Operator: Good day, and welcome to the Essex Property Trust Q3 2026 Earnings Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions, and beliefs, as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with the SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property TRUST. Thank you, Ms. Kleiman. You may begin.
Angela Kleiman: Thank you for joining Essex Q3 earnings call. Today, I will cover our operating performance for the quarter, considerations heading to next year, and conclude with a transaction market update. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase in our full year growth outlook for same property revenue growth and core FFO per share. This outperformance has been primarily driven by Northern California, which has exceeded expectations. As such, we are now anticipating full year blended rent growth of around 2.9% close to the high end of our guidance range. Moving on to regional highlights, beginning with Seattle. This market has gradually recovered from a soft start to the year. Blended rent growth turned positive in Q2 and remained positive in Q3, generating 2.1% growth.
Angela Kleiman: This improvement has been led by the Eastside, benefiting our portfolio allocation in the region. Turning to Northern California, which continues to lead the nation in multifamily performance. We achieved blended rent growth of 7.3%, which was elevated by a strong leasing season with an extended peak that continued through September. As for Southern California, operating conditions remain stable, with Orange County and San Diego leading the performance across this region. Our blended rent growth of 90 basis points in Q3 was in line with plan. Looking ahead to 2027, the outlook for the broader US economy and labor market remains uncertain. Even against this backdrop, West Coast multifamily fundamentals offer a compelling case for continued growth above the US average, with encouraging green shoots supporting the potential for further momentum.
Angela Kleiman: Total housing deliveries are expected to remain at a historical low of approximately 40 basis points of total housing stock, positioning our markets comfortably to generate rent growth within a modest job growth environment. At the same time, technology sector innovation continues to attract investments and drive economic activities, supporting our expectation for job and income growth above the national average. Together with favorable rental affordability, these fundamentals provide a solid foundation for the next several years. Concluding with an update on the investment market. West Coast transaction volume for institutional quality assets in Q3 was generally consistent with same period last year. Recent increases in the Treasury rates is still being factored into the transaction market. It would not be a surprise if Q4 volume declines as buyers and sellers adjust to the new rate environment.
Angela Kleiman: Although historically, our data shows that rate moves have less impact on pricing and cap rates in markets with strong rental fundamentals. Lastly, I am pleased to announce that yesterday we closed on an acquisition of a 474-unit community built in 2022, located in the East Bay in Northern California. Priced over $200 million and well below replacement cost, this asset is expected to generate a mid 5% yield. It is another example of our investment team's deal acumen in a competitive environment, leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day one. Essex remains disciplined in focusing our capital allocation strategy to maximize FFO and NAV per share growth. We continue to be well-positioned to capitalize on market volatility with our efficient operating platform and strong balance sheet. With that, I will turn the call over to Barb.
Barb Pak: Thanks, Angela. Today, we will cover our Q3 results, discuss updates to our full year guidance, and conclude with comments on the balance sheet. Beginning with our Q3 results, we reported core FFO per share of $4, representing a one cent beat to the midpoint of our guidance range. The primary driver relates to better same property revenues, which grew 3% on a year-over-year basis, led by the continued solid performance of our Northern California portfolio. Turning to our full year outlook, revenues continue to exceed expectations, and as such, we are raising the midpoint of same property revenue growth by 10 basis points to 2.9%, driven by better scheduled rent growth. As for operating expenses, we remain on plan and are reaffirming our full year midpoint. Our expense guidance reflects higher controllable spend in Q4, which we have previously discussed.
Barb Pak: Taken together, we are raising the midpoint of same property NOI growth by 20 basis points to 3%, representing sector-leading growth as we conclude 2026. The strong operating results led to a $0.02 increase in our core FFO midpoint. Finally, a few comments on the balance sheet amid the current interest rate environment. Our total debt maturities for 2027 at pro rata share are around $575 million, of which the lion's share is a $350 million in bonds that mature in May. This represents a very manageable amount of maturities next year, given the size of our balance sheet. Further, we are well positioned as it relates to our floating rate exposure, which is around 12% on a pro rata basis, of which just over 40% is tied to the SIFMA index, which floats at a cheaper rate than SOFR.
Barb Pak: Lastly, over the course of 2026, we have been proactively hedging our floating rate exposure by executing approximately $600 million of swaps at pro rata share at an all-in fixed rate of 4.9% to replace swaps that expire over the next six months. While we will feel the effects of higher interest rates next year, we are favorably positioned relative to the peer group in a higher rate environment. With net debt to EBITDA of 5.4x and well over $1 billion of available liquidity, we have ample flexibility to meet our commitments, navigate the current rate environment, and pursue opportunities that support long-term FFO and NAV per share growth. I will now turn the call back to the operator for questions.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Nick Yulico with Scotiabank.
