Essex Property Trust (NYSE:ESS) raised its full-year outlook after reporting second-quarter operating performance that exceeded its expectations, led by stronger apartment revenue trends and lower-than-anticipated expenses across its West Coast portfolio.
President and Chief Executive Officer Angela Kleiman said the company’s first-half results reflected execution by its operating teams and durable multifamily fundamentals in the company’s markets, despite measured national economic and employment growth. She cited limited housing supply and the relative affordability of renting as support for demand.
The same-property result included revenue growth that was 20 basis points ahead of plan and lower operating expenses. Pak said successful Proposition 8 property-tax appeals provided $0.03 of favorable property-tax results, though she characterized that benefit as one-time in nature. Northern California acquisitions made in the prior year also outperformed the company’s plan as rent growth in the region remained strong.
Guidance Raised on Better Portfolio Performance
Essex increased the midpoint of its full-year Core FFO-per-share guidance by $0.20, or 1.3%, with better operating performance serving as the primary driver. The company raised the midpoint of its same-property NOI growth outlook by 70 basis points to 2.8%.
Pak said the revised same-property revenue outlook includes a 40-basis-point improvement, driven by higher scheduled rent, occupancy and other income. Scheduled rent and other income each represented 15 basis points of the improvement, while higher occupancy represented the remaining 10 basis points. Essex also lowered the midpoint of its operating-expense growth forecast by 25 basis points, primarily due to the property-tax savings.
Higher same-property growth contributed $0.12 to the increase in full-year FFO guidance, according to Pak. The remainder primarily reflected stronger-than-expected results from the non-same-property portfolio.
For the third quarter, Essex forecast Core FFO of $3.99 per share at the midpoint, a sequential decline of $0.09 from the second quarter. Pak attributed the expected decline to seasonal utility costs, California property taxes and higher controllable spending in the second half. She said controllable expenses were lower than expected in the first quarter because of timing and are expected to be $0.09 higher in the second half than in the first half.
Northern California Leads Rent Growth
Northern California remained Essex’s strongest region in the second quarter, with blended rent growth of 6.5% and strong occupancy. Kleiman said limited housing deliveries, technology-sector investment and positive migration trends among talent and entrepreneurs supported the market.
“We are experiencing growing momentum of demand for housing throughout the broader region,” Kleiman said, adding that peak leasing momentum has extended beyond typical seasonal patterns.
Essex expects full-year blended rent growth of about 2.5%, with the first half coming in at approximately 2.6% and the second half implied at about 2.4%. Kleiman said Northern California’s momentum remains strong and the region had not yet reached its seasonal rent peak during the call.
However, she said the company’s portfolio-wide outlook incorporates slower economic and job-growth conditions, particularly because Southern California and Seattle account for 60% of Essex’s portfolio. Northern California is expected to improve through the second half, while Southern California is expected to slow and Seattle is expected to remain roughly steady, Pak said.
Essex reported a loss to lease of roughly 6% in Northern California, while Southern California had a gain to lease in the low 2% range and Seattle had a slight gain to lease of about 70 basis points. Kleiman said Northern California’s elevated retention rates may extend the time needed for market rent gains to flow through revenue, particularly because California’s AB 1482 regulations can prolong the recovery process.
Seattle Improves; Southern California Remains Stable
Seattle posted 2.6% blended rent growth in the second quarter, a 340-basis-point sequential improvement from the first quarter. The East Side outperformed, generating 3.2% blended rent growth compared with 1% in the urban core.
Kleiman said Seattle rents peaked in early July, consistent with normal seasonal patterns, and are expected to moderate through the rest of the year. Blended rent growth in Seattle rose from 1.4% in March to 2.8% in June before beginning to taper, she said.
The company cited recent office-expansion announcements by technology companies as a positive long-term signal for Seattle demand, though Kleiman noted that office buildouts and hiring typically follow such announcements with a lag. She said the East Side could potentially approach Northern California-like performance if job growth materializes and supply continues to abate, but the market historically produces more new supply and requires greater employment growth to generate substantial pricing power.
Southern California produced 1.4% blended rent growth in the second quarter, led by Orange County, while Los Angeles lagged. Essex described the regional market as stable, with occupancy above 95%, but said muted job growth has constrained momentum.
Orange County is leading the Southern California portfolio, while San Diego has begun to improve after working through a large share of new supply, Kleiman said. Los Angeles County remains the principal drag, although its economic occupancy has improved from a 91% trough in 2023 to roughly 93% to 94%. The company is seeing early signs of demand from aerospace and defense companies, including Anduril, but Kleiman said it is too early to assess the magnitude of any effect.
Capital Position and Investment Activity
Essex ended the period with net debt to EBITDA of 5.4 times, minimal debt maturities over the next 12 months and more than $1 billion of available liquidity, Pak said. She said the company has access to multiple capital sources and flexibility to fund commitments and pursue growth opportunities.
Investor interest in West Coast multifamily properties has remained healthy despite higher interest rates, according to Kleiman. She said institutional-quality assets have generally traded at capitalization rates in the mid-4% range, while many Northern California transactions have been priced in the low-4% range.
Rylan Burns, Essex’s chief investment officer and executive vice president, said the company and a joint-venture partner sold a San Jose property at a cap rate in the mid-4% range, below 4.5%. Debt maturity at the joint venture prompted the review, and Burns said Essex concluded it could achieve better risk-adjusted returns by redeploying capital elsewhere.
Burns also said development economics have improved during the past year as rent growth has exceeded construction-cost growth. Essex’s South San Francisco project is ahead of its initial underwriting and ahead of schedule, he said. The company is evaluating another project farther down the peninsula and continues to seek development yields roughly 100 to 150 basis points above acquisition yields, with South Linden expected to stabilize at a yield closer to 6%.
About Essex Property Trust (NYSE:ESS)
Essex Property Trust, Inc (NYSE: ESS) is a publicly traded real estate investment trust that acquires, develops, owns and operates multifamily residential properties. The company focuses on market-rate apartment communities and delivers a full suite of property services including leasing, resident services, asset management, and capital improvement programs designed to preserve and enhance long?term property values.
Essex concentrates its portfolio in West Coast markets, with a significant presence in California and the Pacific Northwest.
