Essex Property Trust - Q4 2025

Transcript

Operator (participant)

Good day, and welcome to the Essex Property Trust Fourth Quarter 2025 Earnings Call. As a reminder, today's conference is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. You may begin.

Angela Kleiman (President and CEO)

Good morning. Welcome to Essex fourth quarter earnings call. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. Today, I will cover highlights of our fourth quarter and full year performance for 2025, provide our outlook for 2026, and conclude with an update on the transaction market. 2025 played out generally in line with our initial macro forecast for the U.S., with job growth moderating throughout the year. Within this environment, we achieved full year same-store revenue growth at the high end and FFO per share growth above the midpoint of our guidance range. I'm particularly pleased with the well-coordinated efforts between our property operations and corporate teams to drive results, especially in other income growth and improving delinquency recovery to near pre-COVID levels. From a market perspective, two key factors contributed to our performance in 2025.

First, Northern California outperformed expectations as a result of expansion in the technology sector, favorable migration trends, and limited new housing supply. Second, rent growth across most Essex markets outperformed the U.S. average, demonstrating the significant advantage of limited housing supply, even in a soft employment environment. Turning to the fourth quarter property operations. The results were generally consistent with our expectations, with 1.9% blended lease rate growth in the fourth quarter. Occupancy increased by 20 basis points sequentially to 96.3%, and concessions averaged approximately one week, which is typical for this period. Within the portfolio, Los Angeles delivered the best occupancy improvement, increasing 70 basis points sequentially, a good indication that this market continues to progress towards stabilization. As for regional performance, Northern California was our best region, followed by Seattle, then Southern California. Moving on to our 2026 outlook.

Consensus expectations for the broader U.S. point to slow but stable economic growth. Further, employment trends are expected to remain consistent with what we have seen recently, with major employers maintaining a cautious approach to hiring. Against this backdrop, our base case assumes the current level of demand continues in 2026. On the supply side, we forecast total new housing supply to decline by approximately 20% year-over-year. Accordingly, we anticipate steady West Coast fundamentals to deliver solid blended rent growth above the U.S. average and at a level comparable to 2025, with the Essex markets to be led by Northern California, followed by Seattle, and lastly, Southern California. In terms of scenarios, global uncertainty continues to weigh on the economy and job growth and represents the primary driver of low end of our guidance range.

This uncertainty has contributed to a measured hiring environment, which has tempered near-term acceleration in demand. On the other hand, we see a path to the high end of our guidance range if hiring trends improve modestly. Given historically low levels of new housing supply across our markets, even a small inflection in demand could have an outsized impact on fundamentals. While broader expectations call for muted hiring nationally, we believe northern regions are better positioned. Activities in the technology sector remains constructive, with companies expanding office footprints and investments in artificial intelligence continuing. In addition, these markets should continue to benefit from ongoing return-to-office enforcement. In summary, the favorable supply backdrop across West Coast multifamily markets, combined with the continued recovery in Northern California, reinforces our outlook for our markets to outperform over the long term. Turning to the investment market.

Activities in our market remain healthy, with $12.6 billion of non-portfolio institutional multifamily transactions in 2025, a substantial increase of 43% compared to 2024. Improving operating fundamentals and minimal forward-looking supply deliveries led to a significant sentiment shift to the West Coast, resulting in deeper bidder pools and cap rate compression, especially in Northern California and Seattle. Generally, cap rates for the highly sought-after submarkets, which represent approximately one-third of the total deal volume, occur in the low 4% range, and cap rates for the remaining two-thirds occurred in the mid-4% range. Lastly, Essex has been the largest investor in Northern California over the past two years, with majority of our acquisitions transacted ahead of the cap rate compression, resulting in significant NAV appreciation.

Looking forward to 2026, we will continue to evaluate all opportunities and allocate capital with a disciplined focus on creating shareholder value. With that, I'll turn the call over to Barb.

Barbara Pak (EVP and CFO)

Thanks, Angela. Today, I will briefly discuss 2025 results, the key components to our 2026 guidance, followed by comments on funding needs and the balance sheet. We are pleased with our fourth quarter and full year results, as we were able to achieve same property revenue growth of 3.3%, which was at the high end of our most recent guidance range and 30 basis points ahead of our original projections for the year. The outperformance in the fourth quarter was driven by lower concessions, higher occupancy and other income. Turning to the key drivers of our 2026 outlook. The components of our full-year same property revenue midpoint of 2.4% is outlined on the chart on page S-16.1 of the supplemental. There are three key drivers of revenue growth this year.

First, as anticipated, our earn-in based on our 2025 results will contribute 85 basis points to growth. Second, our guidance assumes blended lease rate growth of 2.5% at the midpoint. As Angela noted, our outlook for market rent growth is based on tempered job growth, which is partially offset by a meaningful reduction in new supply. As such, this should allow us to achieve similar blended net effective rent growth as last year. Third, we expect 30 basis points contribution from other income. Moving to operating expenses. We forecast 3% same property expense growth at the midpoint, which is the lowest rate of expense growth we have seen in several years. There are a couple factors contributing to this outcome. First, we expect controllable expenses to increase around 2%, which reflects the continued benefits of our operating model.

Second, we expect insurance costs to be down around 5% on a year-over-year basis as the property insurance market has continued to improve over the past year. These benefits will be partially offset by increases in utilities and property taxes. As a result, same-property NOI growth is forecasted to increase 2.1% at the midpoint. As for 2026 Core FFO per share, we expect growth to be flat on a year-over-year basis. The drivers of our forecast are illustrated on S16.2 of the supplemental. While we expect solid top-line performance and growth in net operating income, it is being offset by recent and expected redemptions within our Structured Finance portfolio, which are contributing to a 1.8% headwind to growth.

