ESS Q2 2025: Guides H2 blended rent growth at 2.7%, Q4 at 2%
- Robust Performance in Key Markets: Northern California’s rental market is showing strong blended rent growth and resilient demand—as evidenced by positive trends in job postings among top tech companies—supporting a bullish view on the underlying fundamentals in this vital market.
- Disciplined Capital Allocation: Management is strategically scaling back its mezzanine investment exposure—from sizing it at 9% of FFO to a target of around 3%—and reallocating capital into higher-quality, fee simple assets to drive NAV and cash flow accretion, which underpins long‑term earnings stability.
- Strong Financing and Liquidity Profile: The company’s proactive capital market transactions—such as leveraging a $1,500,000,000 liquidity line and a lower-cost commercial paper program—help enhance balance sheet flexibility and reduce refinancing risks, setting a solid foundation for future growth.
- Underperformance in the Los Angeles market: LA’s blended rent growth came in at around 1.3%, well below expectations, driven by high supply deliveries and lingering delinquency issues, suggesting potential continued weakness in a key market.
- Headwinds from structured finance redemptions: The upcoming repayment schedule—especially the significant headwind of approximately $0.06 reduction in core FFO in the fourth quarter due to maturities—could weigh on earnings as the structured finance book shrinks.
- Macro and policy uncertainties impacting demand: Broader economic softness, coupled with uncertainties around public policy and labor market dynamics (e.g., questionable BLS data reliability and potential shifts in job growth), could adversely affect lease renewals and new lease performance across the portfolio.
Metric | Period | Previous Guidance | Current Guidance | Change |
---|---|---|---|---|
Core FFO per Share | FY 2025 | Full-year guidance range reaffirmed | Increased by $0.10 at the midpoint to $15.91 | raised |
Same-Property Revenue Growth | FY 2025 | Full-year guidance range reaffirmed | Midpoint raised by 15 basis points to 3.15% | raised |
Same-Property Expense Growth | FY 2025 | no prior guidance | Midpoint reduced by 50 basis points to 3.25% | no prior guidance |
Same-Property NOI Growth | FY 2025 | no prior guidance | Now expected to grow 3.1% at the midpoint | no prior guidance |
Structured Finance Book Contribution | FY 2025 | no prior guidance | Expected to be less than 4% of Core FFO | no prior guidance |
Multifamily Supply Deliveries | FY 2025 | no prior guidance | Anticipating an average decrease of 35% in supply deliveries in H2 vs H1 | no prior guidance |
Core FFO per Share | Q3 2025 | no prior guidance | Forecasted at $3.94 with a $0.09 sequential decline | no prior guidance |
Same Property Operating Expense Growth | Q3 2025 | no prior guidance | Forecasted to increase 3% year-over-year | no prior guidance |
Blended Rent Growth | Second Half 2025 | no prior guidance | Expected to moderate to 2.7% at midpoint; Q4 closer to 2% | no prior guidance |
Market Rents | Second Half 2025 | no prior guidance | Expected to moderate in the second half | no prior guidance |
Delinquency Recovery in Los Angeles | Second Half 2025 | no prior guidance | Assumed to remain lumpy with potential for slower recovery | no prior guidance |
Job Growth and Hiring Trends | Second Half 2025 | no prior guidance | Gradual positive trends expected | no prior guidance |
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Mezz Scaling
Q: Why reduce mezz exposure?
A: Management explained that they are scaling back the mezzanine investments from a 9% contribution to about 3% of FFO. This deliberate reduction, which will bring a $0.06 per share headwind in Q4 and a roll-down of yields from 10% to 5%, underscores their commitment to maintaining a high-quality, less volatile asset base. -
Rent Guidance
Q: What’s the updated blended rent outlook?
A: The team revised guidance for the second half to an average blended rent growth of around 2.7%. They expect Q3 to be slightly lower than Q2 with a further deceleration in Q4 to roughly 2%, reflecting normal seasonality and softer performance in certain markets. -
LA Performance
Q: Why is LA underperforming?
A: Management noted that Los Angeles is lagging with blended growth at about 1.3%. This is primarily due to heavier supply in the first half and slower improvement in delinquency recovery—not policy changes—while they expect improvements as supply moderates later in the year. -
Cap Rate Environment
Q: Where do cap rates stand now?
A: In Northern California, the average cap rate for institutional assets is around 4.25%, with some deals even transacting in the low 4% range in well-located markets like San Francisco. This competitive environment is driving management to adjust return expectations as prices change. -
Structured Finance Repayments
Q: How is the structured finance book evolving?
A: The structured finance book is expected to decline from $550M currently to roughly $400M by year‐end and further to about $200–$250M in 2026, with anticipated repayment headwinds of $0.02 in Q3 and $0.06 in Q4. This will be moderated by the shift in coupon rates from 10% to 5% on new investments. -
Capital Allocation Priorities
Q: What is the capital allocation focus?
A: Management emphasized that fee simple acquisitions remain the top priority given their favorable risk-adjusted returns, while they maintain a disciplined stance on development and the mezzanine platform, ensuring overall leverage stays within a conservative 70%–85% range on projects.
Research analysts covering ESSEX PROPERTY TRUST.