Essex Property Trust, Inc. (ESS) June 3, 2026 Conference Transcript

Okay.

Thank you so much for joining us today. My name is John Kim with BMO Capital Markets. It is my pleasure to be hosting this panel presentation with Essex Property Trust, one of the preeminent multifamily owners. With me today, Angela Kleinman, CEO and President, to the far left, Bar Pack, Chief Financial Officer, and in between, Ryland Burns, CIO. I think at this time, we're just going to pass it off to Angela for some opening remarks, and then we'll go to Q&A.

Great. Thanks, John, and welcome, everyone, to the Essex presentation. Just a high-level overview. Essex is an S&P 500 company and the only public company dedicated to the West Coast geography. We have our market cap is about $25 billion. We own somewhere around 258 units apartment buildings, a little over 63,000 units across our footprint, and we have generated Thank you. 32 years of consecutive dividend growth, earning us the dividend aristocrat standing, so we're quite pleased with that. Some of the differentiating factors with the West Coast is really driven by the fundamentals, and The key one being that we produce a low amount of housing supply, and currently, actually, we're sitting at a historical low. We have about 40 basis points of total supply right now, and normally it's about 70 basis points. And that's important because it provides a very safe basis in terms of where the economy is. We don't need a lot of job growth to drive demand and to have stable rent growth. But on the other side, what's interesting with our market is being in the center of innovation, having right now technology as a key wealth creator, especially with artificial intelligence, we have strong catalysts for job growth and demand. And so therefore, in addition to a favorable supply environment, we have a strong growth ahead of us because of that demand. And so that sets us well, you know, as we continue in our investing in our markets, and the prospect for rent growth is much better than the rest of the U.S.

Can I just start off? I mean, San Francisco, Northern California has just been some of the standout markets and multifamily. How much of the improvement do you think is just cyclical because they were some of the last markets to recover versus structural change and demand, just given all this growth in AI, in fact?

That's a great question. At this point, we're still looking at Northern California as a recovery story. And so what I mean by that is, as John alluded, you know, this is a market right now should be generating about 20% rent growth above pre-COVID. But on average, it's still kind of in that 10-ish percent range. So there's still a lot of runway as this market just started recovering. We were the last to open our businesses since COVID. So there's that catch-up effect. But what's happening right now on the ground is very exciting because what we're seeing is the... The startups with AI, the expansion that's happening up and down our coast. We actually have a presentation slide. Barb, you want to go over some of the fundamentals that we're seeing?

Yeah, so we do have a slide on page 16 of the presentation. It is available on our website. And just some of the demand drivers that we're watching and seeing, which is leading to above-average rent growth, is not only AI job postings, which are up year-to-date relative to 2025, We're also seeing the top 20 tech job postings be at the 16 to 19 level, which we think is healthy for us to see real acceleration in rent growth. We'll want to see that continue to move upward and stay stable for several quarters. The other thing we're seeing is white-collar job growth in the Bay Area. There's a lot of headlines about layoffs, but the layoffs that are occurring are a fraction of the numbers highlighted in the press Because they're all over the U.S., so only about a third, 25% to a third are in our markets. And the people that are getting laid off are getting gobbled up very quickly. We're not seeing unemployment claims rise, initial or continuing claims. The last factor that we are seeing is net domestic in-migration, and we're seeing it turn positive for the first time in decades in the Bay Area, and that's really that return to office, as Angela mentioned, we're the last to reopen our markets. Tech was the last to require employees to be back to the office. They now are, and there's also this fear of missing out, and so people are returning and have come back to the Bay Area, which is all leading to a good demand backdrop.

AI is strongest in San Francisco, but can you talk about your other markets or sub markets where you're seeing a lot of the AI job growth?

Yeah, so we also published a slide on page 17, and you can see that AI is in San Francisco, but it also is throughout the entire peninsula where a lot of our assets are. There's a lot of startups that have been created. So it's not just anthropic and open AI. There's 250 AI-related startups that are creating new products for companies to be able to bolt onto their existing platforms. And so the growth that we're seeing is throughout the entire peninsula from the AI boom.

Okay, looking at another slide in your presentation, slide 12, it shows that your blended lease rate growth was 1.4% in the first quarter, going up to 3.1% in April, and then 3.7% in May. Can you just talk about your occupancy versus pricing strategy today? Do you have more pricing power in your markets, and where should we see this trend line go?