Nick Yulico: Thanks. I guess just maybe starting out with the blended rate growth. I think historically, you do not typically see an acceleration in the new lease rate growth in Q3 versus Q2. At the same time, you also have Northern California as a region being very strong right now, and sort of seems like it is strengthening in the third-party data year to date. I guess I am just wondering, maybe you just talk about maybe what new lease rate growth looked like in Northern California versus the other regions in Q3. Thanks.
Angela Kleiman: Hey, Nick. It's Angela here, and thanks for your question. You're absolutely right. Typically, sequential growth in blends from Q2 to Q3 is, you typically see a deceleration because it's just normal seasonality for this business. In fact, Northern California has bucked that trend, and we have seen a slight increase on new lease rates increasing. So new lease rates from Q2 to Q3 actually improved by 20 basis points. That is unusual, but then again, this market has had tremendous momentum as it starts its recovery. This is a good sign that, if we look at our blends this year compared to last year sequentially, this year is doing better overall, not just in Northern California. I'll give you an example. Seattle last year sequentially, new lease rates actually declined by over 700 basis points.
Angela Kleiman: This year, it's only about 120 basis points. All our other markets are doing just fine with, of course, Northern California leading the charge.
Nick Yulico: Okay. Thanks for that, Angela. Secondly, in terms of LA, I know you're getting closer to that 95% financial occupancy you've talked about. How should we think about the other components needed to help drive some better rental rate improvement in that market? Thanks.
Angela Kleiman: Yeah, Nick, a good question on LA. Certainly, it's a market that we've been monitoring very closely. A couple of things, I think, we're seeing green shoots in LA, although these things will take time. Supply continues to decrease, so over the past 2 years, supply has decreased by over 40% in the LA market. Even though there's been layoff announcements related to entertainment industry, it's no longer meaningful. It's a small portion of the economy with less than 100,000 jobs in the past couple of years. There's some noise there, but certainly isn't anything that we are concerned about. What we've been really focusing on is the defense and aerospace green shoots. That industry is expected to grow faster in GDP over the next 10 years than the rest of the economy.
Angela Kleiman: It is estimated to surpass over $1.5 trillion in the next 10 years. A third of that funding is allocated to Southern California. It is great that there is a catalyst for demand growth to come in this market, and certainly it is the first we have seen in a long while in terms of a major industry taking a foothold in this market.
Operator: Our next question is from Steve Sakwa with Evercore ISI.
Steve Sakwa: Thanks. I guess good morning out there. Maybe just kind of following up on the last line of questioning. I know we still have Q4 to go here, and I am sure you are focused maybe more on just overall blended rate growth and not any one component. I guess it does feel like new rent growth this year will probably be slightly weaker than the new lease growth, I guess, posted last year, with renewals obviously better this year. As you kind of look forward, is there a path to new lease growth accelerating next year in a, let us call it, a mixed or challenged job market, given that you have got low supply? I guess, what gets a new lease growth to really accelerate kind of moving into 2027?
Angela Kleiman: Hey, Steve. Thanks for your question. It is a good point that you made to not get overly focused on a particular metric like a new lease growth because we are focused on the blends, and we have to be, because that is ultimately what flows to the bottom line. As I have said in the past, we can actually fabricate or even generate a fantastic new lease rate growth. All we have to do is pull back on occupancy or pull back on renewals. That is not going to maximize total revenues either. Just keep in mind, new lease rates, when you leave a unit vacant, one week costs you 2%. We are not going to run our business focusing on pushing new lease rate growth. That does not mean that the market fundamentals are not sound or are not improving.
Angela Kleiman: If we look at new lease rate growth this year compared to last year at the same time, it certainly has done much better. Once again, I point to the sequential number. Last year, new lease rate growth sequentially went down about 40 basis points for the entire company as a whole. This year, sequentially, new lease rates is only down 120 basis points. That would tell me that we actually have improvements in new lease rate growth, and that is continuing. In terms of the overall outlook, Steve, on the jobs, for example, that is really what is going to drive new lease rate growth is that when we look at by region, of course, Northern California remains very strong with great momentum there. But Seattle, interestingly, is starting to show some positive trends.
