Essex Property Trust, Inc. (ESS) Q3 2026 Earnings Report, Transcript and Summary

Good day, and welcome to the Essex Property Trust third Quarter 26 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, 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, Mrs. Angela Kleiman. President and chief executive officer for Essex Property Trust. Thank you, Ms. Kleiman. You may begin.

Thank you for joining Essex third quarter earnings call. Today, I will cover our operating performance for the quarter, considerations heading into next year, and conclude with a transaction market update. Barbara will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase in our full year growth outlook. For same property revenue growth and core FFO per share. This outperformance has been primarily driven by Northern California which has exceeded expectations. As such, we are now anticipating full year blended rent growth of around 2.9% close to the high end of our guidance range. Moving on to regional highlights. Beginning with Seattle. This market has gradually recovered from a soft start to the year. Blended rent growth turned positive in the second quarter and remained positive in the third quarter generating 2.1% growth. This improvement has been led by the Eastside, benefiting our portfolio allocation in the region. Turning to Northern California. Which continues to lead the nation in multifamily performance. We achieved blended rent growth of 7.3% which was elevated by a strong leasing season with an extended peak that continued through September. As for Southern California, operating conditions remain stable. With Orange County and San Diego leading the performance across this region. Our blended rent growth of 90-basis-points in the third quarter was in line with plan. Looking ahead to 2027, the outlook for the broader U. S. Economy and labor market remains uncertain. Even against this backdrop, West Coast multifamily fundamentals offer a compelling case for continued growth above The US average with encouraging green shoots supporting the potential for further momentum. Total housing deliveries are expected to remain at a historical low of approximately 40 basis points of total housing stock, positioning our markets comfortably to generate rent growth within a modest job growth environment. At the same time, technology sector innovation continues to attract investments and drive economic activities, supporting our expectation for job and income growth above the national average. Together with favorable rental affordability, these fundamentals provide a solid foundation for the next several years. Concluding with an update on the investment market, West Coast transaction volume for institutional quality assets in the third quarter was generally consistent with same period last year. Recent increases in the treasury rates is still being factored into the transaction market. It would not be a surprise if fourth quarter volume declines as buyers and sellers adjust to the new rate environment. Although, historically, our data shows that rate moves have less impact on pricing and cap rates in markets with strong rental fundamentals. Lastly, I am pleased to announce that yesterday, we closed on an off-market 474-unit community built in 2022 located in the East Bay in Northern California. Priced over $200 million and well below replacement cost, this asset is expected to generate a mid-5% yield. It is another example of our investment team's deal acumen in a competitive environment leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day 1. Essex remains disciplined in focusing our capital allocation strategy to maximize FFO and NAV per share growth. We continue to be well positioned to capitalize on market volatility with our efficient operating platform and strong balance sheet. With that, I will turn the call over to Barbara.

Thanks, Angela. Today, we will cover our third quarter results, discuss updates for our full year guidance and conclude with comments on the balance sheet. Beginning with our third quarter results, we reported core FFO per share of $4, representing a $0.01 beat to the midpoint of our guidance range. The primary driver relates to better same property revenues which grew 3% on a year over year basis led by the continued performance of our Northern California portfolio. Turning to our full year outlook. Revenues continue to exceed expectations and as such, we are raising the midpoint of same property revenue growth by 10 basis points to 2.9%. Driven by better scheduled rent growth. As for operating expenses, we remain on plan and are reaffirming our full year midpoint. Our expense guidance reflects higher controllable spend in the fourth quarter, which we have previously discussed. Taken together, we are raising the midpoint of same property NOI growth by 20 basis points to 3%, representing sector leading growth as we conclude 2026. The strong operating results led to a $0.02 increase in our core FFO midpoint. Finally, a few comments on the balance sheet amid the current interest rate environment. Our total debt maturities for 2027 at pro rata share are around $575 million of which the lion's share is the $350 million in bonds that mature in May. This represents a very manageable amount of maturities next year given the size of our balance sheet. Further, we are well positioned as it relates to our floating rate exposure which is around 12% on a pro rata basis. Of which just over 40% is tied to the SIFMA Index, which flows at a cheaper rate than SOFR. Lastly, over the course of 2026, we have been proactively hedging our floating rate exposure by executing approximately $600 million of swaps at pro rata share at an all-in fixed rate of 4.9% to replace swaps that expire over the next 6 months. While we will feel the effects of higher interest rates next year we are favorably positioned relative to the peer group in a higher rate environment. With net debt to EBITDA of 5.4x, and well over $1 billion of available liquidity, we have ample flexibility to meet our commitments navigate the current rate environment and pursue opportunities that support long term FFO and NAV per share growth. I will now turn the call back to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. 1 moment please while we poll for questions. Thank you. Our first question is from Nick Yulico with Scotiabank.

Thanks. I guess just maybe starting out with the blended rate growth. I think historically, you do not typically see an acceleration in the new lease rate growth in the third quarter versus the second quarter. But at the same time, you also have like Northern California as a region being very strong. Right now and sort of seems like it is strengthening the third party data year to date. So I guess I am just wondering, maybe you just talk about, like, what you know, maybe what new lease rate growth looked like and Northern California versus the other regions in the third quarter?