Sure thing. So what you're alluding to is on page 12 of our presentation, and typically we have our seasonality where the seasonal peak is in the second and third quarter, which means the seasonal low or where demand is lowest in the first and the fourth quarter. During those two periods, first and fourth quarter, we tend to focus on building occupancy, so preserving occupancy, because that's more of a defensive move. As if we move into the second quarter and we see strength in our market, we've now flipped. For our markets, for the majority, we are pushing rents, and so we're stepping back on occupancy, pushing rents, which is one of the reasons you're seeing that 3.7 blended lease rates. It's definitely heading the right direction, and we're seeing that momentum continuing on that same slide. There's a graph on the left-hand side that shows where we are trending on the market rent relative to historical levels. So where we are right now is we're higher than last year, which is great, heading the right direction, but we're still slightly below the long-term average. So that tells us that we still have room and more upside to capture in our markets.

You talked about seasonality, and it's been a little bit more unpredictable. In recent years, your guidance basically calls for blood and rents to be flat in the second half of the year versus the first half. Are you still expecting that to happen, or what kind of visibility do you have on the second half of the year?

Yeah, that's a great question. The reason we have a first half and a second half relatively similar is because we did not forecast the economy accelerating in the second half. We're assuming that for the rest of the year, job growth remains somewhat muted, and part of it is not because we're concerned about our markets or we are in fear of a recession. It's really the uncertainties. You know, the second half, we have the midterm elections. We still have—what that means is that will employers really make meaningful capital spending and higher in a meaningful way? We don't know, and they probably don't know either. And right now, we're still in a war, or kind of in a war. I'm not quite sure what to call it these days. But there's just more uncertainty in the second half. Where we are right now is we are trending ahead of our guidance. Having said that, we'll probably look at, you know, once we have the second quarter numbers and when we're well into our peak leasing season, we'll revisit how we're going to guide the street.

Can we talk a little bit about perception versus reality? Tell us what you're seeing in your portfolio. We talked a little bit about this before, but the AI job growth versus the tech layoffs. The tech layoffs are up year-over-year, but they're still below 2023 levels, and we're seeing the headlines, but at the same time, your rent growth is very strong. So what are you seeing in your portfolio?

Yeah, we just encourage investors to unpack the headline layoff announcements. You know, for example, Meta announced a 9,500-person layoff recently. The war notices were, which is actually how many people will be let off within California, was 2,446. So many of these tech companies hired significantly in 21-22, coming out of COVID, and we know that that hiring was not occurring in our markets because their campuses were closed in many instances, and we were not seeing the rent growth that would typically be associated with that level of job growth. So we're seeing the reversal of that where many remote hires or in secondary locations, the majority of these cuts are occurring. So the headline numbers don't line up with what we're seeing on the ground. And then, you know, in a bigger picture, you've seen... AI be incredibly disruptive or productivity improving for software engineers. And you would think, hey, you'd see a bunch of software engineers unemployed. We have not seen that in our markets, and we've actually seen the inverse where software engineers and coders are actually in higher demand as the cost of software is coming down. With AI, you're seeing more companies look to pick these people back up. So the reality on the ground is that the Peninsula and San Francisco are doing incredibly well. The economy is vibrant. The city is fun and vibrant. Again, there's a lot of young people on the streets. It feels really great, and I would encourage everyone to come out and visit our markets because it's not necessarily what we've been seeing on some of the headline news programs over the past several years. And our view is that, hey, this is just getting started in terms of the capital flowing into new AI-enabled companies and that application layer of companies. We think we're really early stages as it relates to an investment cycle in new technology companies along the peninsula.

Turning from your strongest markets to probably your most lackluster LA, Southern California, the recovery has been, I think, a little bit slow. What do you need to see to have LA recover? We have a mayoral election, which could be kind of interesting. There's the Olympics coming up in a couple years. But what would you like to see for the market to turn?

