Essex Property Trust - Earnings Call - Q2 2025

Executive Summary

• Core FFO per diluted share was $4.03, up 2.3% YoY and $0.07 above Q2 guidance midpoint, driven by stronger same‑property revenue growth and a 9% decline in Washington property taxes; full‑year Core FFO midpoint raised by $0.10 to $15.91.
• Same‑property revenues and NOI grew 3.2% and 3.3% YoY; sequentially, revenues +1.0% and NOI +2.5%, with Northern California and Seattle leading; Los Angeles lagged on elevated H1 supply and slower delinquency recovery.
• Balance sheet flexibility increased via a $300M delayed‑draw term loan (SOFR+0.85%, $150M swapped to 4.1%), a new $750M commercial paper program ($365M outstanding at quarter‑end), and upsizing the revolver to $1.5B (SOFR+0.775%); liquidity ~ $1.5B.
• Guidance: FY net income midpoint up $0.73 to $10.17; FY same‑property revenues midpoint to 3.15% (+15 bps) and expenses midpoint down to 3.25% (−50 bps); Q3 Core FFO guided to $3.94 (seasonal OpEx headwinds and structured finance redemptions).

What Went Well and What Went Wrong

• What Went Well

  • “Core FFO per share exceeded the midpoint of our guidance range by $0.07,” primarily from better same‑property operations and lower Washington property taxes (−9% YoY).
  • Northern California and Seattle posted 3.8% and 3.7% blended rate growth; San Mateo and San Jose outperformed with 5.6% and 4.4% blended growth, supported by limited supply and rising tech job openings.
  • Accretive capital allocation: ~$240.5M of NorCal acquisitions and a $239.6M SoCal disposition; recent NorCal transactions sourced near 5% caps ahead of market cap rate compression (low‑4% on listed deals).

• What Went Wrong

  • Los Angeles underperformed: blended growth ~1.3% vs expectation “a little bit north of 2%,” with elevated H1 supply, slower delinquency normalization, and soft demand; concessions remained higher than portfolio averages.
  • Q3 Core FFO expected to decline sequentially to $3.94, reflecting typical seasonality in utilities/taxes and back‑end‑loaded preferred equity redemptions creating near‑term earnings headwinds.
  • Structured finance book reduction (from ~9% of FFO in 2023 toward <4% in 2026) temporarily pressures FFO; CFO quantifies ~$0.06 headwind in Q4 as 10% coupons roll to ~5% stabilized asset yields.

Transcript

Operator (participant)

Good day and welcome to Essex Property Trust Q2 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 risks and uncertainties. Forward looking statements are made based on current expectations and 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)

Good morning. Welcome to Essex's second quarter earnings call. Barbara Pak will follow with prepared remarks and Rylan K. Burns is here for Q and A today. I will cover key takeaways from the quarter, our outlook for the second half of the year and provide an update on the transaction market. We are pleased to report solid results for the first half of 2025, highlighted by a $0.07 core FFO outperformance in the second quarter and an increase to same-property and core FFO guidance for the year. Starting with operations highlights, second quarter performed on plan with 3% blended rate growth. For the same-property portfolio, Northern California and Seattle led with 3.8% and 3.7% blended rate growth respectively, while Southern California lagged with 2% blended rate growth, primarily because of Los Angeles.

On a more granular level, the suburban markets of San Mateo and San Jose were notable outperformers with 5.6% and 4.4% blended rate growth respectively. We attribute the outperformance to limited housing supply, increased enforcement of return-to-office and likely better job growth than what has been reported by the BLS. In contrast, Los Angeles remains challenging with 1.3% blended rent growth resulting from pockets of elevated supply deliveries coupled with legacy delinquency challenges in a soft demand environment. Despite these challenges, we have been able to generate a positive blended rate growth in every Los Angeles submarket year to date. Additionally, we are tracking several large infrastructure investments related to the World Cup and Olympics that should improve overall economic activities in this market in the next few years. Moving on to our outlook for the second half of the year, we continue to expect modest U.S.