Nick, it is Angela here, and thanks for your question.

And you are absolutely right. Typically, sequential growth in blends from second to the third quarter is not. Or you typically see a deceleration because we are just it is just normal seasonality for this business. And in fact, Northern California has bucked that trend. And we are. We have seen a slight increase on new lease rates. Increasing. So new lease rates from second quarter to third quarter actually improved by 20 basis points. That is unusual, but then again, this market has had tremendous momentum as it starts its recovery. And this is a good sign that, you know, if we look at our blends, this year compared to last year sequentially, this year is doing better overall, not just in Northern California. So I will give you an example. Seattle last year sequentially new lease rates actually declined by over 700 basis points. This year, it is only about 120 basis points. So all our other markets are doing just fine. With, of course, Northern California leading the charge. Okay. Thanks. Thanks for that, Angela. And then secondly, in terms of LA, I know you are getting sort of closer to that 95% financial occupancy you have talked about. How should we think about the other components needed to know, help drive some better rental rate improvement in that market? Thanks. Yeah. Nick, Good question on LA. Certainly, it is a market that we have been monitoring very closely. Couple of things I think have. We are seeing green shoots in LA. Although, you know, these things will take time, but supply continues to decrease. So over the past 2 years, supply has decreased by over 40%. The LA markets, And even though there is been layoff announcements, to entertainment industry, it is no longer meaningful. it is it is a small portion of the economy with, you know, less than 100 thousand jobs in the past couple years. So there is some noise there, but certainly is not anything that we are concerned about. But what we have been really focusing on is the defense and aerospace green shoots. And that industry is expected to grow faster in GDP over the next 10 years. Than the rest of the economy, and it is estimated to surpass over $1.5 trillion in the next 10 years. And a third of that funding is allocated to Southern California. So it is great that there is a catalyst for demand growth to come in this market, and certainly it is the first we have seen in a long while in terms of a major industry taking a foothold in this market.

Our next question is from Steve Sakwa with Evercore ISI.

Maybe just kind of following up on the last line of questioning. I know we saw the fourth quarter to go here, and I am sure you are focused maybe more on just overall blended rate growth and not any 1 component. But, you know, I guess it does feel like new rent growth this year will probably be slightly weaker than the new lease growth I guess, posted last year. With renewals obviously better this year. As you kind of look forward, is there a path to new lease growth accelerating next year? In a, let's call it, a mixed or challenged job market given that you have got low supply? Or, I guess, you know, what gets a new lease growth to really accelerate kinda moving into 2027?

Hey, Steve. Thanks for your question. And it is a good point that you made to not get overly focused on a particular metric like a new lease growth because we are focused on the blends, and we have to be because that is ultimately what flows to the bottom line. So as I have said in the past, we can actually fabricate or even generate a fantastic news rate growth. All we have to do is pull back an occupancy. Or pull back on renewals. But that is not going to maximize total revenues. Either. So And then just keep in mind, new lease rates, you leave a unit vacant, 1 week costs you 2%. So we are not gonna run our business focusing on pushing new lease rate growth. That does not mean that the market fundamentals are not sound and are or not improving. And if we look at new lease rate growth this year compared to last year at the same time, it certainly has done much better. And so once again, I point to the sequential number Last year, new lease rates new lease rate growth sequentially went down about 40 basis points for the entire company as a whole. This year sequentially, new lease rates is only down 120 basis points. So that would tell me that we actually have improvements in new lease rate growth, and that is continuing. In terms of the overall outlook, Steve, on the jobs, for example, that is really what is going to drive new lease rate growth. Is that when we look at by region, of course Northern California remains very strong with great momentum there. But Seattle, interestingly, is starting to show some positive trends. And when we track the top 20 tech openings, Seattle, for the first time, has reached its pre COVID average in job openings in the first time in the last 2 years. And with the office expansion announcements, that occurred last year, we. And supply deliveries continue to decline. We do anticipate that Seattle will have a nice rebound toward the end of next year and LA remains stable. it is gradually improving with green shoots with the defense sector and supply decrease as well. So I think all our markets are should actually do better than last year. If nothing else, you know, look at our earn in. it is quite a bit better this year compared to last year.

Well, thanks for that because you just teed me up for my next follow-up question, which is could you talk about the earn in as we sit here today for next year and maybe where are renewals going out kind of for the fourth quarter and into, I guess, early part of 27? Thanks.

Yeah. The renewals are going out. In the mid-4% range, in the fourth quarter and so it is unplanned and it is actually a little bit stronger than what we had originally hoped. That means that asking is actually higher. Just, you know, I know that you guys wrote a piece and you were looking at the asking rents. And so asking rents are higher. They are in the low to mid-5s. And we anticipate that we are laying around mid-4s on renewal and the actual renewal.

Our next question is from Brad Heffern with RBC Capital Markets.

Yes. Hey, everybody. Is there anything you can give on where October spreads are trending? Obviously, I am sure you are seeing the normal seasonal follow-up, but I know you also had the longer than normal leasing season. So I am wondering if that is playing into it at all.