This reduction to FFO reflects a conservative modeling approach, which excludes any redemption proceeds and minimal income from the 2026 maturities. We expect 2026 to be the final year of structured finance-related headwinds due to the substantial reduction in the size of this book over the past several years. We are pleased to have strategically reallocated redemption proceeds into higher growth, fee simple acquisitions in Northern California, which provides better risk-adjusted returns. Lastly, a few comments on the balance sheet. We are well positioned from a funding perspective as our free cash flow covers our dividend and all planned capital expenditures and development plans for the year. In addition, our finance team has done a great job proactively reducing our near-term maturity risk with a portion of our 2026 maturities accounted for via the bond offering we did in December.

With strong credit metrics, over $1.7 billion in liquidity and ample sources of capital available, the company is well positioned. I will now turn the call back to the operator for questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Jaime Feldman (Managing Director)

Great, thank you. Maybe just—I mean, there's been so much movement in the tech market in the last couple weeks. As you think about demand for your assets, especially in Northern California, I mean, what are your latest thoughts on what we should be watching in terms of, you know, where the risk is, where the growth is, and what are you seeing on the ground in terms of, you know, changes? And I guess we can, you know, ask the same question about Seattle.

Angela Kleiman (President and CEO)

Hi, Jamie. Thanks for your question. Northern California is in a very interesting position at this point in time because we had talked about the potential recovery, and it's finally starting to take hold. So it's an exciting time for us from that perspective. And in terms of... You know, we're watching a couple of things. I think you know, it's fair to acknowledge that the jobs environment broadly across the U.S. has been soft, and that you know, relates to my comment on Seattle in a second. But in Northern California, it's done fine.

We look at a couple of things, you know, job openings at the top 20 tech companies, and from that perspective, it's done well in that when we looked at 2025, it ticked up above pre-COVID levels around the second quarter, but then it retreated in the fourth quarter. So it's not too inconsistent from the seasonal, seasonal norm, but it is an indication that this market is not robust when it comes to jobs, but it is stable, and it's doing fine... With that backdrop, when we look forward, we are seeing a couple of activities that gives us, you know, encouragement that this area is going to continue to improve.

When we look at, for example, VC funding in the fourth quarter, it's at the highest level for, you know, over four years, and it increased by 91%, so almost doubled on a quarter-over-quarter basis. Over 65% of that spending is in the Bay Area. Now, that doesn't mean that there's going to be job acceleration tomorrow, but it is a great sign of growth to come. When we look at office absorption, you know, another indicator, we're seeing positive absorption for the first time in all three major markets in our northern region, San Fran, San Francisco, San Jose and Seattle. So, you know, that, that's the backdrop. In Seattle, I'll have to acknowledge that in the fourth quarter, it was soft.

It performed. It did not achieve the expectations that we had planned in terms of the rent growth and the lease numbers. We had several corporate announcements in terms of layoffs. But having said that, looking forward in Seattle, we still like the fundamentals. Supply is down by 30% in that market, and other than in addition to the, you know, positive office absorption, we're also seeing additional leasing activities with by OpenAI. They quadrupled their space in Seattle. And so with and additionally, we have return to office tailwind in Seattle. Amazon starts enforcing return to office in January. Microsoft starts return to office in Q1. So there's a path to the high end of our range.

I just want to note that, you know, with the backdrop of the employment landscape, there is an element of unpredictability with that because it's highly influenced by public policy, and public policy so far has tempered job growth. So that's an environment which we are in, and we do have to, you know, be sensitive to that.

Jaime Feldman (Managing Director)

Okay, thank you for that. And then can you talk about what you're thinking on new and renewal blends for the year?

Angela Kleiman (President and CEO)

Yes, of course. So we're assuming that our blends, at this point, is going to come in similar to 2025, at about 2.5%. And that's because, you know, as I mentioned earlier, we're assuming that demand is generally flat, going forward. So what that means for new and renewal is that, and I'll give you a range, because that's probably more relevant, because different markets, you know, behave differently. So under the new leases, we're assuming somewhere around flat to 2%, and under renewals, around 3%-4% for the year. So not too different from last year.

Jaime Feldman (Managing Director)

Okay. All right, thank you for that. Appreciate the color.

Operator (participant)

Thank you. Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.

Nick Yulico (Managing Director)

Thanks. I guess first off, I just wanted to ask about Los Angeles. You talked about, you know, occupancy picking up there in the fourth quarter. Where is that market now in terms of where you're hoping it to be on occupancy and to be able to drive rental pricing a little bit better this year? Maybe you just talk a little bit about more about how you're expecting LA to perform this year. Thanks.

Angela Kleiman (President and CEO)

Hey, Nick. Good morning. Yeah, on LA, what we've seen is a steady increase or improvement in occupancy, so that's good. Especially, you know, we all know that the jobs environment has been quite soft. And where we are today, if you look at economic occupancy, which is the financial occupancy, we report less than delinquency. In the fourth quarter, this market sits at 94.7, so we're just so close to stabilization at 95%. And compared to last quarter, I'm sorry, compared to third quarter of 94% economic and, and of course, second quarter, 93.8%. So it's been steadily improving, which is fantastic. And what we're seeing next year, in 2026, is that supply decreases by 20% in this market.