GDP and job growth and for the West Coast, a stable job environment. Year to date, our seasonal rent curves have generally matched our expectations and our seasonal peak for rents occurred around late July. Accordingly, our guidance for the second half of the year assumes market rents to moderate consistent with normal seasonality. Our increase to the same-property revenue guidance generally reflects the outperformance achieved to date. In terms of range of outcomes, the low end of our guidance contemplates two factors. First, a softer macro economy stemming from public policy. Second, delinquency recovery in Los Angeles slows because this area can be lumpy. As for potential factors for high end of the guidance range, first is an increase in hiring driving rent growth.

We have seen a gradual positive trend in job openings in the 20 largest tech companies and this metric has been a reliable leading indicator of demand. The second factor is a more favorable operating environment as we are expecting an average decrease of 35% in multifamily supply deliveries in our markets in the second half of the year compared to the first. Turning to the transaction market, investor appetite for the West Coast multifamily properties remains healthy, with deal volumes slightly higher in the second quarter compared to the same period last year and average cap rates have remained in the mid 4% for institutional quality assets. In the second quarter we started to see a higher volume of transaction pricing in the low 4% in Northern California.

In comparison, Essex is generating on average yields in the mid to high 4% from approximately $1 billion of acquisitions in Northern California over the last 12 months. Our team has done a terrific job investing ahead of the cap rate compression resulting in immediate NAV accretion. Lastly, as we have maintained our disciplined capital allocation by funding the majority of these acquisitions with select dispositions going forward, we will continue to arbitrage our cost of capital and reallocate our portfolio to optimize the risk adjusted returns to drive NAV and core FFO for share accretion. With that, I'll turn the call over to Barb.

Barb Pak (EVP and CFO)

Thanks Angela. I'll begin with a recap of our second quarter results followed by the components to our revised full year guidance and conclude with an update on capital markets and the balance sheet. Beginning with our second quarter results, we achieved a solid second quarter with core FFO per share exceeding the midpoint of our guidance range by $0.07. The primary driver of the beat relates to $0.04 from better same-property operations, of which half relates to higher same-property revenue growth and the other half relates to lower operating expenses. The expense reduction is driven by a 9% decline in Washington property taxes as compared to 2024. In addition, the quarter benefited from lower G&A, which is timing related. Turning to our revised full year outlook, we are pleased to announce a $0.10 increase at the midpoint for core FFO per share to $15.91.

Contributing to the increase are three factors. First, we are raising the midpoint for same-property revenue growth by 15 basis points to 3.15% driven by higher other income and better delinquency collections partially offset by lower occupancy. Second, we are reducing our same-property expense midpoint by 50 basis points to 3.25% on account of lower property taxes which I previously mentioned. With these revisions, we now expect same-property NOI to grow 3.1% at the midpoint, a 40 basis points improvement from our original guidance. The increase in same-property NOI contributed $0.07 to our full year FFO guidance raise. The third component relates to our co-investment platform as our joint venture properties are performing ahead of plan.

As for our third quarter core FFO guidance, we are forecasting $3.94 at the midpoint, a $0.09 sequential decline from the second quarter primarily related to elevated operating expenses given typical seasonality in utilities and taxes which is partially offset by higher sequential revenues. For the third quarter, we are forecasting same-property operating expense growth to increase 3% on a year-over-year basis. In addition, preferred equity redemptions are expected to be back-end loaded which is also causing a reduction in sequential core FFO year. To date we have received approximately $30 million in redemptions and we expect an additional $175 million in proceeds before year end. We are pleased with the progress we have made in executing our strategy to reduce the size of the book even though it is causing a temporary headwind to core FFO growth at year end.

We anticipate the structured finance book will be less than 4% of core FFO and continue to decline in 2026 as we anticipate being repaid on the majority of our outstanding investments over the next four quarters, after which the earnings headwind will have largely abated. Lastly, a few comments on capital markets and the balance sheet. During the quarter we executed several transactions to further enhance our balance sheet flexibility. We issued a $300 million delayed draw term loan of which $150 million is drawn and fixed at an attractive 4.1% rate through April of 2030. We also expanded our line of credit to $1.5 billion while extending the maturity and we established a commercial paper program. As a result of these financings, we further enhance our balance sheet strength while optimizing our costs and access to capital with minimal refinancing needs in 2025.