Yeah. On the October, spreads, it is let me take a quick look. it is it is generally in line with plan. it is obviously starting to taper off. Keep in mind, we are now, you know, hitting our seasonal low here. And Northern California is leading the pack. And on the new and renewal--you know--Northern California on the new is well north of 10%. And with everybody else on the new side, starting in the negative territory as it should be in October.

Okay. Got it. Thanks for that. And then, can you just go through concessions by market and how those have changed, if they have changed? Sure.

Happy to. So concessions by market. So overall, let me just start with portfolio average. We have data from here. So concessions, third quarter compared to last year compared to this year, not a whole lot different. So third quarter last year, portfolio average around 6 days. This year, a little bit more. A few days more around 10 days. Nothing to get excited about. Heading into the fourth quarter, we are around a week so similar to last year's levels. And if we are talking about by market, let me see. So Northern California, effectively no concessions. PNW is less than a week, and Southern a little over a week. So once again, all normal and very stable levels.

Our next question is from Eric Wolfe with Citi.

I might have missed this in your answer to Steve's question, but did you say that our earn-in is still around 150 basis points? Just wanted to confirm that.

Yes. Thank you for that follow-up. I did I did not finish my answer. So our earn-in, which we originally published at around 150 basis points about a month ago, we are assuming a slightly higher earn-in, probably an additional 5 to 10 basis points. Got it. And just for context, you know, last year was about 85 basis points, so it is certainly much better this year.

Yep. Makes sense. And then just second question. You mentioned some positive indicators in Seattle that could cause it to inflect late next year. I think you said late next year, so I wanted to confirm that. But, you know, there is also been some news around Microsoft trying to buy out 60 thousand employees. You know, does that does that impact your thoughts on near term fundamentals, or you think all the other sort of positive indicators that you are seeing will sort of more than offset that.

Yeah. that is a good question. Yes. We saw the Microsoft announcements, but what we have been looking at and tracking very closely is also the unemployment and continuing claims for the market and it has remained well below the long term average. So this tells us that layoffs have been absorbed very quickly or they have been rehired more importantly, with this market, employees are doing what they are supposed to do, which is moving business units to high. Reallocating their resources to higher profit businesses And so once again, this does not really concern us too much when we look at everything else. All the other fundamental data points point to a healthy environment. The 1 comment I will add is that, you know, remember when Amazon had all these layoff announcements? Well, they ended up rehiring a lot of the laid-off employees. So there is going to be that continued movement, but it has not been in a way that it is disrupted normal market functions.

Our next is from Alexander Goldfarb with Piper Sandler.

2 questions for you. The first question, Angela, aerospace and defense certainly has been getting a lot of attention and, you know, 25-plus years in REIT land, it is, you know, never really received this amount of attention. As we think about Southern Cal, especially SpaceX and the other companies that are down there, is this more just like, you know, sort of cocktail conversation or are your communities seeing actual evidence where increased hiring is actually showing up, to rent apartments in your Southern Cal? that is my first question, then I have a second.

Okay. Hey, Alexander. Thanks for your question. I think the difference with respect to the aerospace defense now versus you know, what is been discussed in the past is that now there is actually been commitments or investments earmarked that is been published And so $1.5 trillion is an eye-popping number. And have it stated that a third of it allocated to Southern California is, as far as we are concerned, really terrific. Indication of where that industry is headed. As far as, you know, having SpaceX headquartered in the LA region and, of course, ANDRIL in the Long Beach area. Having 2 major industry giants having a foothold in those markets are also good very good indication for that market. Now having said that, once again, these are relatively new and money is just getting allocated. Companies are just starting to hire. And so it would be too early, way too early to see that translate to job growth. It just never happened that quickly, that announcement and then immediate job hire It always takes time. For feasible to find the right talent, find the right office space for them, and, grow that business.

Okay. And then the second question is on Seattle. I do not know if you saw the article, but there was a recent, you know, business survey You know, local businesses not too happy with the way, you know, Seattle is going, thinking about leaving, what have you, obviously, the Microsoft news. But can you just break down the market? Because you talk about strength from the East Side, weakness in the CBD where you have less exposure. there is obviously the political overhangs. And just trying to understand you know, the market if Seattle retains its economic engine or if there are disruptions where it may be a bifurcated market even next year and, therefore, the hopeful growth that many of us think about is coming. May not actually occur because of other dynamics in the market, whether it is a split between Eastside and CBD, or, you know, where companies are allocating their hiring there versus Bay Area or elsewhere?

Yeah. that is a good question on Seattle, Alexander. What we see is certainly East Side has been a beneficiary. Of some of those migrations from not just from Downtown Seattle, but from other markets as well. And we do see that continuing because certainly no employee no employers are making noises about leaving the East Side. I think that article really relates to the concern about the legislation And I think when legislation becomes business unfriendly, and discourages housing, I think that is a concern for all of us. And I do think that it is a good starting point to have a conversation with the legislation, you know, with Seattle and the city of Seattle. I am hopeful that they will take note. I know in the past, when these conversations occurred, there were adjustments and both sides were at the table trying to work things out. And so I am hopeful that will occur once again. But, ultimately, with E side being the beneficiary, you know, I think Essex is in a solid position. But do not forget, keep in mind, the other overhang in downtown Seattle has been supplied. And supply is starting to abate. So at least there will be some relief on that end.