So we are hopeful that we will move toward this 95% stabilization sooner rather than later. But having said that, once again, you know, the timing is not so much in our control because the eviction processing timeline is what really drives our ability to move that delinquency number. And so we, you know, try to take a more prudent approach on that front, but it's moving in the right direction.

Nick Yulico (Managing Director)

Okay, thanks. And then, second question is just on, you know, San Francisco and I guess the Bay Area broadly. You know, I know—I, I think some of the strong rent growth we've seen from the market data has been, has been helped by removing concessions from that market, and so there was a comp issue, I think, helping, you know, the, the numbers. Does that become, like, a headwind this year in terms of us just thinking about, like, how San Francisco rent growth could look this year versus last year? Thanks.

Angela Kleiman (President and CEO)

Yeah. Hey, Nick. I think, you know, on the concession, the margin, it could be a result of, you know, hangover from previous supply pressures. But what we're seeing concession level in this market is not too different from historical averages, and it's not, you know, a factor when it comes to the uplift in San Francisco. It's really been more of a recovery story. We are finally at a point where San Francisco, as a market, is somewhere around 9% above pre-COVID level. And if you look at, you know, where it should be, it should be somewhere around 20% above pre-COVID levels. So it's still in the recovery phase, and so it's less of a concessionary story pick up.

Operator (participant)

Thank you. Our next question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Thanks. It's Nick Joseph up here with Eric Wolfe. There were reports, I guess, last week about a large Southern California portfolio coming onto the market. So curious where you see buyer cap rates today in, I guess, across your markets, but maybe specific to Southern California, if there's any differences between the regions. And then just broader, your thoughts on kind of external growth and capital allocation coming into this year.

Rylan Burns (EVP and CIO)

Hey, Nick, Rylan here. I'll start on the comment on the portfolio in Southern California. You know, in general, not gonna go into details, don't really want to comment on a live transaction, but so for background, there's been approximately $11 billion of transactions in Southern California over the past two years. The majority of the transactions last year occurred in that 4.5-4.75 cap rate range. So this is a healthy environment where there's a lot of capital coming in, that you know, I think they're gonna do quite well. Obviously, we look at everything that comes through our market, so we will be evaluating. And if there's an opportunity to create value, you would expect us to participate there. You know, in terms of just bigger picture, you know...

Sorry, go ahead, Nick. Yeah.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

No, no, no. Yeah, go ahead.

Rylan Burns (EVP and CIO)

You know, capital allocation, you know, just a reminder of our, our broader philosophy, right? So for investment criteria, we have three things that we're looking to solve for. One, FFO per share accretion, two, NAV per share accretion, and looking for opportunities that are better growth profiles than the rest of our portfolio. And our strategy, which is unchanged, is to allocate capital to those investments that offer the highest potential accretion relevant to the cost of capital. So we're gonna continue, as we've done for the, you know, for this team being here the past five years and over the past 30 years, to look for those opportunities where we can drive the highest potential accretion.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Thanks. And so for that 4.5-4.7 you quoted, is that buyer or seller, and, and how wide does that spread typically?

Rylan Burns (EVP and CIO)

That's buyer cap rates. Those are economic cap rates on in-place rents. Obviously, seller, it really depends on, you know, when the asset was purchased and what the tax base is involved. That's where you'll see some difference between buyer and seller cap rates in Southern California.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Got it. And then just in terms of the cap allocation, just given where the stock is trading today, how do buybacks play into the stack of opportunity, just given where you're seeing cap rates versus where the implied cap rate for the stock is?

Angela Kleiman (President and CEO)

Hey, Nick. It's a good question, and it's a, you know, it, it's a calculation that we go through on a regular basis. So I want to start with everything is on the table, buybacks, preferred equity, development, acquisition, all of the above. And when we think about buyback, we also look at, you know, the yield that we can generate from a straight acquisition towards development and the growth thereof. So, you know, there's an IR consideration. Based on the stock today, which is, I don't know, in the mid-$255, it's kind of a close tie across the board, if you will. And so, you know, so then we need to look at, you know, how do we create value for the company? And I just want to point you that, you know, what we've done.

You know, when we directed capital deployment for fee simple properties in Northern California over the past year and a half, it's done well for us, even though our stock was trading in this range, because those assets ended up generating portfolio-leading rent growth with cap rate compression. We really provided, you know, produced a lot of appreciation of these assets and shareholder value. And so we have to consider that fact. And also, you know, if you look at we had done the buyback say six months ago, well, the stock has gotten cheaper, so not as attractive. And so there's a lot of things that we really, you know, we do consider and I hope that you realize that we do try to be very thoughtful about it.

You've seen us buy back stock in, you know, big chunks when it makes sense to do so.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Absolutely. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa (Senior Managing Director)

Yeah, thanks. Good morning. I think, Angela, you had mentioned that renewals would be in the three-four range for the year. I'm just curious, you know, what have you experienced thus far, kind of in the January, February, and presumably March timeframe?

Angela Kleiman (President and CEO)

Hey, Steve. Right now our renewal is looking at around fourish to mid-4% for February, March, and so we're pretty much on track.

Steve Sakwa (Senior Managing Director)

Are you doing a lot of discounting? Are you pretty much getting what you're asking for, or is there a gap between kind of what you ask and what you achieve?

Angela Kleiman (President and CEO)

So far, the negotiation is somewhere between 30-50 basis points. So it's, you know, to us, that points to just a normal, stabilized environment.