Healthy net debt to EBITDA of 5.5 times and $1.5 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We request participants to limit to one question and one follow up. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Nick Kyulico with Scotiabank. Please go ahead.

Nick Yulico (Managing Director)

Thanks.

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

Angela Kleiman (President and CEO)

Hey, Nick, it's Angela here on Los Angeles. It has underperformed relative to our expectations. It's really a couple of different factors. It's not related to the fire ordinance. It's not a legislative concern. It's more of the supply is heavier in the first half, which of course we knew that was going to be an impact. The delinquency recovery is taking time. What we had hoped for was that we could make progress sooner and because of the progress we made from.

Last year to this year.

So far, first half is moving along, it's just not improving at such a great rate. The last factor is really, it's a soft demand environment. What we're seeing, the soft demand environment is actually not just Los Angeles, it's Southern California as a whole. I just want to remind everyone that Southern California mirrors the U.S. economy. The U.S. economy has been soft. It's not broken. It's not, you know, it doesn't have any. We're not seeing cracks, but it's been soft. For those reasons, Southern California as a whole, which is 40% of our portfolio, has been more of a drag. What we expect is that in the second half, the one benefit is that the supply is declining. Supply in the first half is actually 68% of total supply in Southern California. That is one benefit.

We certainly have seen offsets from our northern regions that has benefited our overall performance, with Northern California and of course strength in Seattle.

Nick Yulico (Managing Director)

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

Angela Kleiman (President and CEO)

Hey Nick. Yeah, that's a great question. We are seeing strength in Northern California and what I think has been a little confusing is really two factors. One is that we had expected a solid performance from Northern California and we are seeing job postings to gradually increase, which of course it does lag from that perspective. When we look at the seasonal curve in Northern California, it's performing actually slightly better than we had expected. I think what's confusing is the blended and how that is presented across our peers because everyone defines it differently. Let me just step back and explain our blend at least for a second. Our blended lease, what we try to do is provide an apples to apples for life to life, for example 9-15 months leases. That doesn't represent all leases. What impacts our financials is all leases.

What's showing up that's reported is about 75% of the leases signed. If we use all leases, new lease rates would flip from 70 basis points as reported to 3.3%. I know that's a huge delta which is why we try to shy away from doing all because there's more volatility. That 25% makes a difference because that represents corporates which typically has a 15%-25% premium and of course the short term visas which has a higher premium. Our blend, if we use all leases it will be 4% versus 3% and once again that's what hits our financials. I think the other factor that can be a little confusing is that people expect the blend to continue to accelerate throughout the year. That would be contrary to the comment that we have achieved our seasonal peak which is normal.

July is a normal time for us to peak and therefore the rest of the year, this is normal seasonality. It's going to decelerate and it would be unusual for the blend to actually be higher in any normal environment. The one caveat is that if we see a greater strength on the macroeconomy, if hirings pick up in a meaningful way, for example, then yes, then we could see that. We could see a situation where the seasonal peak actually gets prolonged, which is not what we're currently observing. I think we've all experienced a lot of noise with public policy and the lack of clarity there. I do think companies have been more reticent in hiring and investing, which of course impacts overall growth. That's really what we're experiencing here. Northern California is doing just fine.

Nick Yulico (Managing Director)

Appreciate it, thanks.

Operator (participant)

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

Alexander Goldfarb (Managing Director)

Hey, morning. Morning out there. Just to Angela, just to go back and maybe this was all our sort of misunderstanding of the fire impact on housing, but presumably we would have thought that LA would have seen a pickup in demand. I know that you guys and others articulated that, hey, single family people are different than apartment people, which clearly is the case. Also, the COVID unit replacement taking this long, I mean, we're five years past. Are there other dynamics at work? Like is this more just the Hollywood spillover, the strikes or fallout of port workers who got laid off?

Just trying to understand the dynamic because would have expected at least a little bit better, you know, maybe not the strength of Northern Cal or Seattle, but still, you know, would have expected that between the COVID units and just absorption, it would have been a little bit faster this year, not what seems to be slower.