Angela Kleiman: When we track the top 20 tech openings, Seattle, for the first time, has reached its pre-COVID average in job openings, and it is the first time in the last 2 years. With the office expansion announcements that occurred last year and supply deliveries continue to decline, we do anticipate that Seattle will have a nice rebound toward the end of next year. LA remains stable. It is gradually improving with green shoots, with the defense sector and supply decrease as well. I think all our markets should actually do better than last year. If nothing else, look at our earn-in. It is quite a bit better this year compared to last year.
Steve Sakwa: Well, thanks for that because you just teed me up for my next follow-up question, which is, could you talk about the earn-in as we sit here today for next year and maybe where are renewals going out for Q4 and into, I guess, early part of 2027? Thanks.
Angela Kleiman: Yeah. The renewals are going out in the mid 4% range in Q4. So it is on plan, and it is actually a little bit stronger than what we had originally hoped. That means that asking is actually higher. I know that you guys wrote a piece and you were looking at the asking rents. So asking rents are higher. They are in the low to mid 5s, and we anticipate that we will land around mid 4s on the renewal side, on the actual renewal.
Operator: Our next question is from Brad Heffern with RBC Capital Markets.
Brad Heffern: Yeah. Hey, everybody. Is there any update you can give on where October spreads are trending? Obviously, I am sure you are seeing the normal seasonal fall off, but I know you also had the longer than normal leasing season, so I am wondering if that is playing into it at all.
Angela Kleiman: Yeah. On the October spreads, let me take a quick look. It is generally in line with plan. It is obviously starting to taper off. Keep in mind, we are now hitting our seasonal low here. Northern California is leading the pack. On the new and renewal, Northern California on the new is well north of 10%, and with everybody else on the new side starting in the negative territory as it should be in October.
Brad Heffern: Okay. Got it. Thanks for that. Can you just go through concessions by market and how those have changed, if they have changed?
Angela Kleiman: Sure, happy to. Concessions by market. Overall, let me just start with portfolio average. We have some data here. Concessions Q3 compared to last year compared to this year, not a whole lot different. Q3 last year, portfolio average around 6 days. This year, a little bit more, a few days more, around 10 days. Nothing to get excited about. Heading into Q4, we are around a week, so similar to last year's levels. If we are talking about by market, let me see. Northern California, effectively no concessions. PNW is less than a week, and Southern California, a little over a week. Once again, these are all normal and very stable levels.
Operator: Our next question is from Eric Wolfe with Citi.
Eric Wolfe: I might have missed this in your answer to Steve's question, but did you say that the earn-in is still around 150 basis points? I just wanted to confirm that.
Angela Kleiman: Oh, yes. Thank you for that follow-up. I did not finish my answer. Our earn-in, which we originally published at around 150 basis points about a month ago, we are assuming a slightly higher earn-in, probably an additional 5 to 10 basis points.
Eric Wolfe: Got it. Thank you.
Angela Kleiman: Just for context, last year was about 85, so it is certainly much better this year.
Eric Wolfe: Yep, makes sense. Just a second question. You mentioned some positive indicators in Seattle that could cause it to inflect late next year. I think you said late next year, so I wanted to confirm that. There has also been some news around Microsoft trying to buy out 60,000 employees. Does that impact your thoughts on near-term fundamentals, or you think all the other positive indicators that you are seeing will more than offset that?
Angela Kleiman: Well, that is a good question. Yes, we saw the Microsoft announcement, but what we have been looking at and tracking very closely is also the unemployment and continuing claims for this market. It has remained well below the long-term average. This tells us that layoffs have been absorbed very quickly, or they have been rehired. More importantly, with this market, employers are doing what they are supposed to do, which is moving business units to reallocating their resources to higher profit businesses. Once again, this does not really concern us too much when we look at everything else. All the other fundamental data points point to a healthy environment. The one comment I will add is that, remember when Amazon had all these layoff announcements? Well, they ended up rehiring a lot of the layoff employees.
Angela Kleiman: There's going to be that continued movement, but it hasn't been in such a way that it's disrupted normal market functions.
Operator: Our next question is from Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb: Hey, morning out there. Two questions for you. The first question, Angela, aerospace and defense certainly has been getting a lot of attention and, 25 plus years in REIT land, it's never really received this amount of attention. As we think about Southern California, especially SpaceX and the other companies that are down there, is this more just sort of cocktail conversation, or are your communities seeing actual evidence where increased hiring is actually showing up to rent apartments in your Southern California? That's my first question, then I have a second.