Steve Sakwa (Senior Managing Director)

Great. Thanks. And then, I guess, following up on the capital allocation discussion, you talked about sort of acquisitions and buybacks, but I think in the release you explicitly said you would not have any development starts. I'm just curious, you know, where, where would development pencil if you were to start one? And I guess, what does that mean about costs having to come down or rents having to grow in order to get to a yield that makes sense to you?

Rylan Burns (EVP and CIO)

Hey, Steve, this is Rylan. We currently in our, in our development pipeline, right, we have two land sites that we continue to move forward with, but they're not expected to start in 2026. Our team underwrote probably about 100 land sites last year, and none of them really made sense from an economic perspective. So you really need to see land sellers take a reduction in their expectation on land prices to make the numbers work today. And/or you're gonna have to see, you know, 10%+ rent growth for some of these deals to make economic sense. So we're closer.

We have, you know, our own pipeline that we continue to work forward to, and if we can find something at a significant premium to the underlying transaction rate, where we feel comfortable for the risk that we'd be taking in development, we'd happily step in. We do think there's gonna be some opportunities on the development side. We're just trying to make sure we're getting the best risk-adjusted returns.

Steve Sakwa (Senior Managing Director)

And sorry, just what would you need on that? Is that a six? Is that 6.5? Is that 5.5 in your markets?

Rylan Burns (EVP and CIO)

Yeah, as I said, you know, depending on the submarket in Northern California, as Angela mentioned, where, you know, the transaction market feels like it's shaking in a 4.25 type range, something close to asix, I think, would definitely be worth the risk. If we, you know, if we had clear visibility on entitlements, we knew exactly what we're gonna build, felt good about the land bases. Those are the types of opportunities that we would jump at.

Steve Sakwa (Senior Managing Director)

Great. Thank you.

Operator (participant)

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

Brad Heffern (Director)

Yeah, thanks. Another question on LA. Obviously, seeing some improvements there. Can you talk about if the guidance assumes a significant improvement in performance year-over-year? And if not, when do you expect LA to become more of a positive contributor?

Angela Kleiman (President and CEO)

Hey, Brad. We are assuming that LA continues to improve gradually, and so, you know, we are hopeful that by year and next year, that it returns to the normal delinquency rate. Long term for LA is a little elevated than our typical portfolio average, but that's okay, that's what we expected. So we do have that baked in. The potential upside really comes from the general jobs environment, you know, for especially with supply going down, certainly there's opportunities there with LA.

Brad Heffern (Director)

Okay, got it. And then on the immigration front, has there been any sort of noticeable impact on demand or anything that you can see on your dashboards just from the lack of immigration?

Angela Kleiman (President and CEO)

We have not seen any direct impact from the immigration on the immigration front. I think I'm assuming you're talking about international immigration. What we have seen is it's generally returned to pre-COVID historical norm, and activities are at a normalized level. You know, and when we look at, you know, legislation like that impact that relates to, like, an H-1B, we certainly haven't seen any adverse impact from that. In fact, that continues to be viewed as a positive, and there are certain carve-outs, you know, for students and et cetera, that really should not hurt our business.

Brad Heffern (Director)

Okay, thank you.

Operator (participant)

Thank you. Our next question comes from the line of Jana Galan with Bank of America. Please proceed with your question.

Jana Galan (Director)

Thank you. Good morning. This year, there's a mayoral election in L.A. and an election for governor in California, as well as a number of proposals that could impact real estate. I'm curious if you can kind of let us know what you're watching from a policy front that could potentially be beneficial for rental housing?

Angela Kleiman (President and CEO)

Hey, Jana, thanks for your question. You know, it's, it's an interesting situation here in that we've seen, California, you know, slowly migrate away from these extreme liberal policies, which has been actually good for the overall economy and, and, and the voter population as well. So there's been a couple of, proposals that were more on the extreme end, and we were pleased to see that those proposals actually did not were not successful. So that's a good indication. What we're watching on the margin, of course, is, you know, the, the, the outcome, and, and we don't have any more insight to the election than, than what's publicly available. But what we can tell is that the sentiment is that the general view is people want to have a normal functioning economy.

You know, these extreme measures have not been well received.

Jana Galan (Director)

Thank you. And then, on the structured finance book, now that it's kind of right-sized or will be at the end of 2026, just going forward, how should we think about modeling and the growth here?

Barbara Pak (EVP and CFO)

Hi, yeah, it's Barb. That's a good question. So how you should think about it is at the end of the year, our book value is $330 million, but what is in our guidance for 2026 is $175 million that we are having income on, that's hitting our numbers. And that is a three year maturity. So there will be future redemptions, but it'll be much more manageable over the next three years, and we are looking for new opportunities to backfill. We obviously want to make sure they're the appropriate risk-adjusted returns, but it is a much more stable book than what we've had, you know, two-three years ago. So I think if you took the $175 million, that'll get you a stable number going forward.

Jana Galan (Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes in line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Austin Wurschmidt (Senior REIT Analyst)

Great, thank you. Just going back to L.A. for a minute. Are you guys seeing conditions, I guess, broadly in your submarket stabilize and rent growth maybe approaching an inflection, or was this more of a strategic, you know, approach on your part to build occupancy back to a stabilized level? And, you know, everything you're seeing is kind of specific to, you know, your portfolio.

Angela Kleiman (President and CEO)

Hey, Austin, that's a good question. It's, it's more Essex operational strategy driven with how we are, you know, operating in LA. But ultimately, you know, our goal is, of course, to maximize revenues. And so in an environment where, you don't have stabilized occupancy, it's just, you really don't have pricing power. And so it's critical to, you know, focus on delinquency, which I think our team has done an exceptional job, and focus on building occupancy. And once we get to that 95% occupancy, stabilized, economic occupancy for our portfolio, then we will have some pricing power.