Angela Kleiman (President and CEO)

Yeah, Alex, that's a great question. We share your view in that we did not expect LA to just suddenly take off, but we did expect that on the occupancy side that it would run a little tighter, which is what we had forecasted. What we are experiencing is, you know, that overall macroeconomy softness, which of course has an impact on LA. Of course, keep in mind, you know, yes, we're five years since COVID, that's 2020, but LA was shut down for three years. Eviction moratorium lasted three years. We're only in the second half, you know, the back half of the second year of this recovery and it's a huge economy, is going to take more time.

What we have not done is we have not redlined LA because there is a lot going for LA and it is the largest economy in terms of by county with over a trillion dollars of GDP. With the infrastructure investment that's earmarked for LA for the World Cup and the Olympics, the latest estimate is over $80 billion. We do see that the market has been stable. That's great. It's remained in that low 95% occupancy, has not picked up as much as we would like. Having said that, we do see positive environment moving forward.

Alexander Goldfarb (Managing Director)

Okay, and then the second question is on your mez platform, you guys have a long track record of making a lot of money.

I know that you don't include the.

Gains in core FFO, but you guys have created a lot of value over time. It almost sounds like you're maybe not fully exiting, but dramatically scaling back. Two part, one, why the decision to scale back when you have a successful track record? Two, Barb, can you just articulate the fourth quarter FFO impact? Obviously the number is below where consensus is. Trying to understand how much of that below, the implied below, is just from the debt and preferred FFO going away versus other. One is why the dramatic scale back, and two, the FFO impact in the fourth quarter.

Barb Pak (EVP and CFO)

Yeah, Alex, this is Barb, you are correct. We do have a long successful track record in this business and we are going to remain in the business just not to the level of scale that we got this book to. So the book got to $700 million and it became 9% of our FFO back in 2023. It creates a lot of volatility in earnings and we think it's more appropriate to have it a much smaller size. We think investing the money into stabilized multifamily assets leads to better quality of cash flow and cash flow growth and NAV growth. This will be a portion of our company, but it's going to be smaller in that 3% of our FFO going forward.

In terms of our impact to the fourth quarter, it's about $0.06 because the maturities are kind of evenly balanced between the third and the fourth quarter and they are pretty meaty. That's what's driving that fourth quarter reduction. From a modeling perspective, you should assume that the 10% coupon we're earning on the mezz and preferred equity investments is rolling down to a 5%, which is where we're investing for new stabilized assets.

Alexander Goldfarb (Managing Director)

Just to be clear.

Angela Kleiman (President and CEO)

Yeah, it's Angela here. I just want to point to, you've seen us diverting or reallocating our investment very much focused on fee simple assets and in Northern California. Back to when the prep equity book was up to 9% FFO, the dynamics were completely different. We were not developing because cost was increasing higher than revenues or rent growth. That was one. In addition to that, the rent growth actually was pretty darn close to long-term CAGR, so it made sense to lean into prep equity at that point and it was a great way to complement our development pipeline. The world is very different now and of course we would want to shift our strategy to make sure that we're optimizing our returns whenever possible.

The one thing I do want to compliment your firm is that, just on a separate note, I thought Piper Sandler published a really good note on the impact of AI and jobs and the developers. I thought that was a thoughtful piece. I thought your tech team should know that.

Alexander Goldfarb (Managing Director)

I'll pass that on. Thank you.

Operator (participant)

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

Brad Heffern (Director and Analyst)

Yeah, thanks. Can you talk about what you're seeing for concessions in Los Angeles? Is the year over year activity higher or is it just, you know, more broadspread, more widespread, you know, on the rent side and not the concession side?

Angela Kleiman (President and CEO)

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

Brad Heffern (Director and Analyst)

Okay, got it. And then Barb, you guys have the commercial paper program now, is there a.

Significant savings on that versus the revolver?

Just, you know, how do you plan to leverage that tool versus how.

You would historically use the revolver?

Barb Pak (EVP and CFO)

Yeah, yeah, that's correct. It's about 70 basis points difference in borrowing cost between our line of credit and the commercial paper program. Historically though, we have not utilized our line as a permanent source of capital. We've used it as a temporary bridge to permanent financing. Going forward, how we'll be using the CP program is very similar. We don't expect to have a large balance on that over long periods of time. You will see it pop up when we are temporary bridging financing, but overall we don't expect to utilize it in a different way than how we've utilized our line historically.