Angela Kleiman: Okay. Hey, Alex, thanks for your question. I think the difference with respect to the aerospace defense now versus what's been discussed in the past is that now there's actually been commitments or investments earmarked that's been published. A $1.5 trillion is an eye-popping number, and have it stated that a third of it allocated Southern California is, as far as we're concerned, really terrific indication of where that industry is headed. As far as having SpaceX headquartered in the LA region and, of course, Anduril in the Long Beach area. Having two major industry giants having a footprint in those markets are also a very good indication for that market. Now, having said that, once again, these are relatively new and money is just getting allocated. Companies are just starting to hire, and so it would be way too early to see that translate to job growth.
Angela Kleiman: It's just never happened that quickly, that announcement and then immediate job hire. It always takes time for people to find the right talent, find the right office space for them, and grow that business.
Alexander Goldfarb: Okay. The second question is on Seattle. I don't know if you saw the article, but there was a recent business survey, local businesses not too happy with the way Seattle is going, thinking about leaving, what have you, obviously the Microsoft news. But can you just break down the market? Because you talk about strength from the Eastside, weakness in the CBD, where you have less exposure. There's obviously the political overhangs and just trying to understand the market, if Seattle retains its economic engine or if there are disruptions where it may be a bifurcated market even next year, and therefore the hopeful growth that many of us think about is coming may not actually occur because of other dynamics in the market, whether it's a split between Eastside and CBD or where companies are allocating their hiring there versus Bay Area or elsewhere.
Angela Kleiman: Yeah, that's a good question on Seattle, Alex. What we see is certainly Eastside has been a beneficiary of some of those migrations from, not just from downtown Seattle, but from other markets as well. And we do see that continuing because certainly no employers are making noises about leaving the Eastside. I think that article really relates to the concern about the legislation. And I think when legislation becomes business unfriendly, and discourages housing, I think that's a concern for all of us. And I do think that it's a good starting point to have a conversation with the legislation with Seattle and the City of Seattle. I'm hopeful that they'll take note. I know in the past when these conversations occurred, there were adjustments and both sides were at the table trying to work things out. I'm hopeful that that will occur once again.
Angela Kleiman: Ultimately, with Eastside being the beneficiary, I think ESSEX PROPERTY TRUST is in a solid position. But don't forget, keep in mind, the other overhang in downtown Seattle has been supply, and supply is starting to abate. So at least there'll be some relief on that end.
Operator: Our next question is from Jana Galan with Bank of America.
Jana Galan: Thank you. Good morning. Just wondering if you can go over latest thoughts around capital allocation. You mentioned the recent Oakland acquisition was in the mid 5s. How do you kind of weigh that relative to share buybacks? Also curious if you are seeing increased opportunities in lending or preferred equity.
Rylan Burns: Hey, Jana, this is Rylan here. Just starting with the capital allocation strategy. What we are really trying to do, consistent with the past, is source the highest risk-adjusted returns, pair it with our lowest cost of capital to drive NAV and FFO per share. So you mentioned several potential investment opportunities that we have done this year. When we think about our menu of options from acquisitions, development, preferred equity, reinvestments, stock buybacks, debt paydown, we have allocated to five of those six in 2026. So we are going to remain nimble. Our strategy is not going to change, and we are just going to, when we see an opportunity to create NAV and FFO per share, that is when we are going to lean in.
Rylan Burns: As it relates to the most recent question about the deal that we just announced yesterday, again, this is really consistent with what we are doing for the past several years, where we have been allocating acquisition capital into newer assets where we can drive efficiencies from our operating model in markets where we have conviction of growth. As you mentioned, and Angela mentioned, this is a mid 5 initial yield, and we believe the East Bay is in the path of growth. We have seen this before in previous cycles, where you see really strong rent growth in a tight housing market in San Francisco and the Peninsula that is moving into Oakland and down south through Milpitas, and we believe this is coming with high level of conviction on the East Bay.
Rylan Burns: We are really comfortable with the basis in this property, and most importantly, we think we can create value.
Rylan Burns: We've got 2 communities nearby, so we can take costs out, improve the retail leasing. This is, I think, a nice win for our investors. Bigger picture, as we think about capital allocation, all of that whole menu is on the table for us, and we're going to continue to lean in where we can drive the most value for our shareholders.
Jana Galan: Thanks, Rylan. Then just with the increased volatility and rates, curious if you are seeing more opportunities on that lending side.
Rylan Burns: Yes. I'd say it's still a little bit too early. I think the market's still adjusting to the move in rates that we've seen in September. But as the financing market gets a little bit tighter, that should create more opportunities for us on the preferred equity book, as well as on the acquisition side. So it's still early. I think buyers and sellers are still adjusting. I think you've heard the public commentary in terms of bid-ask spreads widening. I think that's fair on the West Coast as well. So we're, again, underwriting everything, trying to create opportunities, and I do think it will create additional options for us in the near future.