Austin Wurschmidt (Senior REIT Analyst)

Got it. And then just going back, I mean, does that speak a little bit to the negative 2.4% new lease rate growth in the fourth quarter? And maybe what was the driver of that? Because it did seem that was a little lower than it's been in, in, you know, many years outside the COVID period. And have you started to see that, you know, reaccelerate into the new year, given that occupancy is now in a better position even than it was, you know, a year ago at this time?

Angela Kleiman (President and CEO)

Yeah, that's a good question. That new lease rate is driven by, you know, the weakness in Seattle and weakness in San Diego, more due to supply. LA was more, you know, is not, not as exciting. It was a little, well, yeah, it was still negative. Okay. It's all not great on that front. Never mind. So I think looking forward, there, there are a couple of things happening, you know, with the supply decreasing and also, yeah, the, the environment in LA stabilizing, it certainly that it should turn. It should start to turn.

Operator (participant)

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

John Kim (Managing Director)

Thank you. On the new lease growth rate, expectations of flat to 2%, I'm wondering what your thoughts were on cadence. Last year, it peaked in the first quarter at 1%, and I'm wondering if you expect a similar dynamic this year. And as part of that, I was wondering if you could share your new lease rate growth in January.

Angela Kleiman (President and CEO)

So that's a good question. In terms of cadence, we do assume that 2026 is gonna be pretty moderate. We're not expecting, you know, say, you know, first half or to be significantly greater than second half and vice versa. And that's really driven by our view that the current job environment is going to continue just because of, you know, political uncertainty. And keep in mind, we have a midyear midterm reelection in the second half, and we don't know how public policy is gonna behave in light of that. So, you know, it builds in because some of those unknowns.

As far as, you know, January numbers, I mean, I don't think it's all that productive to talk about that, because December and January are always, always the worst period in our business because of seasonality, and it's not going to point to anything relevant with what's gonna happen for the rest of the year.

John Kim (Managing Director)

Okay. And Angela, in the past, I mean, last year, you talked about happily trading out of Southern California, or reducing Southern California and buying in Northern California. Based on Rylan's commentary about being perhaps a little bit more opportunistic and the occupancy improvement you saw in LA this quarter, is that trade still the case, or are you more agnostic on markets?

Angela Kleiman (President and CEO)

Well, at this point, you know, well, let me start with our view is, has always been there's a price for everything. And in an environment where cap rates are generally consistent, you know, throughout our markets, we certainly would want to deploy capital in a market where we believe has a elevated level of rent growth ahead of us, which is Northern California. So if you look at the current environment, if all cap rates remain generally in line, Northern California is still the more compelling place to deploy capital because it's just, you know, it's in the recovery phase. But once you start, you know, seeing a gap between among the cap rates in the different submarkets, then it's a different calculation. And so we're gonna have to look at that holistically rather than just, you know, based on a specific number.

John Kim (Managing Director)

How much should that gap be, in your mind?

Angela Kleiman (President and CEO)

Well, it depends on the growth, and it really is more submarket driven. So, for example, when I say, you know, Northern California, we certainly wouldn't invest in Mountain View at the same cap rate as we would invest in Oakland. And so I wish I could give you a finite number, because that would make everyone's life so much easier. But it really depends on the growth rate of that specific asset, which has a lot to do with how it's managed and what's going on in the submarket. And, you know, it's just not as simple as a, you know, one-size-fits-all situation.

John Kim (Managing Director)

Thank you very much.

Operator (participant)

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

Haendel St. Juste (Managing Director)

Hey there. Thanks for taking my questions. A couple follow-ups from me. First, I guess I wanna go back to the blends. I know you talked quite a bit about it, but I just wanted to clarify a few things. I guess, by our math, it looks like your outlook for blended rents for the year implies a slight decel in the back half of the year, which seems pretty unlike your peers who are embedding an acceleration in the second half. So first, is that fair? And then second, can you comment on what your expectations are for market rate growth by key region for this year? Thanks.

Angela Kleiman (President and CEO)

Hey, Haendel. Sure thing, and thanks for your question. I'm not sure where we're seeing a decel in the second half. Maybe we can sync up after call, because we're modeling pretty much, you know, a consistent rate. What we typically assume is that first quarter and fourth quarter blends are at the lowest level, and then second and third quarter blends are higher, and so they kind of, you know, kind of offset each other. As far as the market rents by market, it's actually, you know, in an environment of low growth, it's not all that different from our blends. So last year, our market rents landed at the mid twos, and we're assuming that in 2026, market rents will be very similar.

We're assuming Northern California to be, you know, on the higher end, say in the mid-threes to 4% range, and Seattle in the mid-twos and Southern California in the mid-ones.

Haendel St. Juste (Managing Director)

Got it. That's helpful. And I guess to your point on the blend, maybe it's not decel, but certainly there's not an acceleration required in the back half of the year, like your peers. Second question, I wanted to talk a little bit about Southern California, but ex LA. Obviously, we know LA is gonna be a bit challenged near term, but curious how you're thinking about the prospects for Orange County and San Diego near term. And then maybe sprinkling in a question on LA, how you would think of LA growth over the next few years. You mentioned cap rates generally being kind of in that, you know, sub five-ish range, but curious how you think an IRR for a LA portfolio would look like. Thanks.