Brad Heffern (Director and Analyst)

Okay, thank you.

Operator (participant)

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

Eric Wolfe (Analyst)

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

Angela Kleiman (President and CEO)

Yeah, no, that's a good question. In terms of our view of the second half, we do have a, the blended decelerating. Having said that, it's also typical with the normal seasonal curve. It's just the normal seasonality of our business. For example, if I look at our new lease rates for the fourth quarter, for the estimate, actual last year, new lease rates declined down to 190 basis points. We've said that in the past where our loss to lease by year end actually become a gain to lease once again, not unusual this year. The peak obviously is not as strong as last year. It's still unplanned, which means we are expecting a more modest deceleration. We do not know what that level is, but we're assuming a negative 70 basis points on new lease rates, just as an example.

Eric Wolfe (Analyst)

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

Barb Pak (EVP and CFO)

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

Eric Wolfe (Analyst)

Okay, thank you.

Operator (participant)

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

Janna Kalan (Analyst)

Thank you. Good morning. Question for Rylan. If you could provide some details on.

The strategy to go forward with a new joint venture focused on structured finance investments. It sounded like your preference at this point in the cycle was to buy on balance sheet. Just curious, what's kind of what you're seeing on cap rates.

Rylan Burns (EVP and CIO)

Yeah, yeah, good question. Again, this goes back to Barb's comment earlier. Strategically, we're trying to target an FFO contribution from pref mes. You know, that's sub 4% of FFO. You know, we've had a lot of partner interest in this business given our track record of success and relationships as it relates to preferred and mes. This allows us to stay in the business and really select the highest risk-adjusted reward opportunities while managing that earnings volatility inherent in some of these shorter term investments.

Janna Kalan (Analyst)

Thanks Rylan.

Angela, thank you for all the detailed comments on the like for like blended rent spreads. It still seems like the initial guidance there was an expectation the blended rent growth in the second half would be a little bit lower. Sorry, in the first half would be lower than in the second half. Just trying to better understand kind of if you're seeing, you know, if it's a year over year, why that would need the blends would need to decelerate in the second half now.

Angela Kleiman (President and CEO)

The first half blend, Heyana, actually we outperformed our expectations in the first half and it's really, you know, strength of Northern California, which is a good, it's a quality beat. That's what Barb calls it. What we're expecting is second half just the same approach we did when we had our earnings call last quarter, which was we assume the second quarter will perform as unplanned and therefore right now what we're doing is we are expecting that the second half will perform on plan as our original plan. You may be expecting a greater rate but it's really not going to because we're just, you know, it's really the strength of the first half driven by the first quarter.

Janna Kalan (Analyst)

I see.

Thank you.

Operator (participant)

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

Austin Wurschmidt (Analyst)

Great, thanks and good morning everyone. Angela, appreciate all the detail on kind of the like for like leases versus all leases.

I'm interested in how much of that.

Benefit in 2Q to new lease rate growth is seasonal related and typically reverses in the back half of the year. I guess for that all.

Lease metric, what did you expect at?

The outset of the year versus what?

You're expecting now within the revised guidance?

Angela Kleiman (President and CEO)

Austin? Good question. On the second quarter it's about 260 basis points higher on new leases. When you look at the all versus just the like for like. It is a big variation and the blend is which resulted in the blend of 100 basis points greater. Of course as you mentioned, you know it's going to decel more. We are assuming that the full year blend on all these basis to land close to 3% and original guidance. Barb, would you comment on that? I don't have one.

Barb Pak (EVP and CFO)

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

Austin Wurschmidt (Analyst)

That's helpful. I think on last quarter's call you had talked about achieving renewals.

Around the high 3% range for April. I think it went out a little bit higher than that and clearly that metric.

Improved through the quarter.

Do you think you can continue to?

Achieve that low to mid 4% level moving forward or is some of the pressure you're seeing in Southern California could.

Lead for that, you know, renewal piece to moderate?

