Essex Property Trust, Inc. (ESS) March 2, 2026 Conference Transcript

The City's 2026 Global Property CEO Conference. I'm Nick Joseph here with Eric Wolf with City Research. I'm pleased to have with us Essex Property Trust and CEO Angela Kleiman. This session is for City clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit any questions.

Angela, we'll turn it over to you to introduce the company and team provide any opening remarks tell the audience the top reasons an investor should buy your stock today and then we'll get into q a and red is actually on great thanks nick and uh great being here and thanks for having us uh here with me is barb pack our chief financial officer and normally rylan would be here with us as well but he's at home having a baby so we're gonna to let him off the hook this time so Essex is an S&P 500 company with over 63,000 units we are the only public apartment REIT that is solely focused in the west coast of the United States in our investment strategy we own develop operate anything multifamily were involved and then active in since our IPO, we have delivered one of the best long-term CAGRs and total returns of the REIT sector and we are pleased to announce that this year is our 32nd year of increasing our dividends consecutively. So this track record is really foundational. It's based on combination of strong fundamentals and our unique operating platform on the fundamental side California especially has a widely known characteristic of low supply and currently we're at a historical we're only building at about half a percent of total supply to stock and this is total housing so include single-family as well this is incredibly compelling because the downside risk is very low but on the other hand we have demand catalysts especially in our northern region from the technology sectors and it's over multiple cycles this has continued with most recently artificial intelligence spurring demand and job growth and we expect that to continue to occur in the foreseeable future and lastly what's unique is our operating platform we operate in a collections model where we're operating about 10 to 12 properties as a single business unit. This gives us fantastic marketing, leasing, and customer service economies of scale and efficiency. So our controllables is expense per unit or even a percentage basis is significantly better than our peers. And one key compelling reason to invest in Essex today is that we are still in the recovery phase. So if you look at the post-COVID recovery cycle, Northern California, particularly Santa Clara or San Jose markets, started a recovery only in 2024. San Francisco followed in 2025, but we are still well below our long-term CAGR of rent growth in a cumulative way. And so with historically low supply, fantastic affordability because income growth has been outpacing rent growth and the demand catalysts ahead of us, these are compelling fundamentals for our markets and for Essex.

Great, I'll start off, and if I lose my voice, then somebody else please help me out. You know, when I look at Essex over your history, and this is in a lot of your presentations, but you've had a great rate of core FFO growth. I think now what people are looking at and trying to understand is whether you can continue that when you have perhaps some increased regulatory burdens in California, maybe you can say whether that's true or not. But then you also have artificial intelligence and and other things that people are questioning whether job growth just going forward is going to be structurally lower. So you know my question to you is sort of what gives you the confidence that you're going to be able to continue this track record of great growth?

That's a great question. It's actually an important strategic debate for us because we have a long view of our markets and we are not in the West Coast because we have to it's really because it has generated the best one of the best long-term rent growth and as we look forward well regulatory is probably more challenging in California than other parts of the US there's also benefits of regulation for example low supply and you know when you're competing with a lease up that's giving two three months concessions forget about regulation you're a sitting duck for a long period of time on the flip side what we're seeing on the regular regulatory is that the environment has remained quite stable you know the November election was a moderate sweep which is great for the citizens of the state of California but currently there's always rhetoric and there's always noise and and and that will continue but in terms of the actual public policy that's getting to the front of the committees that's getting passed we're not seeing anything that is on the extreme or that gives us concern and so the political environment actually from our experience is more stable now than it has been prior to covet as far as jobs and ai is concerned That is an interesting dynamic because we do see AI disrupting certain companies, and some of them are going to be software companies. But that disruption in jobs is also getting absorbed or offset by the companies that are new companies that are being created or the growth in AI companies. What we're seeing is the two largest AI companies, they have continued to add jobs. And we're seeing new claims, unemployment claims, or continuing claims to remain at an all-time low. So that tells us that people that are losing their jobs in our markets are getting rehired quickly. So then the question is the long-term durability of AI as a catalyst for job growth. There's actually, in our view, it'll play out in two ways. one is that in the near term say three to five years we expect that AI will be a net or neutral add to jobs and the reason is because AI is still in its infancy and the need for developers is significant you know for the right kind of developers but also it's facilitating the number of startups that we've never seen before that was not possible but now because utilizing ai they can and so office space that are say around 5 000 square feet are getting absorbed in a accelerator rate and we are seeing vc funding almost doubling this year and so that inerts to the tailwind that's still possible with ai so what happens after that it depends on what you believe so there are two schools of thoughts One is AI will take over, and everybody will lose their jobs, and machines will do everything. In that case, after the run, you're right, we will be looking at a very anemic economy, but not just for Northern California. This will be all of U.S. and probably globally. The other school of thought is perhaps something else will happen, because the former means technology and innovation stops with AI where it's it's done it's over that seems like a stretch to me our belief and we've seen this play out in multiple cycles you know over three to five cycles at this point that there will be something else after AI we don't know what it is but what we know is that 20 percent of the jobs today did not exist just five years ago in 2020 so there are