Angela Kleiman (President and CEO)

Hey, Haendel. Yeah, good, good questions. No, Rylan will take talk about the cap rates. In terms of Southern California, we're assuming that L.A. and-- I mean, sorry, if San Diego and Orange County perform similar to this year, it, it's really more driven by, by the fact that we view the job growth to be generally constant. And supply, from what we see, in San Diego, it's about at the same level. In Orange County, it's slightly elevated, but not in such a huge magnitude that it's gonna, you know, drive a significant movement. So stable, not very exciting, but kind of this more, more of the same for, for Orange County and, San Diego.

Rylan Burns (EVP and CIO)

Haendel, jumping on the IRR expectations, I think where we've seen a lot of transactions in Southern California with our growth expectations in these markets, you know, we've seen market clearing trades, I would say in the low seven IRR-type range. Again, you know, wide variety depending on the asset and the business plan for some of these assets, but we think we've been, you know, able to achieve much better returns in our submarket selection in Northern California. So that's where we've really been focused. Now, if any of those assumptions were to change as it relates to the going-in cap rate, the business plan on a specific asset and/or the growth rates, then you would see us, you know, change our capital allocation priorities.

That's where it's been trending in 2025, I'd say.

Haendel St. Juste (Managing Director)

Thank you, guys.

Operator (participant)

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

Alexander Goldfarb (Analyst)

Hey, good morning out there. Two questions. First, Angela, you guys have outlined, you know, what you expect advocacy costs in your guidance, although it's not part of Core FFO, it's just part of NAREIT FFO. But given that advocacy is sort of a recurring part of operating assets in real estate in California, wouldn't these expenses just be a normal part of the business? Like, no, it's core to the business of being in California, no different than, you know, insurance costs, you know, earthquake costs or any of that in California, weather costs, et cetera. So just curious about that, because I would think, especially as people are contemplating that other portfolio in Southern California, you know, the regulatory costs are part of the calculus of how they look at whether or not to invest.

Barbara Pak (EVP and CFO)

Well, Alex, it's Barb. So in terms of the advocacy costs or the political costs that we had, we had $2 million in 2025. We have not specifically outlined what the costs will be in 2026. We've provided a number, but it does include other legal fees that are outside of our normal core operation. So we don't expect there to be significant advocacy costs in 2026. There will be a small amount, but we don't see them as necessarily recurring. They can be lumpy from year to year when we have a big ballot measure. We're not expecting a lot on the advocacy front in 2026.

Alexander Goldfarb (Analyst)

Okay. And then, Rylan, just in looking at deal flow, it seems like 2021 was a, you know, banner year for, you know, ultra-low rate deals that, you know, may not have hit their pro forma and maybe, you know, have it coming back for debt maturities or restructuring, you know, in the next year or two. Do you see a lot of these deals coming to the market to trade? Or as you guys take a look at these deals that are having issues, most of them seem to be resolved internally between the existing sponsor and the lenders. I'm just trying to figure out if the 2021 vintage is gonna create opportunity for you guys, or if it's gonna be one of these where most of the stuff gets resolved on its own.

Rylan Burns (EVP and CIO)

Hey, Alex, I think you're correct in that, you know, there were a lot of deals on very low cap rates in 2021, and most of them were funded, you know, with five-year debt, as typical. So in theory, there should be a lot of deals coming to market that have lost that attractive debt rate there. However, as you also acknowledged, you know, there is a lot of debt capital out there looking to deploy in the multifamily space. So I think there's been a lot of deals being done between lenders and sponsors, and we really have not seen any indications of distressed sales coming to our market.

The other thing to, you know, keep in mind is that Southern California, in particular, has done, you know, fairly well relative to the rest of the country over the past five years. So NOIs are up, and, you know, these—they've created value in many cases. So I'm not anticipating a significant onslaught of distress in 2026 for the reasons you mentioned. One, general, you know, really favorable lending environment, and then two, you know, performance has done okay.

Alexander Goldfarb (Analyst)

Thank you.

Operator (participant)

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

Wes Golladay (Senior Research Analyst)

Hey, yeah, good morning, everyone. This quarter, you took control of an asset in Los Angeles, tied to the preferred portfolio. Can you talk about when you expect that asset to stabilize, if it hasn't, and was it much of a drag on earnings this year?

Rylan Burns (EVP and CIO)

Hey, Wes, this is Rylan here. Yeah, this is a unique asset. We expect this to stabilize in the mid-five range. There was no impact to the economics last year. We just took management of it at the end of last year. Going in, it's probably a low to mid-four cap. The previous sponsor had a unique business model, where a certain portion of the units were rented as fully furnished short-term rentals, which had not done well, elevated delinquency and, you know, a little bit higher controllable expenses. So putting it onto our platform with no assumption of significant rent growth on that asset, we are very confident we're gonna be able to get this to a mid-five by the end of the year.

Wes Golladay (Senior Research Analyst)

Okay. Thank you. That's all for me.

Operator (participant)

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

Michael Goldsmith (US REITs Analyst)

Good morning. Thanks a lot for taking my questions. First question is on the legislative front. Are you seeing anything that may be related to the so-called junk fees or Essex's ability to continue to grow non-rental income?

Angela Kleiman (President and CEO)

Hey, Michael. We have looked at our practices with, as it relates to other fees, and we've also utilized consultants to make sure that our practices are in compliance. So we don't expect that to be, you know, to have a meaningful impact to our business.