Operator: Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt: Great. Thanks. Hello, everybody. With respect to the mid 4% renewal rate growth that you highlighted on achieved rates in Q4, are you guys more focused on building occupancy today ahead of next year? I would be curious where occupancy has trended subsequent to quarter end. Is the move from the 5.3% renewal rate growth you achieved in Q3, the mid 4s, is there some other factor that is causing you to pull back a little bit?
Angela Kleiman: Hey, Austin, it is Angela here. Thanks for your question. We typically favor occupancy heading into our seasonal slow in Q4. You will see us continue to deploy that strategy with the caveat in certain pockets of Northern California, we are continuing to see strong momentum. That, of course, will allow us to continue to favor rents. We will see how long that lasts, but we certainly will try to maximize that momentum as much as possible.
Austin Wurschmidt: As far as where occupancy sits today?
Angela Kleiman: Occupancy today is 96.3, I think. Yep, 96.3.
Austin Wurschmidt: Helpful. Last one for me on the expense side. It looks like the guidance implies a fairly big pickup late in the year. Anything specific that is driving the increase? Any considerations for expenses ahead of next year? Thank you.
Barb Pak: Hi, Austin. It is Barb. As we have said the last several quarters, we did expect a H2 increase in our controllable expense spend. It is just timing on when we were going to finish up some of the projects that we had going on this year. So that is what is really driving the Q4 expense increase of about 5% on a year-over-year basis. It is really driven by that controllable side, which has been light year to date. So no change from our original plan this year. As we look to 2027, we are still working through the budget process. But as I look at things today, when I look at the key categories that we publish on S10, I do not see too many deviations in year-over-year growth from what we expect in 2026, with the exception of property taxes.
Barb Pak: We did have some favorable Prop 8 appeals this year, which allowed our property taxes to be only 60 basis points increase on a year-over-year basis. I would assume that is going to be more in line with our historical average of 3% to 4% next year. So that is the one line that I think has a little more pressure than the other lines.
Operator: Our next question is from Jamie Feldman with Wells Fargo.
Jamie Feldman: Great. Thank you for taking the question. I guess as we are thinking about next year, can you quantify how to think about the earnings impact from the JV swap resets, including the $496 million moving from 2.7% to 5.3%, and then the remaining $128 million? How do we think about the rate and timing when we are building out our models for next year?
Barb Pak: Yes, Jamie, this is Barb. That is a good question. So we do have three swaps maturing within the joint venture portfolio. One 1 December of this year, and then two at the end of March next year. We have executed new swaps for 80% of that at an all-in fixed rate of 5.3%. While our rate is going up, it is obviously a byproduct of the market. It is not an ESSEX PROPERTY TRUST specific issue, just rates are higher. What I can tell you is if we waited to hedge and we did not hedge, our rate would even be higher today in the high 5s. So we feel good that we do have a better than market rate going into next year.
Barb Pak: The impact to our interest expense from the swaps that we have executed at pro rata share will lead to a $0.09 increase to interest expense in the joint venture portfolio. As you mentioned, 20% is not hedged, and that is going to be floating at this time, and that will add a couple more pennies to interest expense, depending on what SOFR rate you assume. We will monitor the markets. If we see an opportunistic window to hedge that, we might, but right now it does not make sense to hedge that. So all in, $0.10 to $0.12 increase next year on interest expense from the swaps at pro rata share.
Jamie Feldman: Okay. Thank you for that. The term loan, I do not think that is hedged either. Are you making an interest rate bet overall, or it just was cost prohibitive, or you just felt like you could be patient on it?
Barb Pak: Yeah, that term loan we did in September. Once again, we don't have a lot of variable rate exposure. Really, our exposure to SOFR is 7% at pro rata share, so it's very low on a total basis, and that does include the $275 million term loan that we just did. When we closed that term loan and we looked to go swap it didn't make sense. It was very prohibitive. We were paying up for a lot of interest rate increases that may or may not happen. We'll monitor the market and look to see if there's a window that makes more sense, but at the time it didn't, and it still doesn't today.
Operator: Our next question is from John Kim with BMO Capital Markets.
John Kim: Good morning. I wanted to ask about San Francisco. It's the gift that keeps on giving. I wanted to ask how much further you think it has to go. We noticed occupancy kind of fell sequentially. When you look at rent-to-income ratios or other metrics, where do you see San Francisco pricing versus income? Do you think other markets like Oakland, East Bay, South San Francisco, they'll play catch up to San Francisco, just given affordability?