possibilities out there and so part of your point there i think is that look if ai is as disruptive as people believe it's not like this is a california issue west coast issue this is a everywhere issue so the idea of diversifying away from that um into other markets doesn't really eliminate that risk, I guess, if I'm hearing you correctly. Because I think some of your peers would say, look, we don't know the answer to a lot of these questions. We actually don't even know where our customers are really going anymore. We thought it was all coastal markets at one point. Now they're going to sunbelt markets in some instances. So we're just going to diversify, you know, operate, you know, things really well. But your point is that you can't really diversify that risk way if I'm hearing you correctly.

That's correct and it's because technology is now everywhere. It's ubiquitous and AI experimental rate is very high. Adoption rate is low because it's just not ready and that's what I mean by in its early stages but this will become more of a global issue and at the end of the day we're all in business here. Where is money going to go? it's gonna go where there's innovation and wealth creation and that's going to continue to be in California it's the same logic that we heard when you know internet things or even social media became proliferated everybody said well we can go anywhere why do you need to stay in Northern California it's it's sticky and we have on one of our presentation we show that Walmart the all-time low-cost provider just opened another office in Mountain View. They could be anywhere, but they chose Northern California for a very specific reason.

So can we talk about what you're seeing in real time? You know, my understanding of most companies pricing systems, revenue management systems, is that it sort of gives you a view on where your occupancy will be, where your sort of lease risk is you know 30 to 60 days out can you talk about what your your system is telling you now in terms of you know maybe the early part of the of the peak leasing season where pricing is going is it progressing as planned are you seeing some pockets of strength pockets weakness yeah that's a great question from just a current view perspective what we're seeing is pockets of strength and no surprise mostly northern California which

obviously wouldn't happen if everyone's losing their jobs so and in certain pockets of east side of Seattle and where we are tracking right now is that we are slightly ahead of plan don't get excited it's two months into the year but it's a good sign it's a good start northern region slightly ahead and southern region playing out on plan and when you say we're two months into the year I mean I guess we're two months but you do have fairly good understanding of where March will be you have okay understanding of April is that misplaced to say yeah I think that's a fair point and we're worse because we could see by our asking rents or how we're sending out renewals and it's consistent with what we had communicated you know in our first earning quarter earnings call We're sending out renewals around 4% to mid-4%, but we're negotiating, of course, that always happens, and landing, say, around mid to high threes, depending on the market. So, like I said, slightly ahead of plan in some cases, but generally unplanned.

And maybe you could just talk about demand for a second, how you measure it. And I'm partly asking the question because, you know, the way that people search for things is changing a bit. like you know if i'm looking for something now i might just go into um you know gemini and just say like give me you know the best four apartment buildings around this price point and then i go directly to your site afterwards as opposed to you know maybe googling it and clicking on it and all that i guess how are you measuring demand internally when you're meeting each other and you're having your weekly meetings or daily meetings about how things are going what are you talking about and have you seen sort of a change in how you measure demand based on kind of a different way that people are finding you now or maybe they're finding the same as it same way as they were you know a year ago yeah