Michael Goldsmith (US REITs Analyst)

Got it. Thanks for that. And then just as a follow-up, have you seen any changes in the pace of move-in from outside of Essex's core markets?

Angela Kleiman (President and CEO)

Would you repeat that question? Sorry.

Michael Goldsmith (US REITs Analyst)

Have you seen any change in the pace of move-ins from, you know, into-

Angela Kleiman (President and CEO)

Oh, move-ins.

Michael Goldsmith (US REITs Analyst)

From outside markets, the pace of move-ins into the market.

Angela Kleiman (President and CEO)

Gotcha. Gotcha. Sorry. Good question. We have seen an increase in the immigration trends, especially in our northern region. But you know, I do wanna caution you on the immigration numbers, in that this is really driven more probably by return to office. It's not driven by robust job hiring environment. So you know, but so far it's showing positive, and it's been a nice little tailwind for us.

Michael Goldsmith (US REITs Analyst)

Great. Thank you very much. Good luck in 2026.

Angela Kleiman (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Juien Blouin with Goldman Sachs. Please proceed with your question.

Julien Blouin (VP)

Yeah, thank you for taking my question. I just wanna go back to Seattle. You mentioned the, you know, return to office plans for Amazon and Microsoft, but then, you know, on the other hand, both of those companies have announced corporate layoffs there by the thousands over the past six months. I guess, what is your sense of how that push and, and pull will sort of play out this year? Can the, can the RTO benefit really outweigh, you know, the continued layoffs we've seen?

Angela Kleiman (President and CEO)

Yeah, that's a good question, and that's really, you know, as far as, you know, how we judge or how we decide on our setting our guidance, right? What does that mean? How long does it take? What we have seen with Seattle, in particular, is that it moves quickly. So yes, there's layoffs offset by return to office, but Seattle also has having a 30% reduction in supply. And so, you know, absent of, say, additional job growth, for example, this market should fare just fine, if not slightly better than last year. But it's gonna do just fine. But secondly, you know, when we look at the layoffs, we do dig into the reason for the layoffs, because that really matter.

So when we look at the reasons for layoffs from the large companies, and including Amazon, the reasons cited are they're either eliminating non-profitable businesses, you know, for example, Amazon Fresh pivoting to Whole Foods, or they're expanding. They're investing to expand into new business units or expand the business. And so the layoffs are not because of distress, and that's actually a good reason for layoffs. And, you know, additional data points to that, of course, the increased office absorption and increase in office leasing activity. You know, all these data points together point to that this is still a good, vibrant market to be in.

Julien Blouin (VP)

Thank you. No, that's, that's very helpful. Maybe digging into the South Bay as well, just in light of the fears that are out there around sort of AI-native companies disrupting legacy tech and software. You know, on the face of it, the South Bay is also one of those sort of more legacy tech or software-heavy markets, where companies have been announcing corporate layoffs and has sort of less of that AI-native HQ benefit that maybe San Francisco has. Why, why do you think the South Bay is, is sort of holding up so well while Seattle has maybe, struggled a little bit more?

Angela Kleiman (President and CEO)

Well, I think the, you know, the South Bay market is a much deeper market than, than Seattle. And even though, keep in mind, you know, there, there is some disruption that we would expect from AI, but when you look at what's happening there, you know, so if you're talking about disruption, you know, in, in, you know, by cloud or coworker, for example, it's creating a demand and increase in usage in agentic AI. And so you're going from one, you know, application that may be deprecated, but there's an expansion in another, and this is all happening still within the same submarket. And so that's, that's one of the, you know, foundational, benefits of this market and having that concentration of all these tech companies there.

Julien Blouin (VP)

Got it. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Linda Tsai (Senior Analyst)

Thanks for taking my question. In 2026, do you expect any year-over-year changes in tax expenses from Seattle and Washington State due to the Seattle Shield Initiative and B&O surcharge?

Barbara Pak (EVP and CFO)

Yeah, this is Barb. I mean, we, we have baked in a Seattle tax increase this year into our guidance in the high single-digit range, but that and that encompasses kind of everything that you talked about, but that's what we're, we're assuming this year, which is a big change from what we saw in 2025, where we had a pretty meaningful reduction in taxes.

Linda Tsai (Senior Analyst)

What would be the dollar amount?

Barbara Pak (EVP and CFO)

I don't have that off the top of my head. I can follow up with you after.

Linda Tsai (Senior Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.

John Pawlowski (Managing Director)

Thanks. I had a follow-up to the return to office discussion from a few questions ago. I would've thought work patterns are normalized by now, with Amazon's policy has been in effect five days a week. It's been in effect, I think, for a year now. Has your local team seen a real second wind of demand to start the year, either in Seattle or the Bay Area, or it's more of you—you're hoping that the positive momentum in the market continues gradually over time? Hey, John. You know, our expectations is based on what we've seen actually happen on the ground. And what we have seen happening on the ground is that a company announces a return to office policy, and some employers would comply, and some will not, for various reasons.

Angela Kleiman (President and CEO)

It is not until they announce enforcement that people, all, everyone starts to come back to the office. That happened with Essex as well. We had announced it, allowed people to get used to it, and then, you know, three quarters later, we announced that we're going to check key cards, for example, and everybody came back. So our expectation is that this is going to play out similarly. Amazon actually announced that they're starting enforcement in January. They're doing that for a reason, and I don't think, I don't believe that their population would behave drastically different than, you know, than the norm.