Our next question is from Jana Galan with Bank of America.

Thank you. Good morning. Just wondering if you can go over your latest thoughts around capital You mentioned the recent Oakland acquisition was in the mid-5s. How do you kind of weigh that relative to share buybacks? And also curious if you are seeing increased opportunities in lending or preferred equity?

Hey, Jana. This is Rylan here. Just starting with the capital allocation strategy, what we are really trying to do, consistent with the past is source the highest risk adjusted returns, pair it with our lowest cost capital to drive NAV and FFO per share, You mentioned several potential investment opportunities that we have done this year. When we think about our menu of options from acquisitions, development, reinvestments, stock buybacks, debt pay down, we have allocated to 5 of those 6 in 2026. So we are gonna remain nimble. Our strategy is not gonna change, and we are just going to, when we see an opportunity to create NAV and FFO per share, that is where we are going to lean in. As it relates to most recent question about the deal that we just announced yesterday, Again, this is really consistent with what we are doing for the past several years where we have been allocating acquisition capital into newer assets where we can drive efficiencies from our operating model, and markets where we have conviction of growth. Mentioned and Angela mentioned this is a mid-5 initial yield. And we believe the East Bay is in the path of growth. We have seen this before in previous cycles where you see really strong rent growth in the tight housing market in Sanketkumar Francisco and the Peninsula, that is moving into Oakland and down south from Milipitas, and we believe this coming with high level of conviction on the East Bay. We are really comfortable with basis in this property. And most importantly, we think we can create value We have got 2 communities nearby, so we can take costs out improve the retail leasing. So this is, I think, a nice win for our investors. But bigger picture is we think about capital allocation. All of that whole menu is on the table for us, and we are going to continue to lean in where we can drive the most value for our shareholders.

Thanks, Rylan. And then just with the increased volatility in rates, curious if you are seeing kind of more opportunities on that lending side.

Yes. I would say it is still a little bit too early. I think the market is still adjusting to the moving rates that we have seen in September. But as the financing market gets a little bit tighter, that should create more for us on the preferred equity book as well as on the acquisition side. So it is still early. I think buyers and sellers are still adjusting. I think you have heard the public commentary in terms of, you know, bid ask spreads widening I think that is fair on the West Coast as well. So we are. Again, underwriting everything, trying to create opportunities, and I do think it is going to be--it will create additional options for us in the near future.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Great. Thanks. Hello, everybody. Just with respect to the mid-4% renewal rate growth that you highlighted on achieved rates in the fourth quarter, I mean, are you guys more focused on building occupancy today ahead of next year And I be curious where occupancy has trended subsequent to quarter end. Or is the move from the 5.3% renewal rate growth you achieved in the third quarter, the mid-4s? Is there some other factor that is, you know, causing you to pull back a little bit?

Hey, Austin. it is Angela here. Thanks for your question. And so we typically favor occupancy heading into our seasonal slow in the fourth quarter. And so you will see us continue to deploy that strategy. With the caveat in certain pockets of Northern California, we are continuing to see strong momentum. That, of course, will allow us to continue to favor rents And we will see how long that lasts, but we certainly will try to maximize you know, that momentum as much as possible. And then as far as where occupancy sits today? Oh, occupancy today is 96 hold on. 93. I think. Yep. 93.

Helpful. And then just last 1 for me on the expense side. It looks like the guidance implies a fairly big pickup late in the year? Anything specific that is driving the increase? And then any considerations for expenses ahead of next year? Thank you.

Hi, Austin. it is Barbara. As we have said the last several quarters, we did expect second half increase in our controllable expense spend. It is just timing on when we were going to finish up some of the projects that we had going on this year. So that is what is really driving the Q4 expense increase of about 5% on a year over year basis. it is really driven by that controllable side, which has been light year to date. So no change from our original plan this year. And as we look to 2027, we are still working through the budget process, but as I look at things today, when I look at the key categories that we publish on S-10, I do not see too many deviations in year over year growth. From what we expect in 2026 with the exception of property taxes. We did have some favorable prop 8 appeals this year, which allowed our property taxes to be only 60 basis points increase on a year over year basis. I would assume that is gonna be more in line with our historical average of 3% to 4% next year. So that is the 1 line that I think is--has a little more pressure than the other line.

Our next question is from James Feldman with Wells Fargo.

Great. Thank you for taking the question. I guess, as we are thinking about next year, can you quantify how to think about the earnings impact from the JV swap resets including the $496 million moving from 2.7% to 5.3% and then the remaining $128 million, how do we think about the rate and timing when we are building out our models for next year?