Angela Kleiman: Yeah. Hey, John. I'll try to hit, I think all of your questions. If I miss something, just holler. As far as when you're talking about sequential occupancy, we took it down from 96.1% to 95.6%. That's intentional because we were able to push rents, and in that environment, that was a more of a offensive play. So it's actually a good sign. Landing where we land for San Francisco is actually quite a good number. As far as what's to come in this market or I guess what's left in the gas tank, Rylan will talk about affordability in a second. What we're seeing is that market rents is still catching up and coming. At this point, just to get back to the historical long-term CAGR, we're maybe halfway there at the most. I'll give you one example.
Angela Kleiman: If you just take affordability, which Rylan will talk about all the other markets, but in Northern California, just to return to pre-COVID affordability levels, rents could actually increase by over 20% with no wage growth. That gives you the magnitude just from this one metric. We have seen that coming out of the great financial crisis, the strength in this market, where the momentum actually lasted many years. You have a high cost of homeownership, which continues to favor rental affordability and historical low supply. That is continuing, and of course, with demand catalysts. Rylan, you want to cover?
Rylan Burns: Yeah, John, just to give you some more specifics. When we look at the rent to median income ratios in Northern California, so San Francisco, that ratio has increased with the rent growth that we have seen by about 150 basis points compared to a year ago. It is currently sitting at 25.7%. This compares to the long-term average or 20-year average of just under 30%, and a historical peak of 36% over the previous two decades. So a long way to run there. Oakland and San Jose, we are starting to see some improvements, but these ratios in Oakland are 21%, in San Jose, just under 21%, again, with historical peaks in the 30% range. So affordability remains a tailwind in this market for us, and we continue to have conviction that there is more room to run there.
John Kim: Okay, thank you. I think you hit all parts of my multi-point question. I wanted to ask about LA. You talked about green shoots in the market and it being stable. You kind of threw cold water in response to Alex's questions on aerospace demand, at least being a near-term pickup. So what are some of the green shoots you are seeing in terms of 2027 in terms of rent growth and employment growth?
Angela Kleiman: Well, first of all, we do not have enough visibility when it comes to employment growth because LA is a reflection of the broad US economy. It does have more professional services, so that is a good staple that essentially supports the overall LA market. We do have, of course, supply continuing to decline, so that in itself will signal that you just do not need as much job growth to generate rent growth. So that is another thing that is good. As far as my comment on the defense industry, I did not obviously mean to throw cold water on Alex. He makes a good point. I do think that it is a catalyst. It is a future catalyst. My comment only relates to timing, which is we really do not know. We know it is coming, we just do not know when.
Angela Kleiman: And it is the same question I got about Northern California 2 years ago when everybody was asking, when is it going to happen? And our view was, well, we see something happening, we could not pinpoint exactly when. So it is a similar thought process.
Operator: Our next question is from Adam Kramer with Morgan Stanley.
Adam Kramer: Hey, great. Thanks for the time. Wanted to ask about same-store expense growth in the quarter. I think Seattle was a bit elevated, maybe relative to the other markets, relative to expectations. So just wondering if there is anything in there to call out, and then maybe just how to think about that specific market going forward within the context of your guidance.
Barb Pak: Hi, Adam. It is Barb. No, nothing specific to call out. There was a little bit more controllable expense spend in the quarter versus a year ago, so that led to a little bit more elevated year-over-year growth. And then property taxes obviously go up there more than in Southern California and Northern California. So that also led to a little bit elevated. But I think it is timing related on the controllable expense spend, so I do not see anything unusual in that market that would lead to higher expense growth, all else being equal, than the other markets going forward.
Adam Kramer: Okay, great. Then maybe a little bit of a bigger picture one. I know we've talked a little bit about aerospace defense sort of industry and what that can mean for broader SoCal. Maybe just for the Northeasterners on the call here, myself included, just maybe by sub-market or sort of however you want to slice it, just sort of what are the regions, areas that you think are sort of seeing this benefit or are seeing this benefit right now? Then maybe just talk about sort of your exposure to those specific sub-markets that are benefiting from the aerospace defense spend here.
Angela Kleiman: Yeah. Hey, Adam. It's mostly concentrated in the South Bay. I talked about Anduril having a headquarter in Long Beach and, of course, SpaceX in Hawthorne. But those are kind of the two bookends, if you will. Then everything else in between. There's quite a few. I think we have a map in one of our presentations recently, which we can send to you after the call so you can get a good visual. So it's really broader South Bay, which is good. That's a widespread footprint.