John Pawlowski (Managing Director)

Okay. And then drilling into Seattle again, obviously, it takes a little bit of time for a layoff to get announced, you know, severance policies, et cetera, to actually flow through the housing decisions and people moving out. So in your Seattle portfolio, are you seeing a real uptick in, you know, notices to move out? Can you share any kind of forward-looking blended lease spread expectation, just given the lag between the layoff announcements and the actual, decisions renters make?

Angela Kleiman (President and CEO)

Well, first of all, you know, typically, when there's a layoff, there's the public announcement and there's the private conversations. And, you know, employees don't typically find out that they're getting laid off publicly. There's usually a conversation, and people typically make decisions, their housing decisions, 45 days in advance of a job change event. And so our view is that the bulk of that layoff impact already has been felt in the fourth quarter and some, you know, spillover in January and less so in February. And when we look at our leasing activities and our blended renewal rates, they're not all that different from historical patterns for Seattle. So yeah. So I'm not, you know, we're not expecting a second shoe to drop, if you will, because of the layoff announcements.

John Joseph Pawlowski (Analyst)

Okay, so blended spreads for, you know, the first half of this year in Seattle, you'd expect not to look meaningfully different than the second half of last year?

Angela Kleiman (President and CEO)

Correct. Correct. I would say, I would say the whole year, you know, because we're not expecting a huge difference between first half and second half in 2026. And then the one other, you know, data point I'll point to is that Seattle supply is declining by 30%, and so that will also benefit the markets.

John Joseph Pawlowski (Analyst)

Okay, great. Thanks for the time.

Operator (participant)

Thank you. Our next question comes from the line of Rich Hightower with Barclays. Please proceed with your question.

Rich Hightower (Managing Director)

Hey, good morning out there, guys. Just one from me. I just want to go back to Barb's comment in the prepared comments about the, I guess, the conservatism baked into the idea that, you know, the structured investment redemptions would not be redeployed, and that's basically what's embedded into guidance at this point in time. I mean, I guess, how, how conservative is that view? And is it conservative to the point of being a little bit unrealistic based on kind of what's in the pipeline and sort of, you know, the, the real underlying expectations for those redemption proceeds? Thanks.

Barbara Pak (EVP and CFO)

Yeah, Rich, it's a good question. So what makes 2026 unique in terms of our redemption profile is 90% of the redemptions we expect back are tied to 2 assets. So they're large redemptions, which do move the needle in the guidance. And on one of them, we did stop accrual in the fourth quarter. We did a third-party valuation on it, and we're fine from a valuation perspective today, but if we keep accruing, we felt we got a bit stretched, so we did the prudent thing and we stopped accruing. And then on the other one, we're just in discussions with the sponsor at this time, and so we, given we don't know the final outcome, we decided to not assume any redemption proceeds. There's no further downside in the guidance from these 2 assets.

There will and could be upside, but we don't know until we get further along in our discussions what that will be.

Rich Hightower (Managing Director)

Perfect. Okay. Thanks, Barb.

Operator (participant)

Thank you. Our next question comes from the line of Alex Kim with Zelman & Associates. Please proceed with your question.

Alex Kim (Equity Research Senior Associate)

Hey, good morning out there. Just a quick one for me. I wanted to talk about the delinquencies, and they look to be near pre-COVID trend line. Do you anticipate further improvement, even below pre-COVID norms? And could you quantify how much of a contribution is embedded into that 30 basis point tailwind from the other income bucket for your full year same store revenue growth guidance? Thanks.

Barbara Pak (EVP and CFO)

Yeah, this is Barb. So, you know, we are pleased with how much progress we've made on the delinquency front over the last two years. We're at 50 basis points. We're about 10 basis points off of our historical pre-COVID average, so we're really close. And to Angela's earlier point, it's really tied to L.A., where eviction courts are still, the processing times are still slightly elevated relative to pre-COVID averages. So we haven't baked any meaningful benefit in from delinquency in 2026. We've gotten the bulk of our delinquency benefit already in the prior years. We're still trying to get back there on the L.A. front, and maybe by year-end we could, but it's not going to move the needle like it did in 2025 from that perspective.

Alex Kim (Equity Research Senior Associate)

... Got it. Thanks for the time.

Operator (participant)

Thank you. Our final question comes from the line of Omotayo Okusanya with Deutsche Bank. Please proceed with your question.

Omotayo Okusanya (Managing Director)

Hi. Yes, good morning out there. I wondered if you could talk a little bit about technology initiatives you guys are still undertaking to help with things like customer satisfaction, customer retention, you know, rent growth, operating expense management, and just kind of what benefits from that are being built into your 2026 guidance.

Angela Kleiman (President and CEO)

Hi, that's a good question. From a technology perspective, we do have a variety of initiatives in our pipeline, both top line and of course some on the bottom line benefits. You know, on the sales and leasing front, it's really more AI focused and of course on the bottom line as it relates to expenses, there's some expense management opportunities and technology that we are implementing. Having said that, you'll see that other income contributions from these initiatives are fantastic, but they are lumpy. And when we start something, it usually takes a year or two to really monetize the opportunity. And so I'll give you an example.

You know, last year we had a nice pickup, and one of the reasons was EV parking, and that was rolled out in 2024. We, you know, captured the bulk of the benefit in 2025, and there's some residual in 2026, and that's, that's a reasonable cadence. So we are not baking anything new from this year, because this year is a pilot rollout phase, and we're gonna see how the pilot performs before we assess the rollout and the ultimate economic benefits for future years.

Omotayo Okusanya (Managing Director)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our question and answer session, and we'll conclude our call today. Thank you for your interest and participation. You may now disconnect your line.