Angela Kleiman (President and CEO)

That's an excellent question and I wish I had a crystal ball. What I can tell you is that, you know, for the second quarter as a whole, we sent renewals out at about 4.3% for the whole portfolio, we landed at 4.2%. We did not need to negotiate much, which is terrific. If you look at the components, essentially Southern California remained soft and it was an offset mostly from the northern regions. As far as August, September, we are sending renewals out slightly higher in Q2, which is a good trend. In the mid-4s, the question here is how much will we need to negotiate? We just, it's just too early to tell at this point, but it is a good sign that we are sending out renewals at comparable or slightly better levels.

Austin Wurschmidt (Analyst)

Thank you.

Operator (participant)

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

Jamie Feldman (Analyst)

Great. Thanks for taking the question. Rylan, maybe a question for you. I think some of the commentary earlier in the call talked about cap rates compressing. You know, you guys feeling good about buying and ahead of the move? I think you've been buying in the mid fours, mid to high fours. So can you talk about where cap rates are now? Are they below four, low fours? And where do you see them heading?

Rylan Burns (EVP and CIO)

Hi Jamie. Yeah, we, that I would say, you know, buying market rate. For the past year we have done over almost $1 billion in Northern California. We have been the largest buyer along the peninsula over the past year and, you know, market cap rates on average are slightly above 4.5%. Again, on our platform we have been hitting closer to a 5% cap rate and that was consistent with the two acquisitions we were able to source in the second quarter. In an off market transaction we have seen cap rates compress. I think as Northern California and San Francisco have outperformed the nation, you have seen incremental buyers step in and a lot of the deals that were recently listed in recent months have guided and in several instances traded in that low 4% range.

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

Jamie Feldman (Analyst)

Okay.

I guess given your success there, buying ahead of the curve, clearly struggling hard to know when it gets better. I mean, any, and I know you've sold there and redeployed into Northern California, but any thoughts are going the other way? You know, get very early in the cycle and probably find better opportunities than in Los Angeles or still feeling best about, you know, reallocating into Northern California and keeping your chips there.

Rylan Burns (EVP and CIO)

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

Jamie Feldman (Analyst)

Okay, great. Thank you.

Operator (participant)

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

Adam Kramer (VP of Equity Research)

Great.

Thanks for the time here, guys. Just wanted to ask about 2Q pointed rate growth. I think it was exactly in line with what you had guided to a quarter ago. I just wanted to ask, what were the puts and takes there? Was it renewals are better, new leases worse, vice versa? In terms of specific markets, I would imagine LA probably came in worse than you thought, but maybe just breaking down that if you can quantify that at all, how much worse was LA than maybe what you had thought a quarter ago? How much better or as a result were the other markets?

Angela Kleiman (President and CEO)

Yeah, that's a good question. Louisiana certainly underperformed. Louisiana blended came in below 1.5%, so close to say 1.3%. We had expected that Southern California as a whole, and of course with LA, would be a little bit north of that 2%. That's probably the biggest factor on the second quarter. Of course, renewal came in a lot stronger. Keep in mind our strategy is not to focus just on one specific metric, and I caution on getting too hyper focused on whether it's new lease rates specifically or only renewals, because the way we run our business is we want to maximize revenues. Our goal is to generate new lease rates in a way that can be net positive. Keep in mind, there is a cost to incurring turnover and it can be expensive. I mean, two weeks of downtime is—I mean, one week of downtime is 2%.

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

Adam Kramer (VP of Equity Research)

That's really helpful, thank you. Just as a follow up, just capital allocation priorities. We've talked about acquisitions here a bit. We've talked about sort of the mez book business. How would you sort of stack rank your capital allocation priorities today. I know development right is back as well. I know you started with the project last course. Maybe just stack ranked the different opportunities in terms of capital allocation here.

Rylan Burns (EVP and CIO)

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

You just have to be really selective in these types of environments. We still think there's value to be had on the acquisition opportunity. To answer your question most directly.

Adam Kramer (VP of Equity Research)

Great, thanks everyone.

Operator (participant)

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

John Kim (Managing Director)

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

Barb Pak (EVP and CFO)

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

Sorry.

John Kim (Managing Director)

I guess that sort of answers it. How are you thinking about earn in for 2026?