Yeah, we've been describing L.A. I mean, it's weighed on performance in recent years, which I think everyone's very aware of. It's fortunately been somewhat stable the past two year and a half, I would say. Two years ago, we were at 92 and a half economic occupancy, so that's physical occupancy, less bad debt. We're currently at 94.5. We're very close to a point where we're going to actually have pricing power in L.A. The supply has started to come down, which is helping us. And in terms of near-term catalysts, it's more difficult to point to in L.A. L.A. is the largest county in the U.S. It's the biggest economy county in the U.S. And so it's much more representative and has historically grown in line with the U.S. economy. So to the extent that the U.S. economy starts to pick up and we see widespread job growth, we would expect that to be a positive catalyst for L.A. Some industries to highlight, aerospace as well as defense tech. There are some very interesting companies, in Long Beach in particular, that are doing some really interesting stuff where it feels like capital is flowing in. And then, you know, the mayoral races we talked about here. Who knows how that's going to play out over the next several months, But I do think there's a growing awareness that some of the issues you see when you tour downtown L.A., it's reached a point of frustration for many Angelenos, and they're looking for change. So with the Olympics coming in two years, we are cautiously optimistic that we're going to see the political will to really try to reinvigorate our downtown in L.A. and clean it up and make sure people feel safe and that the businesses can come back. And so L.A. feels stable. We don't have a clear catalyst to point to that this is going to turn this year, similar to our outlook for the U.S. economy. But again, the supply is low relative to the majority of the other markets in the country, so it won't take much for us to really regain that pricing power.

Camden Property Trust made the headlines for putting for sale a large Southern California and LA portfolio. How did that pricing come out relative to your expectations, and what does that mean in terms of investor demand for SoCal?

Yeah, this was a, you know, Camden's a good operator and a high-quality portfolio, 2000s and newer in Southern California. We were not surprised, and I think recently a publication came out that disclosed some of the pricing levels, and I'm sure Camden will be speaking more about it in the upcoming earnings calls, but there has been significant capital demand for properties in Southern California. It has not matched what I think public perception as viewed through the public REITs would be, but we were not surprised. There's been $12 billion of transactions on the West Coast last year. I think we're on pace to exceed that this year. These are deep, liquid markets, and the majority of assets that we've seen trade in Southern California, generally around that 4.5 cap rate range. So there is a lot of capital, private capital, that wants exposure to the high-quality-of-life communities in Southern California, and I think, as Camden provides some more detail about the level of bidding, it was a well-bid portfolio, and it just speaks to the liquidity in our markets.

I think it was either one or two years ago, sometime in the not too distant past, you were looking to buy as much as you could in Northern California and funding that with SoCal sales. Is that still the case, or are you looking for opportunities?

Thank you for mentioning that, John. So we have allocated about $1.7 billion into Northern California over the past two years, really targeting assets along the peninsula where we can put them onto our operating platform, operate them much more efficiently. What I would say is there has been a significant sentiment shift over the past year in terms of private capital now moving back into Northern California, recognizing some of the demand and supply trends that we've been speaking to. So those cap rates have compressed, but there's always going to be opportunities for us to add value. That is still generally our – we're looking quite closely through all our markets, but if we see an opportunity to add value, put it on our platform and increase that NOI yield through our more efficient operations, we will continue to do so. So we have been executing on that thesis for the past two years, and that will likely be the go-forward strategy until something else changes. Again, everything has a price, and we are tracking everything in our market to make sure that we are adding value on an FFO and NEV per share basis for our shareholders.

Your other major metro market is Seattle, and it's gotten a lot of attention recently because I think Starbucks was looking to move, and maybe they haven't, and Amazon, the same thing. There's more rent control measures and income tax being introduced potentially. So can you just talk about how Seattle has performed relative to the rest of your portfolio and where you see it trending going forward?

Yeah, we have seen, you know, legislation aside, what we have seen is a very stable and improving performance out of our Seattle portfolio, and some of the softness in Seattle in the recent quarters was more attributed to the fact that there was competitive supply, and that supply has, for the most part, abated. And in fact, supply is going to be lower by about 25% this year and another quite a bit lower next year. And so that's what really drives the pricing power and the ability to raise rents in Seattle. At this point, what we have seen is when we look at our lease rates in Seattle, it turned positive in March. And since then, every month, it has improved on that, and it's actually slightly ahead of our expectations at this point. Now, as it relates to your comments on legislation, you know, having income tax, well, it's disappointing for the citizens of Seattle. It's not unusual for any state to have a state income tax. So that in itself, I don't think will significantly impact the attractiveness of Seattle to do business in. And as far as the statewide rent control, the level is comparable to that of California. And in that environment, it's really more, we view it as more of an anti-price gouging. And in that environment, it's a win-win for everybody, both the landlord and also for, you know, the tenants.