no that's a that's a good comment in terms of the consumer behavior there has been a change and of course more active use usage of Gemini or cloud or some of these other applications we have also tilted our marketing efforts to make sure that we're capturing you know a the broader segment and we started doing that about I want to say a year and a half to two years ago and so in terms of how our customers are getting to us they're still able to get to us regardless of how they're doing the search and in terms of our metrics we continue to look at closing ratios and because traffic is really driven by your marketing efforts so it's really closing ratios and of course you know how much we're negotiating when we're sending out asking rents so when market is really really strong which is not right now we're negotiating very little maybe from zero to say 30 basis points when it's a when it's more normal level which is consistent with current level we're negotiating say between 30 to 60 basis points and once it's soft it's between 75 to 100 basis points and we're right in that middle zone currently okay so you're putting out renewals sort of in

a four to four and a half percent range and there's like you say 50 basis points of negotiation or so yeah okay yeah so that lands you around high threes depending on where your starting point is or four you've heard four and a half I guess in terms of markets, L.A., you know, it's supplies coming down, it feels like it's maybe on the cusp of finding some pricing power, it's obviously an important market for you as well as your peers, I guess most people are sort of guiding, I don't say conservatively, but guiding the muted growth there this year, I guess when do you think we'll sort of know whether this market's finding a bit more pricing power, do you think we'll have a good sense

for it around may or june or do you think it's going to take longer to sort of work through you know the bad debt situation some of the other issues going on in that market yeah in terms of timing southern california tend to peak a little bit later than northern seattle is usually early june um northern california early july and southern california say later in july so that's the timing framework but in terms of our view Barb has some good data on that yeah I think you're correct in terms of how we underwrote the market this year and guided we did guide conservatively it is expected to be our lowest performing market for the year that said we did see meaningful increase

in our occupancy in the fourth quarter and when you look at occupancy net of delinquency what we call economic occupancy we're at 94.7 percent in the fourth quarter a hundred basis points higher than a year ago and that's a combination of you know the market improving from an occupancy perspective but also from a delinquency perspective we're not quite back to our long-term historical run rate on delinquency we're about 50 basis points shy of that it's really tied up in the courts the courts are still a month month to two months slower than they were historically but we are continuing to make good progress What we've said in the past, though, is we need to be above 95% economic occupancy to really start to have pricing power. We're still short of that. And so that was part of our view of guiding conservatively. But could we get there this year? We don't need a lot more incremental demand given supply is coming down pretty significantly this year. It's really when is that job? What is the job catalyst? That's a little harder to discern in L.A. than it is in our northern regions.

Got it. And then maybe on, you know, Northern California, when you see an announcement, like, you know, from Block, I'm just using an example, 4,000 employees, is that, like, sort of irrelevant for your portfolio? I mean, when you have some assets in Oakland, 4,000 people being laid off, is that, like, does that actually impact things on the ground?

Or is that so small that, you know, you wouldn't really see much unless you just have, like, you know, your building's, like, right next to Block's headquarters or something? well we haven't seen a significant impact but I think it's primarily because a lot of those jobs are remote and so it's not gonna you know impact that Marcus figure out their options before telling you it's actually pretty quick and more often than now we've seen that ahead of the public announcement because they probably know or have some inclination we see typically people make housing decisions 45 days in advance of an event and if they're not sure they probably just wouldn't renew or they would just go month to month until they have better clarity and so you actually you know kind of get more of a leading indication or real time right right away and so the number of people that are either breaking leases today or telling you there's an issue is just similar as to what it normally is there's no we have not seen an elevated trend and leak breakage currently and then maybe on Seattle and obviously everyone feel free

to ask questions and on the live QA if you if you want to not do it through the microphone but you know on Seattle you talked about how it's one of your more volatile markets because of supply and how you know California you know historically just hasn't had the same supply issues which is what makes it a bit more consistent of a grower I guess what keeps you committed to the Seattle market in spite of that supply fluctuations the you know the greater volatility I think you're also seeing some pretty large increases in property taxes there so what keeps you committed to that market yeah with Seattle what