Operator: Our next question is from Rich Hightower with Barclays.
Rich Hightower: Hey, guys. Good morning out there. So obviously, we've talked a lot about the strength in NorCal specifically, but I'm wondering, could you walk us through maybe different sub-markets where you're bumping up against some of the AB 1482 limits in California? Then also add to that maybe where your loss to lease sits currently.
Angela Kleiman: Yes, happy to go through that. In the Bay Area, let's see. Definitely San Francisco is bumping up against that AB 1482, and let's see, San Mateo, of course, and let's see, parts of Alameda is starting to get close, but not quite there yet. San Jose is also up there. So I would say most of the markets, other than, of course, the East Bay, which is why we're excited about our investments there. As far as loss to lease, I have that. So loss to lease in September this year is sitting at about 1.4%. Leading the charge is, of course, Northern California, close to 8. And just for context, much better than same time last year. Last year, we were actually 30 basis points gain to lease. So hopefully that gives you a good reference point.
Rich Hightower: That's great. Very helpful. I guess secondly, that's all good news. I guess, in terms of maybe cautious news, is there anything kind of in the upcoming LA mayoral race or other statewide ballot initiatives? I am thinking of the California wealth tax. I mean, is there anything on your radar that you are sort of strategically planning ahead for if something goes the wrong way there?
Angela Kleiman: Yeah, that's a good question. It's really hard to anticipate where the legislation is moving toward. So we continue to run our business, as we have always done in the past 32 years, in terms of just focusing, optimizing our revenues and our capital allocation strategy. As far as the LA mayoral race, from our observations, it's a really tight race. Karen Bass has received support from major players like Rick Caruso and the LA Police Union, while Raman has gained traction due to frustrations with legacy administration. So it's hard to see where things are going to land. I do think that there has been a recognition that we have a housing shortage, and there has been certainly a focus on how to work with housing providers, and I am hoping that will continue.
Angela Kleiman: Where I have seen recent legislations that has been proposed that has an onerous anti-business component to it, they have not passed committee, so that's a good sign that the legislatures at least have some understanding of what's important to voters and having a healthy economy is important. So we are hoping that that trend toward moderation will continue. As far as the governor's race
Angela Kleiman: So far, Becerra from his campaign seems to understand, once again, the importance of partnering with private businesses and focusing on addressing housing shortage. There is not a whole lot of noise coming from his camp about rent control, because I think they are aware that that is just so ineffective and it actually discourages housing production. They have been focusing on measures to hopefully produce more affordable housing, which is great for the overall economy.
Operator: Our next question is from Ami Probandt with UBS.
Ami Probandt: Hi. Thanks. To start, maybe another follow-up to some of the previous questions on Northern California. How should we be thinking about tailwinds to blends in Northern California as we move into 2027? Could there be some opportunities on the renewal side as you bring your existing residents up to market rate? Just thinking about where we are currently in terms of new lease growth compared with renewal growth, and if all else equal, that creates a built-in tailwind on the renewal side for next year.
Angela Kleiman: Well, I think, probably a good indication is if you look at our earn-in this year of 150 basis points, and the majority of that is Northern California. So we have a good head start to the year on Northern California. The renewals were capped at AB 1482, which is inflation plus 5%, max at 10. So there is still some room there, or I should say some tailwind there. On the new lease side, you just take the rent to market. So the new leases are not capped. The question really is how long does it take to capture the new lease rates? Perfect example is if market rent growth is growing at 15% and a tenant can stay in place where the rent is capped at 10%, well, the tenant is more likely to just remain.
Angela Kleiman: And so that ability to capture the 15% will just be a little more prolonged. But as far as I am concerned, that is all good for us. Keep in mind, ESSEX historically has operated with our self-imposed 10% cap, because we do not believe in anti-gouging either, and we have done just fine in those environments.
Ami Probandt: Great. Thanks. In terms of the same-store revenue guidance build up, what are you including in terms of occupancy and non-rental revenues? Were there any changes within the outside of blends within your updated guidance?
Barb Pak: Hi Amy, it is Barb. No, the update for same-store revenues, the increase is 100% driven by scheduled rent growth. Just top line.
Ami Probandt: Great. Thank you.
Operator: Our next question is from Wes Golladay with Baird.
Wes Golladay: Hey, good morning, everyone. Over the last few years, you made a point to allocate capital in Northern California. Can you talk about what drove the decision to sell a relatively new asset in San Jose? Did you consider buying your partner's interest?