Okay. Another large or big news item was the announced merger between two of your peers, Avalon Bay and Equity Residential, leaving you as the only coastal multifamily you've left. Actually, they owe you into the sun valves. But what do you think that's going to – how is that going to impact the multifamily sector? And how do you react to that once that closes?

Yeah, you know, it's an interesting case study in that, let's start with, they're both in our markets right now. They're both currently bigger than us, so they're going to be, I guess, more bigger, but I don't expect that to have any impact on the operations. I mean, we run an incredibly efficient operating model. We operate 9 to 10 properties, 9 to 12 properties as one business unit, and that's not going to change. As far as in terms of on the investment side, if you believe that by being bigger, you'll have a better cost of capital, then yes, they could become, say, more competitive. You would need to generate a better cost of capital in a way that it's a meaningful margin to all the other companies. It could be an interesting case if that plays out. What I've seen in the past is that the large-cap REITs, for the most part, they have less volatility in their name, but overall total return, it depends on the time frame. There's three- to five-year time frames where smaller and mid-cap REITs outperform, and so I don't know if it's a foregone conclusion just by being the biggest, but it's an interesting strategy.

And can you talk about the market share that you have in your markets, and if you had greater scale, would that give you an advantage, do you think, compared to where you are today?

Well, at this point, I mean, the multifamily sector is... Pretty highly fragmented, and even though we are the largest public company in those markets, we own less than 10% of the total housing stock. So that in of itself probably wouldn't be a game changer. But in terms of the scale and concentration, there's a point where you have marginal diminishing return. So, what I mean by that is scale is great up to a certain number, but once you are beyond that certain number, you still have to add to it. You have to add staff. You have to add infrastructure. And so, just purely scale for the sake of scale itself wouldn't allow you to have, you know, a huge advantage. It's really how you optimize it within your concentration of assets.

A lot of the investors look at the multifamily sector and see a huge disparity between private valuations and cap rates below 5%, like we talked about with the SoCal sale, and the public reads that trade closer to 6%. You're at a premium to your peers, so you're in the mid-fives, but what do you think the public market is getting wrong, or do you think private market valuations are a little bit too frothy? What's your view on that discrepancy?

Yeah, well, there's a couple of things happening in the public markets that's not as impactful in the private markets. So what I mean by that is, for example, in the public markets, there is a sentiment trade that happens, and there's also a rotation from one industry to the other. So... In the recent past, multifamily has not been in favor of asset class. Funds have been going to, say, the data centers and industrial, for example. The private market has a very different view when it comes to investing. They invest in long horizons and not as focused on sentiment trades. You know, we have a private equity business where we have joint ventures and funds with people that want to own direct real estate with us, and they tend to have a 7, 10, or even longer investment horizons, and it's more fundamentally driven rather than sentiment driven.

And when you look at acquisitions and you compete for... Acquisition opportunities, how are you underwriting market rents growth, and where do you think the public and private buyers are in terms of underwriting that growth?

It's not too inconsistent with, you know, the guidance we've provided in recent years in terms of, you know, broadly rent growth in 4% in Northern California, 2% in Southern California, 3% in Seattle. Those are our base cases. Now, there are specific sub-pockets, and every asset is underwritten individually based on the individual characteristics of where we're seeing competitive supply, demand drivers. So in some cases, that'll be flexed up and down. I would say on the private side, in the last year, my comment about the sentiment significantly improving along the peninsula, you are seeing groups step in and, in many cases, win deals by being quite aggressive on their growth assumptions. And you look at some of these fundamentals, they might not be incorrect in some of these sub-markets. But we have a pretty disciplined process. We want to make sure that every acquisition, we have a high level of conviction that this is going to generate FFO and NEV per share almost immediately for the company. And so that's where you've seen us step in and be most active. Again, we have been the largest buyer in California for the past two years, all in Northern California. So we have stepped in and been aggressive, and I think we're starting to see that thesis play out. And we will continue to be looking for opportunities to add when we know we can add value to our shareholders.

And negative leverage transactions, is that still prevalent in the market?

That's correct. That's correct, which, you know, I think confuses a lot of public investors. In some instances, why would someone be willing to buy below in place debt yields? But again, it goes back to the fundamentals, and, like, if you have no supply and positive tradeouts and a, you know, really attractive demand side on the other side, hey, it doesn't take that long to get to positive leverage. So many private investors are willing to underwrite through this. They have a little bit of a longer-term focus than a portion of our public investors that are very short-term focused, So it doesn't surprise us. You can still make really good returns, beginning with negative leveragement in some instances. So you have to be cautious, but, yeah, that has been the case for the past several years.

