Essex signals 80–100 basis point 2026 earn-in outlook as Northern California leads growth

Earnings Call Insights: Essex Property Trust (ESS) Q3 2025

MANAGEMENT VIEW

* Angela Kleiman, President and CEO, highlighted "solid results for the third quarter, highlighted by a $0.03 FFO performance and an increase to our Core FFO full year guidance." She reported blended lease rate growth of 3% on all leases and 2.7% on like-term leases year-to-date, stressing the "competitive advantage of our low supply markets." Northern California was called the best-performing region, benefiting from declining forward supply, strong demand from AI start-ups, and positive migration trends. Seattle was noted as "healthy, but is trending at the low-end of our full year expectations," due to soft demand and temporary supply pockets. Southern California was described as performing "in line with our expectations" with Los Angeles lagging.
* Kleiman detailed, "We forecast our blended lease rates for the second half of the year to land at a similar level to last year...we anticipate another year of stable growth with 2026 earn-in between 80 to 100 basis points."
* She outlined Essex's investment focus, stating, "We have focused our investments in the highest growth submarkets in Northern California, acquiring almost $1 billion of assets in this region while achieving accretion relative to dispositions and improving overall age of the portfolio."
* CFO Barb Pak stated, "We achieved a solid quarter with Core FFO per share exceeding the midpoint of our guidance range by $0.03, attributed to lower G&A and interest expense. As a result...we are pleased to raise the midpoint for Core FFO per share to $15.94."
* Pak noted, "Looking ahead to 2026, we are pleased that we are in the final year of the redemption-related headwinds and the realignment of this business will be behind us."

OUTLOOK

* Management affirmed a positive outlook for 2026, projecting blended lease rates in the second half of the year to be similar to last year and expecting a stable growth with a 2026 earn-in between 80 to 100 basis points. There was no explicit breakdown of this earn-in by region, but Northern California is expected to lead, followed by Seattle and then Southern California.
* Pak added, "Given heavy redemptions in 2025 and expected in 2026, we anticipate this will reduce our 2026 Core FFO growth, net of reinvestment by approximately 150 basis points depending on timing of redemptions."

FINANCIAL RESULTS

* Essex reported Core FFO per share exceeding the midpoint of guidance by $0.03 for the quarter, and raised the full year midpoint for Core FFO per share to $15.94.
* Year-to-date, $118 million in redemptions from the structured finance portfolio were received, with a full-year anticipation of $200 million in proceeds.
* The balance sheet was described as strong, with net debt to EBITDA of 5.5x and over $1.5 billion in available liquidity at quarter-end.

Q&A

* Nicholas Yulico, Scotiabank: Asked about blended rate growth in L.A. and Orange County. Kleiman responded, "L.A. has been a drag...Southern California came in at around 1.2% and Northern California close to 4% and Seattle right in the middle at about 2%."
* Yulico: Inquired about Northern California demand. Kleiman shared "we're seeing more start-ups than we've ever seen in the past...office space less than 10,000 square feet are in hot demand."
* Nicholas Joseph, Citi: Requested earn-in breakdown. Kleiman indicated Northern California will lead, with Southern California ranking third, and said blended lease rates in the third quarter were "a little bit lower than what we achieved last year."
* Sanketkumar Agrawal, Evercore ISI: Asked about transaction market cap rates. Rylan Burns, EVP & CIO, said "we've been able to acquire significant, almost $1 billion of assets in these submarkets at that 4.8% market rate and a 5.2% yield to Essex."
* Austin Wurschmidt, KeyBanc: Sought clarity on softness in lease rate growth. Kleiman stated, "it's really driven by Seattle...Northern California has 80% of the AI business."
* Multiple analysts pressed for details on capital allocation, regional performance, and the impact of regulation, with management generally providing detailed, data-driven responses but occasionally deflecting on specifics.

SENTIMENT ANALYSIS

* Analysts pressed on L.A. challenges, transaction strategy, and regional performance, indicating a neutral-to-slightly skeptical tone about Southern California and the sustainability of Northern California's outperformance.
* Management maintained a confident, data-driven tone in both prepared remarks and Q&A, repeatedly referring to "competitive advantage," "stable growth," and "favorable outlook," while candidly addressing L.A. headwinds and structured finance book reduction. Kleiman expressed conviction: "we are optimistic about the market's outlook" and "we see a path to pricing power."
* Compared to the previous quarter, management's tone remained confident but focused more on the transition of the structured finance book and regional performance nuances, with less emphasis on broad-based outperformance.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter saw an explicit increase in the Core FFO per share guidance midpoint to $15.94, following a $0.03 outperformance in Q3, compared to a $0.07 outperformance in Q2 and a prior guidance raise to $15.91 midpoint.
* Strategic focus continued on Northern California acquisitions and optimizing capital allocation, but this quarter included more detail on the earn-in outlook for 2026 and the final phase of the structured finance book realignment.
* Analysts maintained focus on L.A. performance, structured finance headwinds, and regional breakdowns. Management's confidence in Northern California and the structured finance transition remained, with added transparency around timing and impact.
* Key metrics such as blended lease growth and transaction cap rates remained central, but guidance for 2026 growth and the expected 150 basis point FFO growth drag from redemptions were new focal points.

RISKS AND CONCERNS

* Management cited soft economic conditions and policy uncertainty as current risks, with muted job growth and delayed hiring and investment decisions across the U.S.
* Structured finance redemptions continue to be a headwind, with $175 million in additional redemptions expected in 2026 and a projected reduction in Core FFO growth by roughly 150 basis points.
* Supply pockets in Seattle and Southern California, as well as continued delinquency recovery in L.A., remain operational risks.
* Regulatory changes—such as Seattle's rent control and new California housing legislation—are noted but not expected to drive immediate impact.

FINAL TAKEAWAY

Essex Property Trust delivered a quarter of solid execution, raising its Core FFO per share guidance midpoint and signaling a stable growth outlook for 2026, with Northern California leading performance on the back of technology sector demand and disciplined capital allocation. The company is nearing completion of its structured finance book realignment, which is expected to reduce future earnings volatility, though it will cause a temporary headwind for Core FFO growth next year. Management remains confident in the portfolio's resilience and the West Coast's ability to outperform national averages, while actively navigating regional challenges and maintaining a robust balance sheet.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/ess/earnings/transcripts]

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