has been compelling to us is if you just step back and look at it from from a long-term CAGR perspective, it's more volatile, but from a long-term growth perspective, it's still a great market. It's better in Southern California, for example, from a long-term CAGR perspective. You know, if the Bay Area is at a four, Seattle's a three. The US is two or sub two, and Southern California is about two and a quarter to two and a half. Seattle has a couple of things going for it. Even though it is more elevated in supply, we're talking one to one and a half percent generally is a total new supply as a percent of stock compare that to other markets that's generating two three four four percent you know it's it's still a market that can quickly absorb the supply pretty efficiently say within six to nine months the reason is because it has strong demand catalysts it does have a benefit drafting off of technology sector and and we're seeing that already we're seeing ai taking a foothold you know and in northern california and now it's starting we're seeing green shoots in seattle

so chat gpt announced uh an office in the east bay and there's several other companies it's in one of our slides you can see the map there and and so there's actually great demand drivers in Seattle that makes it a great market to invest in maybe switching over to capital allocation you know I'll call Rylan after and tell him congratulate hopefully congratulations everything's going well there is there any goals I mean that Rylan you all have set for this year like what would you like to see by the end of the year in terms of I know you don't guide a certain amount of acquisitions but you probably talk internally about things that you would

like to accomplish if you can if it makes sense if your cost of capital supports it so maybe talk through sort of what the goals are for this year yeah we I mean you know us for a long time we don't tend to deal in absolutes so you're not gonna hear from me that we're gonna buy a billion dollars but what you will hear from me and in my conversation with Ryland is that's focused on investing in such a way that we can generate accretion. And so if you look at what we've acquired, we've acquired over two billion over the past two years. Ryland's done a terrific job and the team has as well. And the track record stands. Those deals have all been accretive. We've either sold or used internal cash flow um in in in a way that provided not just a full accretion but also an 80 accretion so that's the goal and that's the bogey he has to hit he has to invest in an accretive way and if that means at some point the stock buyback is more compelling well you've seen us do that too and so everything's on the table but we certainly did not invest issuing stock in the past two years and maybe on the buybacks I think I've asked you kind of like a version of this question but I guess I still don't completely get it because maybe our valuations is completely wrong but you know I think

most people have you trading somewhere between like a five and a half six percent implied cap rate I think you said on the calls that you know assets are trading from a buyer's point of view so I understand there's a you know a mark-to-market on the taxes, you know, but somewhere between a four and a half, kind of four and a half percent, you know, maybe even lower. If there's still, if there's that difference in cap rates, how does it not make sense to sell some assets and buy back stock?

That's a great question. And you'll see that we did not transact in four and a half. And, you know, obviously I'm not going to comment on what's going on currently on the ground. and but what we have done in the past is whatever the buyer cap rate is and we overlay our operating platform so we do get immediate accretion you don't have to wait we ended up close to lower five percent and during those time our stock was trading at around five and a half maybe five seven well let's do the math here. We're buying at five. If we're growing a long-term CAGR in Northern California at four, that's a nine total return. That math works all day long, much better than a stock buyback. Now what we will do moving forward is we're going to go through the same exercise with the same discipline. What's the going in yield? What's the growth? Where's the stock? And where can we generate the most accretion? And we will execute that way.

Got it. And so Northern California, you think, has like a 4% type of, you know, long-term growth to it?

The long-term CAGR for Northern California, yeah, that's proven out to be above 4%.

Got it. And so that would compare to like in LA where you'd put like a 2.5 on it or a 3 or something like that? Probably closer to 2, 2.25-ish for LA. in all these conversations so i mean you know you've probably spent way too much time talking about you know ai for the better part of the day um but are any of these sort of conversations impacting private pricing at all so like when you go to conferences and you meet with um you know people that are deploying capital either in california other places is this top of mind for them I would assume it would be but it doesn't seem to be showing up much in price like it's very obvious in the public market that there's an element of discount for this but it doesn't seem like there is one in the private market so like why is that the case let me make sure I understand your question are you asking why private buyers are still buying or they're not buying well I guess what I'm saying is this yeah I mean I assume that they just have to put money to work and you know maybe they're getting you know good enough debt rates that they're getting positive leverage or something on it i guess my point is that when you think about the disconnect between public and private i see you know is this something that is top of mind for the private investor right now the impact that ai could have on on you know job growth or it's just not like this conference where you're getting asked about it probably every session well it's interesting with the private market first of all you know their motivation to deploy