Any questions from the audience? I wanted to ask about ADUs as a way to add density in some of your projects and maybe to help with affordability. Can you talk about where you are in your portfolio in terms of... ADUs, adding that to your existing communities.

Yeah, this is recent California law changes in several years that allowed by right zoning to add ADUs to your projects, and so we've done a pretty thorough portfolio analysis of where we have opportunity. We have a very significant opportunity for two reasons. One, our operating model, as we've consolidated our operations into operating 10 buildings as one operating unit, it's unlocked some underutilized leasing spaces that we've turned into very attractive units. What we're most excited about, given that the vast majority of our portfolio is garden-style, well-located assets, we have a lot of tuck-under garages where we're adding 10 to 15 units. The per unit cost is about a fraction of what it would have, 50% of what it would cost to build a new unit out of the ground, and these are double-digit returns. So we've ramped that up. We're expecting to deliver 80 next year, and we're continuing to build that pipeline of ADUs to, one, help with the – we need new supply in our markets, but also these are very attractive returns for investors.

Okay. And then I also wanted to ask about your structured finance program. It's been coming down pretty recently, and that's created a little bit of earnings headwinds that I think you're going to be passed after this year. But how should investors think about that program going forward?

Yeah, we remain committed to the business. It's incredibly synergistic with what we do in our relationships with developers. You've had two factors over the past several years. One, you've had development starts come down considerably, which is in the supply numbers that we're talking about over the last few years. So that's created fewer opportunities to add preferred investments on the development side. And then you've also seen a lot of capital that was raised coming, you know, 22, 23 to take advantage of distress. In many instances, we have not seen that yet, and that capital has flowed into that preferred space. We feel like, you know, you're seeing examples of stabilized product preferreds in the high single digits. We thought you could get much better risk-adjusted returns by owning the fee simple for the past several years, but we remain involved. It's a relationship business. If we see the right opportunity to manufacture a yield and a return that we wouldn't otherwise be able to generate through our other opportunities to invest, you'll see us committed to that business. But it's at a much more manageable portion of our business to create less earnings volatility going forward. And so we feel really good about where we are today, and we'll continue to look to add value through that program.

Okay, I think we're going to try to do something a little bit different and go through a speed round. So I'm going to ask you a question, give a very short answer, maybe one of you answer, and then if the other two agree or disagree, then pipe in. Okay, so what's, this could be a total disaster, but here we go. What is the most underappreciated Essex market today?

Most underappreciated? I would say Oakland. You know, Oakland has had a tough... It's a tough go because of supply, and supply has significantly dwindled, and Oakland, at this point, is tracking pretty darn close to what San Francisco and South Bay is performing, and so it's a great up-and-comer.

Any thoughts?

We don't agree on everything, but we agree on that.

This one, I'll direct to Barb. What matters more today, AI hiring and job growth or the return to office?

I think we've gotten through most of the return to office, so I think it's the AI hiring at this point.

What's one metric, this probably goes to Barb as well, but what's one metric investors should watch most closely in the second half of the year for Essex?

Oh, just for 2026? You know, I think we're always focused on same-store revenue growth and core FFO growth. This year, core FFO growth obviously is going to be a little challenge because of the preferred equity headwinds, but we're always trying to maximize our revenue growth, and I think you should watch that number.

Angela, what will investors have gotten wrong about Essex one year from today?

I think investors underappreciate the power of supply. And the kind of supply, you know, in our markets, it's so low that we just need very little job growth to outperform. And I think investors are looking at other markets and seeing, oh, well, supply is coming down in other markets as well. But they don't realize that in other markets, the supply is heavily influenced by single family that can ramp up very quickly. And even if you're going from, say, 3% of supply stock to 2%, even though that's a decrease, it's still a lot of supply.

Rylan, are private market buyers too bullish or public market investors too bearish? I'm sure I know the answer to this.

Yeah, I think you know where I'm going. I think public investors, you know, the marginal public investor, that growth investor, right, is focused on AI and high momentum type subsectors, and, you know, real estate has lied to the past couple of years. Eventually, that'll shift, and I think that flows back into really great wealth compounding return vehicles like asset.

Okay. Any closing remarks? Because I think we're pretty much out of time.

No, thank you for joining the Essex presentation.

Thank you.