Analyst)

Hi. Thank you. I want to get your thoughts on Washington State's rent control proposal. If you could kind of relate how California's similar rent control has impacted your operations and investment decisions over the last several years as kind of a guide for thinking about the Washington State proposal.

Angela Kleiman (President and CEO)

Yeah. Sure thing. Obviously, legislation generally is not something that helps multifamily or housing costs. It does not achieve what the intention is or the misguided notion that it is going to somehow allow cost of housing to be cheaper. It is too bad that Washington is taking this route. Having said that, this rent cap of CPI plus 7% max at 10% is similar to what we have seen in California. We are obviously accustomed to operating in this environment. We want obviously a little more time to assess the details to make sure we understand the full impact. Having said that, when California passed AB 1482, it did not have a meaningful impact to our business because Essex had a self-imposed 10% rent cap for many decades. I mean, I think since I have been here and well before I joined the company. That has not impacted our performance.

At this level, it's really an anti-gouging. And so we certainly don't expect an impact to our business. It's really just the intention of the legislation. I don't think it's going to create the desired results that the legislatures want.

David Segall (Senior Analyst)

Great. Thank you. Just finally on bad debt, you have made a lot of good progress on that. I am just curious what the timeline would be to finally reach full normalization. Would that be by the end of this year or probably more in 2026?

Barb Pak (EVP and CFO)

Hi, David. It's Barb. Yeah. We're at 50 basis points in the first quarter. Our long-term average is around 40. So we're not that far off from it. Yeah, I think by year-end, it's a realistic possibility.

David Segall (Senior Analyst)

Great. Thank you.

Operator (participant)

Thank you. The next question comes from Alex Kim with Zelman and Associates. Please go ahead.

Alex Kim (Equity Research Senior Associate)

Great. Thanks. Morning out there. I wanted to ask about kind of the lower turnover that you've enjoyed for this quarter as well. I'm just curious, is this a primary driver to the lower repair and maintenance expense as well? Just as part of that, have your expectations for this expense bucket changed for the full year at all?

Barb Pak (EVP and CFO)

No. This is Barb. The R&M cost is lumpy from quarter to quarter. It really depends on what happened in the prior year, what projects were being completed, and things of that nature. The R&M cost, we still expect to be up 2.5-3% for the full year. The first quarter was just an easy comp that drove that. Nothing to do with the turnover.

Alex Kim (Equity Research Senior Associate)

Got it. That's helpful to note. Just sticking with the expense side, if I remember correctly, you renewed your insurance policy in December. It looks like insurance costs still remain slightly higher on a year-over-year basis from 1Q 2024. Could you talk through the expectation for being roughly down 2% for the full year? Again, if there's been a change for insurance expectations?

Barb Pak (EVP and CFO)

Yeah. You have a good memory. Insurance is still down 2% for the full year. There is other stuff in that line, primarily related to tenant litigation. That was a little bit more elevated this quarter relative to the first quarter of 2024, which drove that number up 5%. That tenant litigation is lumpy. When we settle claims, it can be lumpy. We do still expect the insurance line, though, the insurance premiums to still be down on a year-over-year basis.

Haendel St.Juste (Managing Director and Senior Reit Analyst)

Got it. Thanks for taking the questions.

Operator (participant)

Thank you. Ladies and gentlemen, that ends our question-and-answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.