Angela Kleiman (President and CEO)

Earn in is way too early and it's not because we don't want to give it out, it's because we don't. It's too early to see the rate of deceleration and it could be more moderate in which case we'll have better earning. It could be more extreme. We don't really see that. It's possible given the economy is a little bit unclear these days. It also could just be flat because we are anticipating lower supply deliveries and Northern California continues to remain strong. The range of outcome is still wide enough that it's not going to be useful to try to predict it today.

John Kim (Managing Director)

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

Angela Kleiman (President and CEO)

Yeah, that's a complicated topic. But as it relates to the actual impact on the demand side, we're not seeing a direct impact from the immigration policy. The softness of the demand is really more of the general economy. You know, do we have tariffs today? No, we don't. Is it 100% now? It's 12% and it's confusing. Right. If you're a business, you're trying to make decisions whether you want to grow your business or hire people, it's hard to do. I think that it's a broader economy as far as what we would expect on the immigration of some of these other policy impact, probably more on the labor side. It will depend on the severity of the policy and the duration. At this point we haven't seen a material impact across the board.

If the intensity continues and we end up with a labor shortage, I think that is going to be an issue for the U.S. as a whole. I don't think it's a specific LA issue.

John Kim (Managing Director)

Very helpful, thank you.

Operator (participant)

Thank you. Our next question comes from the line of Handel Saint Judge with Mizuho Securities. Please go ahead.

Haendel St. Juste (Analyst)

Hey, good morning out there. Thanks for taking the question. First is more of a follow-up. I wanted to get some more color, clarity on the expected cadence of earning from the structured investment book. Sounds like you're expecting the majority of repayments over the next three quarters. You mentioned $0.02 of repayment headwinds in 3Q. I think another $0.06 in 4Q. I was hoping, one, that those numbers are actually accurate and, secondly, a sense of what that headwind could look like in 2026 as you right size the book. Thanks.

Barb Pak (EVP and CFO)

Yeah, this is Barb from a modeling perspective. Let me just try to walk you through the size of the book and then I think that might help you get there. Right now at the end of the second quarter, our total book value in the structured finance investments is $550 million. That includes the MES investments that we have. By the end of the year, assuming we do not do any new investments that have not already been disclosed, the book is expected to be around $400 million. As we look to 2026, given the maturities that we have, we expect the book will be $200 million-$250 million by the end of the year. Although the redemptions are front end loaded in the first two quarters.

From a modeling perspective, you would want to take the book down and then take the coupon from a 10% that we are earning on the investments down to a 5%. That should give you enough color. We have not modeled out 2026 yet. We have not started our budget process yet. That should hopefully help you get into the correct zone.

Haendel St. Juste (Analyst)

No, that is very helpful. Appreciate that, Barb. Just one more, Angela, I guess I was curious on your thoughts. Last month the California State Assembly passed and Governor Newsom signed a bill that appears, I guess aimed at what they say catalyzing new housing through exemptions to CEQA, the law of the land in California since 1970. I guess I am curious what your initial thoughts are on this repeal of CEQA and what you think it could mean for long term capital flows, asset pricing, development, rents, et cetera. Thanks.

Angela Kleiman (President and CEO)

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

Rylan Burns (EVP and CIO)

Yeah, Handel, you know, in the near term we really expect this is going to have limited impact. You know, I'd remind you that in the past several years the state legislatures passed several reforms to encourage development. You know, over the past three years, permits are down anywhere from 40-50% in our submarkets. Really had limited impact so far. I acknowledge that FEMA reform is significant given its history and you know how it has been used in the past to delay and sometimes prevent projects from occurring. You know, to take an example from our development underwriting, we've underwritten approximately 100 development deals over the past year. 80% of those had entitlement, so there was no CEQA risk to begin with. The vast majority of those, the economics really just do not make sense.

I'd call it an untrended return on cost, you know, sub 5% on the majority of those projects. We think the economics are going to continue to be a limiting factor as it relates to supply in California. Yeah, limited near term impact.

Haendel St. Juste (Analyst)

Appreciate the thoughts. Thank you.

Operator (participant)

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

Hi. Thank you. This is Amy.

I'm from Michael.