capital is really driven by what they raised and so private you know investment vehicles typically have a three-year deployment investment period which means they have money and left over from the past two to three years or even last year capital raised and a lot of them also locked in financing when it was still low so it's a different cost of capital structure in terms of the AI conversation we're not seeing that as a deterrent in fact it's a if you look at where the most aggressive bids are happening it's in the Bay Area and because the view is there's growth coming and catalyst for demand we were just sticking on AI but more more micro more Essex specifically where are you seeing the opportunity to deploy and use AI within the organization and how do you think it could drive either efficiencies or better processes so we have rolled out AI leasing capabilities so on the sales front we piloted that last year had to make some tweaks because nothing is off the shelf ready and so that is one obvious area in terms of our data analytics and you know reporting those functionality we're seeing some near-term benefits having said that we're also not seeing that as a reason for attrition we're piloting several other AI functionalities in the maintenance area in procurement and some other customer service and marketing initiatives so doing a lot but I don't think we're all that different most companies are you know have a high experimental rate but a low adoption rate and so we're gonna continue to do that but yeah near term on the sales front that definitely are you excited about I mean that makes a lot of sense are you excited about the opportunity I mean it makes sense that you're gonna try a lot of different things and see what works but do you think there's a meaningful ability to drive either operating margins or GNA savings you know at an apartment company well we're excited about the possibility but it's really how you use it so it's not just AI it's how you run the business using the AI it's kind of like I will make it analogous to revenue management everybody has it but that doesn't mean everybody knows how to optimize their total total revenue so it's all about how you use it does that lend itself more to partnering or building yourself

or buying I mean kind of the revenue management makes a lot of sense right you buy it but then you you really customize it for kind of what you're looking to do is that kind of a similar idea for how you think AI plays out yeah Yeah, it's a combination.

And so there's nothing off the shelf you could just blight and plug it in. But we're a real estate company, so we're not set up to build. And what we will do and what we have been doing is looking at products that's close to what we need and customize it. And generally, these things take a year to two to get it right. Because once you customize it, you have to pilot it and work out all the kinks.

Maybe on the preferred, I think, you know, understand that it creates some earnings dilution this year. I guess your point on the call is, I guess, first that, you know, beyond this year, we're not going to have this issue again. I guess, first, I want to confirm that. And then, second, you know, what type of returns would you want to see if you were to, you know, try to grow your preferred book? Like, what would you need to see to actually want to grow it?

Yeah, so that is a good question. and your point is correct like the bulk of our preferred equity book has rolled off or we're not accruing on it and so the headwinds that we're experiencing this year will not carry forward into 2027 so we we do expect 180 basis points of headwinds this year and then and we had a lot last year so given the bulkiness of the maturities over the last two years which is about 400 million So that is behind us. We'll have about $170 million in book that we are accruing on. And so the amount that we're going to have experiencing for the foreseeable future is pretty low in terms of redemption headwinds. In terms of growing the book, we're open to that if we can find the right risk-adjusted return. And it's going to depend on where we are in the capital stack and a variety of factors. So if it's a development, we're going to want a higher return. And if we have to go up to 85% in the capital stack, it's got to be north of at least 13% to 14%. So it will depend if it's stabilized versus development and then where we are in the stack.

And for the preferred that's maturing soon, where are you in discussions with that sponsor? I think you said that you're kind of nearing the maturity date. So I'm curious where the conversation stands there.

They're still ongoing, and so I don't have an update for you on that. We're not at maturity yet, so still working through it.

But the range of options would be effectively, they put in more equity or you take control over the asset?

We could do an extension, a short-term extension. They could put in more equity to get that extension. We could take back the asset. So there is a variety of potential outcomes. It's just too uncertain. And so that's why we guided to what we did, where we assume no redemption proceeds back on the two assets. It's really two assets maturing in 2026 that are the bulk of it. But the guidance is de-risked. There could be upside depending on the timing of these negotiations and what the final outcome Thank you.

So we do have a rapid fire to end the session. What will SAME-STOR NOI growth be for the apartment sector overall next year in 2027? for the sector we're going to say two percent and then a year from now will there be more fewer the same number of public apartment companies well there's not that many of us left so i'm going to go with same or less and i guess is it the sunbelt dragging that number down for 2027?

Most likely, yes.

Okay. All right. Thank you.

Thank you. Thank you.