Yes, James. This is Barbara. that is a good question. So we do have 3 swaps maturing within the joint venture portfolio. 1 December 1 of this year and then 2 at the end of March next year. We have executed new swaps for 80% of that at an all in fixed rate of 5.3%. And while our rate is going up, it is obviously a byproduct of the market. it is not an Essex-specific issue. Just rates are higher. What I can tell you is if we waited to hedge and we did not hedge, our rate would even be higher today in the high-5s. We feel good that we do have a better than market rate going into next year. The impact to our interest expense from the swaps that we have executed at pro rata share will lead to a $0.09 increase to interest expense in the joint venture portfolio. As you mentioned, there is 20% is not hedged, and that is going to be floating at this time, and that will add a couple more pennies to interest expense depending on what SOFR rate you assume. And we will monitor the markets if we see an opportunistic window to hedge we might. But right now, it does not make sense to hedge that. So all in, a $0.10 to $0.12 increase next year on interest expense from the swaps at pro rata share.

Okay. You for that. And then the term loan, I do not think that is hedged either. Are you are you kinda making an interest rate bet overall, or it just was cost prohibitive, or you just felt like you could be patient on it?

Yeah. That term loan we did in September, once again, we do not have a lot of variable rate exposure. Really, our exposure to SOFR is 7% at pro rata share, so it is very low. On a total basis, and that does include the $75 million term loan that we just did. When we closed that term loan and we looked to go swap it, it did not make sense. It was very prohibitive. We are paying up for a lot of interest rate increases that may or may not happen. We will monitor the market. And look to see if there is a window that makes more sense, but at the time, it did not, and it still does not today.

Our next question is from John Kim with BMO Capital Markets.

Good morning. I wanted to ask about Sanketkumar Francisco. it is, you know, the gift that keeps on giving. But I wanted to ask how much further you think it has to go. We noticed occupancy kind of fell, sequentially. And so when you look at rent to income ratios or other metrics, where do you see Sanketkumar Francisco pricing you know, versus income And then do you think other markets like Oakland, East Bay, South San Francisco, they will play catch up at to Sanketkumar Francisco just given affordability.

Yeah. Hey, John. That was. I will try to hit, I think, all of your questions. If I have missed something, just holler. So as far as when you are talking about sequential occupancy, you know, we took it down from 96.1 to 95.6. that is really. that is intentional because we were able to push rents And in that environment, that was a more of a off. Offensive play. So it is actually a good sign. And landing where you land for Sanketkumar Francisco is you know, is actually a good. it is a quite a good number. As far as the. what is to come in this module or, I guess, you know, what. what is left in the gas tank? And we will talk about affordability in a second. What we are seeing is that market rents are still catching up. And coming at this point, just to get back to the historical long term CAGR, we are maybe halfway there at the most. And I will give you, 1 example. You know, if you just take affordability, which Rylan will talk about all the other markets, but in the Northern California, just to return to pre COVID affordability levels, rents could actually increase by over 20% with no wage growth. And so that gives you the magnitude just from this 1 metric. And we have seen that coming out of the great financial crisis, the strength in this market or the momentum actually lasted many years. You have a high cost of homeownership, which continues to favor rental affordability and historical low supply. that is continuing, and of course, with demand catalyst.

Rylan, do you want to cover Yeah. John, just to give you some more specifics. When we look at the rent to a medium income ratios in Northern California, so Sanketkumar Francisco, Francisco, that ratio has increased with the rent growth that we have seen by about 150 basis points compared to a year ago. it is currently sitting at 25.7%, and this compares to the long term average or 20 year average of just under 30% and a historical peak of 36%, over the previous 2 decades. So a long way to run there. Oakland and San Jose, they-- we are starting to see some improvements, but these ratios in Oakland is 21%, and San Jose just under 21%, again, with historical peaks in the 30% range. So affordability remains a tailwind in this market. For us, and we continue to have conviction that there is more room to run there.

Okay. Thank you. I think you hit all parts of my multipronged question. Wanted to ask about LA. You talked about green shoots in the market and it being stable. Angela threw cold water in response to Alexander's questions on the aerospace demand, at least being a near-term pickup. So what are some of the green shoots you are seeing in terms of 2027 in terms of rent growth and employment growth?

Yeah. Well, first of all, we do not have enough visibility when it comes to employment growth. Because LA is a reflection of the broad US economy. It does have more professional services, so that is good stable that essentially supports the overall LA market We do have a core of supply continuing to decline, so that in itself will signal that you just do not need as much job growth to generate rent growth. So that is another thing that is good. And as far as, you know, my comment on the defense industry, it did not obviously mean to throw cold water on Alexander. He makes a good point. I do think that it is a catalyst, it is a future catalyst. My comment is only relates to timing. Which is we really do not know We know it is coming. We just do not know when. And it is the same question I got about Northern California 2 years ago. Everybody was asking when is it going to happen. And, you know, our view was, well, we see something happening. We could not pinpoint exactly when. So it is a similar thought process.

Our next question is from Adam Kramer with Morgan Stanley.

Hey, great. Thanks for the time. Wanted to ask about same store expense growth in the quarter. In Seattle, was a bit elevated maybe relative to the other markets relative to expectations. So just wondering if there is anything in there to call out and then maybe just how to think about that specific market going forward within the context of your guidance.

Hi, Adam. it is Barbara. No, nothing specific to call out. There was a little bit more controllable expense spend in the quarter versus a year ago. So that led to a little bit more elevated year over year growth. And then property taxes obviously go up there more than in Southern California and Northern California. So that also led to a little bit elevated. But I think it is timing related on the controllable expense spend, so I do not see anything unusual in that market that would lead to higher expense growth, all else being equal, than the other markets going forward?