I was wondering if you have seen any changes in demand in Northern California or Seattle. If renters are being more price sensitive, any changes in foot traffic or conversions or reasons for move out.

Angela Kleiman (President and CEO)

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

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

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

Operator (participant)

Thank you. Next question comes from the line of Wes Holliday with Baird, please go ahead.

Wes Golladay (Senior Research Analyst)

Hey, good morning everyone. I just want to go back to.

Los Angeles or LA County. How do you see a recovery playing out? I think you mentioned supply would be down, but what about the lease-up pressure from that supply?

Angela Kleiman (President and CEO)

The lease pressure, it typically lasts depending on the magnitude, around six to nine months on average. With the supply abating, that lease pressure is actually going to improve. What you'll see is the concessions will start to improve better and kind of end up in that maybe half a week versus closer to a week range over time. That is one good metric to look at. The other influencing factor with LA is with other economies. You could tell or you could see what are the puts and takes. For example, Northern California. Of course there is that technology and artificial intelligence benefit that has been quite steady. In Southern California, particularly LA, there has been a huge amount of infrastructure spending announced that is specific to LA.

That $80 billion will be a meaningful injection into that economy and driving demand, driving people to that market to build and to do business there.

Wes Golladay (Senior Research Analyst)

Got it. Thank you.

Operator (participant)

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

Rich Hightower (Managing Director of U.S. REIT Equity Research)

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

Barb Pak (EVP and CFO)

Hi Rich, it's Barb. Yeah, your memory's pretty good. We are about 10 basis points off of our long term historical average with LA being worse than our average and then being offset by slightly better in NorCal. Overall our guidance assumes we're at this level for the rest of the year. Could we do better? Yes, that would just be the higher end of our guidance.

Rich Hightower (Managing Director of U.S. REIT Equity Research)

Great.

Okay, that's all for me, thanks.

Operator (participant)

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

John Pawlowski (Managing Director)

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

Angela Kleiman (President and CEO)

Yeah, hey, actually it's based on data, so this is not Angela's feeling index here. When it comes to the BLS data, it's become less reliable because participation rate has fallen. Pre-Covid the participation rate was about 60% and today the participation is only about half of that, about 30%. And so the BLS data is just, you know, it doesn't, it's just not a good indication of what's really going on in the ground. A perfect example is that the BLS, you know, shows it's actually the Northern California region produced the worst jobs year to date. It's negative 70 basis points. You contrast that with, it's actually our best rent growth market. It's extreme and that's not possible without job growth.

John Pawlowski (Managing Director)

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

Angela Kleiman (President and CEO)

Yes, yes, a good indicator. A good data we use, which is a third party vendor, is we track the job openings of the top 20 technology companies. We have seen once again, not acceleration, but just a gradual steady increase. We are now pretty darn close to pre Covid levels, which is a good sign because what that means is as these companies backfill the job openings, the open positions remains high, which means they are still incrementally growing. We're not in that robust, frothy period, but it's definitely a great start.

As far as we're concerned.

John Pawlowski (Managing Director)

Okay, and the last one for me.

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

Rylan Burns (EVP and CIO)

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

John Pawlowski (Managing Director)

So the total loan to cost in this project will be, you know, in the 80% range.

Rylan Burns (EVP and CIO)

Sorry, please repeat the question.

John Pawlowski (Managing Director)

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

Rylan Burns (EVP and CIO)

Yeah, that's in the ballpark.

John Pawlowski (Managing Director)

Okay, thank you.

Operator (participant)

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

Alex Kim (Equity Research Senior Associate)

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

Angela Kleiman (President and CEO)

Yeah, normally. Hey, Alex. Normally you would see a wide range between renewal and new lease. I'm sorry, yeah. Renewal, new lease rates in an environment, if market rents continue to accelerate. If that happens in next year, then that spread is going to remain wide. If market rents performs closer to, say, the long term behavior between 3-4%, then those two metrics will likely converge. With the caveat that LA will be different because we have other influences, impacting LA.

Alex Kim (Equity Research Senior Associate)

Got it.

Okay.

That's all for me. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, the conference of Essex second quarter earnings call has concluded. Thank you for joining the call. You may disconnect your lines at this time. Thank you for your participation.