Essex Property Trust, Inc. Q2 FY2025 earnings call

Key points include: Second quarter Core FFO per share exceeded guidance midpoint by $0.07. Revised full-year Core FFO per share guidance increased by $0.10 to $15.91, driven by higher same-property revenue growth, lower expenses, and strong co-investment platform performance. Transaction market for West Coast multifamily properties remains healthy with deal volumes up and average cap rates mid-4% for institutional quality assets. Essex has been acquiring in Northern California, generating yields in mid to high 4% and funding acquisitions with dispositions to optimize returns.

Second quarter performance showed a 3% blended rate growth for the same store portfolio. Northern California had 3.8% blended rate growth, Seattle 3.7%, while Southern California, particularly Los Angeles, lagged with 2% blended rate growth. Suburban markets of San Mateo and San Jose were notable outperformers with 5.6% and 4.4% blended rate growth respectively. Los Angeles remained challenging with 1.3% blended rent growth due to elevated supply deliveries and soft demand, but year-to-date positive blended rate growth was achieved in all Los Angeles submarkets.

Revised full-year Core FFO per share to $15.91 at midpoint, with a $0.10 increase. Same-property revenue growth midpoint raised to 3.15% due to higher other income and better delinquency collections, partially offset by lower occupancy. Same-property expense midpoint reduced by 50 basis points to 3.25% due to lower property taxes. Third quarter Core FFO guidance is $3.94 at midpoint, a sequential decline due to seasonality and preferred equity redemptions. Anticipate structured finance book to be less than 4% of Core FFO by year-end.

Risks include softer macro economy stemming from public policy, slower delinquency recovery in Los Angeles, and uncertainty in labor market due to public policy impacts. Also, potential for lower than expected rent growth if hiring doesn't pick up meaningfully.

Q: Can you talk more about weaker blended pricing in Los Angeles and fire ordinance impact?

A: Los Angeles underperformed due to heavier first-half supply, slower delinquency recovery, and soft demand. Not related to fire ordinance, it's a legislative concern. Southern California mirrors the soft U.S. economy.

Q: On Northern California blended rate growth moderating, any bigger strength not appreciated?

A: Northern California has strength with job postings gradually increasing. Blended rate can be confusing as all leases (including corporates and short-term) impact financials more than like-to-like. Seasonal peak is normal, and deceleration in second half is typical seasonality.

Q: Why scale back mezz platform and impact on fourth quarter FFO?

A: Mezz platform was too large, creating volatility. Moving to smaller size for better cash flow quality. Fourth quarter FFO impact about $0.06 due to preferred equity redemptions. Investing in stabilized assets for better returns.

Q: Thoughts on cap rates compressing in Northern California and L.A. investment?

A: Northern California cap rates slightly above 4.5%, with some deals in low 4%. L.A. well-located submarkets still trade in mid to high 4%. Tracking L.A. closely for right opportunities.

Q: Guidance for blended rent growth in back half and recent trends?

A: Blended rate is expected to decelerate due to normal seasonality. New lease rates typically decline in fourth quarter. L.A. not taking off as expected impacts guidance. Full year blend on all lease basis expected close to 3%.