Okay. Great. And then maybe a little of a bigger-picture 1. I know we have talked a little bit about A&D. Sort of industry and what that can mean for broader SoCal. Maybe just, you know, for the northeasterners on the call here, myself included, just you know, maybe by submarket or sort of however you wanna slice it. Just sort of what are the regions or areas that you think are sort of seeing this benefit or are seeing this benefit right now? And then maybe just talk about sort of your exposure to those specific submarkets you know, sort of that are benefiting from the A&D spend here?

Yeah. Hey, Adam. it is mostly concentrated in the South Bay. Yeah. And so I talked about, you know, Anduril having a headquarters in Long Beach and, of course, SpaceX in Hawthorne. But those are kind of the 2 bookends, if you will. And then everything else in between. there is quite a few. I think we have a map in 1 of our presentations recently, which, we can send you after the call so you can get a good visual So it is it is really broader South Bay, which is which is good. that is you know, a widespread footprint.

Our next question is from Richard Hightower with Barclays.

So obviously, we have talked a lot about the strength in NorCal's specifically, but I am wondering, could you walk us through different submarkets where you are bumping up against some of the AB 1.48 thousand limits in California. And then also add to that maybe where your loss to lease sits currently?

Yes. Happy to go through that. So in the Bay Area. Let's see. Definitely, San Francisco is bumping up against that AB 1.48 thousand and let's see. San Mateo, of course and let's see. Parts of Alameda is starting to get close. But not quite there yet. And let's see, San Jose is also up there. So I would say most of the markets other than, of course, you know, the East Bay, which is why we are excited about our investments. There. As far as loss to lease, I have that. Okay. So loss to lease in September this year is sitting at about 1.4%. Leading the charge is, of course, Northern California, close to 8%. And just for context, much better than same time last year. Last year, we were actually 30 basis points gain to lease. So that is hopefully, that gives you a good reference point.

that is great. Very helpful. I guess, secondly, that is all good news. I guess, in terms of maybe cautious news, is there anything kind of in the upcoming you know, LA mayoral race or other statewide, you know, ballot initiatives and thinking of the California wealth tax? I mean, is there anything on your radar that you are sort of strategically planning ahead for if you know, if something if something goes the wrong way there?

Yeah. that is a good question. it is really hard to anticipate. where the legislation is moving. Toward. And so you know, we continue to run our business. As we have always done in the past 32 years in terms of just focusing and optimizing our revenues and our capital allocation strategy. As far as the L.A. Mayor race, you know, from our observations, it is it is a really tight race. Karen Bass has received support from major players like Rick Caruso and the LA Police Union, while Raman has gained traction due to frustrations with legacy administration. So it is hard to see where things are gonna land. I do think that there is been a recognition that we have a housing shortage and there is been certainly a focus on how to work with housing providers, and I am hoping that will continue. Where I have seen recent legislation that is been proposed, that has onerous anti business component to it, They have not passed committee, so that is a good sign. That the legislature's at least have some understanding of what is important to voters and having a healthy economy is important. And so we are hoping that trend toward moderation will continue. And as far as the governor's race, so far, Peter from his campaign seems to understand once again you know, the importance of partnering with private businesses and focusing on addressing housing shortage. And there is not a whole lot of noise coming from his camp about rent control because I think they are aware that is just so ineffective. And it actually discourages housing production. And so they have been focusing on measures to hopefully produce more affordable housing, which is great for the overall economy.

Our next question is from Ami Probandt with UBS.

Hi, thanks. To start, maybe another follow-up to some of the previous questions on Northern California. How should we be thinking about tailwinds to blends in Northern California as we move into 2027? Could there be some opportunities on the renewal side as you bring your existing residents up to market rate? So just thinking about where we are currently in terms of new lease growth compared with renewal growth and if all else equal, that creates a built in tailwind on the renewal side for next year.

Well, I think, you know, probably a good indication is if you look at our earn in, this year, of 150 basis points and the majority of that is Northern California. So we have a good head start to the year on Northern California. And the renewals were capped at AB 1.48 thousand which is inflation plus 5%, max at 10%. And so there is still some you know, there is still some room there, or I should say some tailwind there. On the NuV side, we you just. You just take the rent to market. So the new leases are not capped. The question really is how long does it take to capture the new lease rates? And so a perfect example is if market rent growth is growing at 15% and a tenant can stay in place where the rent is kept at 10%, while the tenant is more likely to just remain. And so the ability to capture the 15% will just be a little more prolonged. But as far as I am concerned, that is all good for us. Keep in mind, Essex historically has operated with our self-imposed 10% cap. Because we did not believe in price gouging. Either, and we have done just fine in those environments.

Great. Thanks. And then in terms of the same store revenue guidance build up, what are you including in terms of occupancy and non rental revenue Were there any changes within the outside of blends within your updated guidance?

Hi, Ami. it is Barbara. No. The update for same store revenues, the increase is 100% driven by scheduled rent growth. Just top line. Great.

Thank you.

Our next question is from Wesley Golladay with Baird.

Over the last few years, you made a point to allocate capital in Northern California. Can you talk about what drove the decision to sell a relatively new asset in San Jose and did you consider buying your partner's interest?

Hey, Wesley. This is Rylan here. Yes. This was a joint venture asset, as you mentioned. And, again, we thought we got a fairly good value for that there is been a lot of people that have been looking to allocate capital into Northern California over the past year. We did have a discussion about potentially buying this out. But as I alluded to more recently, the recent acquisition in Hayward, we thought provided a better risk adjusted return. So you know, this remains an ongoing discussion in all of our joint venture assets. We do think we have an inside track there if we want to buy some of these assets. But again, with finite amount of capital, we are looking to allocate to the best risk adjusted returns. And in this instance, selling this asset and redeploying into the East Bay made more sense for us.

that is all for me. Thank you.

Our next question is from Julien Blouin with Goldman Sachs.

Yes. Thank you for taking the question. I just wanted to ask about your supply outlook into next year. I think some of the third party data suggests we could see an increase in supply in 2027. I think permitting is up from the bottom a couple years ago. So I was just wondering, I think on page S-16, you show supply coming down. Are you sort of factoring in delays? Is there something else sort of playing into that view?

Hey, Julien. This is Rylan here. Yeah. This is something we have followed for, you know, for many, many years. The differences between our supply forecast, which account for delays as well as the actual lease up pace of buildings in a more likely manner. So we have high conviction you know, high level numbers. We think supply is coming down around 20% in our markets versus next year. And we do not think. And we have pretty good conviction about where these. What that supply number is gonna look like. So I would continue to look at our supply numbers. And that is 1 of the reasons why we are, you know, incrementally more optimistic about our markets next year. Was there a second part to the question?

No. That was it. And then my second question is around. I appreciate the comments around the mid-4s renewals stepping down in the third quarter. Being a bit of function of prioritizing occupancy. But I was just looking. I do not think we have seen a deceleration in renewals from 3Q to 4Q over the last few years. Is there something different this time around? Or is it more just a function of how strong that third quarter renewal was And any specific markets showing a bigger sequential step down in renewals?

Yeah. We certainly had a very strong third quarter renewal. And which is--which, obviously, you know, as you astutely noted, makes it look like there is a big deceleration but, obviously, that is not the case. But in terms of the composition of the renewals, Northern California, of course, is hitting in much higher, kind of in the 8% range, as you would expect, close to that AB 1.48 thousand cap. And then Southern California is hovering around, you know, the 2s to 3s, and Seattle somewhere in the 3 to 4. So the average of our renewals achieved to close to 4.5%. Once again, are all normal numbers. And we are not seeing any cracks.

Our next question is from John Pawlowski with Green Street.

Hey, thanks. Good morning. I have 2 questions on LA. The first is on operating fundamentals. Angela, I think you used the characterization as stable. I guess, do not see the stability in the revenue growth trend. And so you started the year 1Q year over year revenue growth of 1.7%, it is decelerated. to 50 basis points year over year in 3Q. Despite easy comps. Sequential revenue is pretty weak. So what are you seeing in the portfolio that gives you confidence the LA market is stable?

Yeah. We are seeing couple of things. First, the delinquency in LA has remained stable. And it is going to ebb and flow in terms of getting back to that normalized run rate. But when we look at occupancy, it is been hovering around that gross occupancy around that mid 95%. Once again, that is a good sign. Right? Because if things are crashed, you would see the occupancy fall right away. But ultimately, if you look at sequential revenues, LA County, which is on our S-9, is not great, but it is still an improvement, 10 basis points sequential revenue improvement in LA County. I will take it. So I am not seeing you know, a meaningful backslide. I am just seeing either stable or slight improvement. And, you know, if I look at year to date numbers on a revenue perspective for LA County, once again, it is up 1%. So I do not know if I get too caught up on kind of quarter-to-quarter noise. But once you look at all the metrics, it points to a stable environment.

Okay. Second question is on the transaction market in LA. it is obviously not a loved market from capital providers right now. Rylan, I am curious for more urban submarkets, high rise product, where you think kind of market clearing cap rates are for urban, high rise, Los Angeles apartments these days?

Hey, John. that is--we have not seen a ton of transactions. You know, I think you are asking particularly about Downtown LA and high rise. I do not disagree with you. that is been, you know, given the vacancy and that is specific submarket and some of the operating challenges we have seen in recent years, that is a tougher ask. And relatively not well bid. I hesitate to put a cap rate out there. We do think there is a market clearing transaction. it is probably closer to, you know, positive leverage number. But, we have not seen enough transactions to give you a real pinpoint on where that cap rate would transact today.

Okay. Thanks for the time.

Our next question is from Haendel St. Juste with Mizuho Securities.

Yes. Thank you. So I wanted to go back, think it was an earlier question that Jana asked on the mezz book, I guess I am curious if there is been any rethink in the mezz book strategy. I think you mentioned on a prior call or 2 that you had a target sizing for the book of $100 million by year end. Looks like you added a small loan at some point during the quarter. So I guess is the newer higher rate environment causing a rethink? I am curious if, you know, that book could be larger or smaller over the next year. Thanks.

Hey, Haendel. This is, Rylan here. You know, as we said for the past couple of years, we wanted to normalize the size of this portfolio relative to our business. So it has shrunk considerably and it is going to be I a $100 million at the end of this year. We are just being really, really diligent as it relates to incremental investments within this prep book. They have to offer significant better risk-adjusted returns than several of the other options we have to allocate capital, which I mentioned earlier. I do think with the move in rates and the tightening a little bit on the financing market, this should create some more opportunities. The other factor that is happened in the past few years with development starts coming down considerably on the West Coast, you know, that is historically been a good engine for our preferred equity book. I do not envision that changing going forward. But I do think you might see some more opportunities on stabilized assets if the financing market remains somewhat tight over the next few years. So it is something we continue to engage with sponsors on, and, we will continue to look for good opportunities. Where we are getting compensated for that risk.

Thank you, Rylan. That certainly helps. Maybe if I could ask you just maybe a bigger picture question on kind of the growth profile for Essex here over the intermediate term. Sanketkumar Francisco has been such a strong market the last year. Should be strong next year as well. The comps are getting a little more difficult. Sounds like Seattle and LA are moderating. It sounds like there is some green shoots of optimism, but it certainly feels like the core is slowing, and then there is higher interest expense that you are dealing with the Westco JV and the mezz book being a bit smaller. is less additive. So, you know, how do we. Maybe are there other offsets that we are not considering, but, you know, how do we kinda put this all together and think about the growth profile for Essex over the next year or 2--year or so? It certainly does not sound like there is an acceleration kind of story ahead of us in the near term.

Hey, Haendel. You know, I think this is a complicated question in terms of what is going to happen next year and when acceleration can occur. Obviously, Northern California and what is happening there is. that is clear. Right, to everybody on what the potential is and that momentum that is continuing. As far as Seattle and LA, you know, a growth profile, we do see that there is more upside than downside as far as especially relative to past performances, because it is you know, Seattle has had a tough start to the year, but we have seen it turn positive. And LA has remained stable with a potential demand catalyst in the aero defense industry. And in both markets, supply are continuing to decline. So if nothing happens, between or if I should say if conditions remain the same between this year and next year, our fundamentals are slightly better. Just from the supply picture and some potential demand catalysts there. Now that is a top line conversation. And the question is, well, when are you going to see acceleration? I think that relates to the view on the broader economy. And so when we look at third party forecasts, we are not seeing anything that is all that different than kinda more of the same. But it is also too early to predict because we do not know what the results of the midterm elections going to be. So hard to say, but I would go back to the West Coast does have a bull case. There is a path to that growth. Timing is difficult to predict. But I will point back to, once again, to what happened not too long ago coming out of the great Recession. We had 5 plus years of acceleration. And so certainly, it is it is possible, and there is a path to that. As far as bottom line, you know, that interest rate expense pressure, I think that is not a Essex situation. That is a. Not just all REITs. it is really all companies are going to be faced with that headwind. And so I do not think that in and of itself is a callout for the West Coast story.

Thank you. Our last question is from Alex Kim with Zelman and Associates.

Hey, good morning out there. Thanks for taking my question. Rylan, I know earlier this year you mentioned that the South Linden project was trending favorably relative to your initial underwriting within expected stabilized yield around 6%. Given the continued strength in Northern California rents, is that yield expectation improving? And are you guys getting any closer to moving forward with the other development in Mountain View that you discussed in September?

Hey, Alexander. Thanks for the question. Yes. You know, as you have seen the rent growth up and down the peninsula through San Francisco and San Mateo, South San Francisco is also benefiting. So, again, the yields continue to improve on our underwriting costs. Thankfully, we are we are doing a great job managing that project, and we are hoping to deliver it, you know, ahead of schedule. So more to come in the next couple of quarters as we you know, make progress, but everything's going to plan on the 7 South Linden project. And then we are making headway on the entitlement process as it relates to the Middlefield project. So we will probably have more to report on that in the next, coming quarters. But, again, looking for those select opportunities where we think we are getting compensated for the risk taking inherent in development. So excited about both those projects we continue to look for new opportunities to add value through our development pipeline.

Got it. Thanks. And Angela, staying on Northern California, could you talk a little bit about the differences you are seeing in rent growth between urban San Francisco and more suburban markets across the Bay Area? Are you seeing a more meaningful divergence in new lease pricing or demand between those areas? And is 1 outperforming the other as we head into 2027?

Hey, Alexander. Good question. On the Northern California rent growth, if we look at the blends, you know, there is, of course, some divergence. As you would expect, we see let's see, Santa Clara, San Mateo, and San Francisco counties outperforming. And they are closer to you know, on the blended-- So on the blends in Northern California, they are running much higher, closer to, say, above 7%. And with Alameda and Contra Costa--Contra Costa, so the East Bay market. Lagging in at about 5.5%. So that gives you an indication of kind of that probably about, say, call it, 300-basis-point spread between those 2 key areas. And so this is why, you know, we are leaning in on our East Bay thesis, because we have seen this all before. Thank you.

This concludes today's conference call. May disconnect your lines at this time. Thank you again for your participation.