Rylan Burns: Hey, Wes. This is Rylan here. Yes, this was a joint venture asset, as you mentioned. Again, we thought we got a fairly good value for that asset. There has been a lot of people that have been looking to allocate capital into Northern California over the past year. We did have a discussion about potentially buying this out, but as I alluded to more recently, the recent acquisition in Hayward, we felt provided a better risk-adjusted return. This remains an ongoing discussion on all of our joint venture assets. We do think we have an inside track there if we want to buy out some of these assets, but again, with finite amount of capital, we are looking to allocate to the best risk-adjusted returns, and in this instance, selling this asset and redeploying into the East Bay made more sense for us.
Wes Golladay: That is all for me. Thank you.
Operator: Our next question is from Julien Blouin with Goldman Sachs.
Julien Blouin: Yeah, thank you for taking the question. I just want to ask about your supply outlook into next year. I think some of the third-party data suggests we could see an increase in supply in 2027. I think permitting is up from the bottom a couple of years ago. So I was just wondering, I think on page S16, you show supply coming down. Are you factoring in delays? Is there something else playing into that view?
Rylan Burns: Hey, Julien, this is Rylan here. Yeah. This is something we have discussed for many, many years, the differences between our supply forecasts, which account for delays, as well as the actual lease-up pace of buildings in a more likely manner. So we have high conviction, high level numbers. We think supply is coming down around 20% in our markets versus next year. And we have pretty good conviction about what that supply number is going to look like. So, I would continue to look at our supply numbers and one of the reasons why we are increasingly more optimistic about our markets next year. Was there a second part to the question?
Julien Blouin: No. That was it. And then my second question is around, I appreciate the comments around the mid-4s renewals stepping down in Q3, being a bit a function of prioritizing occupancy. But I was just looking, I do not think we have seen a deceleration in renewals from Q3 to Q4 over the last few years. Is there something different this time around, or is it more just a function of how strong that Q3 renewal was? And any specific markets showing a bigger sequential step down in renewals?
Angela Kleiman: Yeah. We certainly had a very strong Q3 renewal, which obviously, as you astutely noted, makes it look like there was a big deceleration, but obviously that is not the case. But in terms of the composition of the renewals, Northern California, of course, is hitting in much higher, kind of in the 8% range as you would expect, close to that AB 1482 cap. Southern California is hovering around 2% to 3%, and Seattle somewhere in 3% to 4%. So that average to our renewals achieved to close to 4.5%. But once again, these are all normal numbers, and we are not seeing any cracks.
Operator: Our next question is from John Pawlowski with Green Street.
John Pawlowski: Hey, thanks. Good morning. I have two questions on LA. The first is on operating fundamentals. Angela, I think you used the characterization as stable. I guess I do not see the stability in the revenue growth trend. You started the year, Q1 year-over-year revenue growth of 1.7%. It has decelerated to 50 basis points year-over-year in Q3. Despite easy comps, sequential revenue is pretty weak. So what are you seeing in the portfolio that gives you confidence the LA market is stable?
Angela Kleiman: Yeah, we are seeing a couple of things. First, the delinquency in LA has remained stable, and it is going to ebb and flow in terms of getting back to that normalized run rate. But when we look at occupancy, it has been hovering around that gross occupancy around that mid-95%. Once again, that is a good sign, right? Because if there are cracks, you would see the occupancy fall right away. But ultimately, if you look at sequential revenues, LA County, which is on our S-9, it is not great, but it is still an improvement. 10 basis points sequential revenue improvement in LA County. I will take it. So I am not seeing a meaningful backslide. I am just seeing either stable or slight improvement. If I look at year-to-date numbers on a revenue perspective for LA County, once again, it is up 1%.
Angela Kleiman: I do not know if I would get too caught up on quarter-to-quarter noise, but once you look at all the metrics, it points to a stable environment.
John Pawlowski: Okay. Second question is on the transaction market in LA. It is obviously not a loved market from capital providers right now. Rylan, I am curious for more urban submarkets, higher-rise product, where you think market clearing cap rates are for urban higher-rise Los Angeles apartments these days?
Rylan Burns: Hey, John. We have not seen a ton of transactions. I think you are asking particularly about downtown LA and high-rise. I do not disagree with you. Given the vacancy in that specific submarket and some of the operating challenges we have seen in recent years, that is a tougher ask and relatively not well bid. I hesitate to put a specific cap rate out there. We do think there is a market clearing transaction. It is probably closer to a positive leverage number, but we have not seen enough transactions to give you a real pinpoint on where that cap rate would transact today.
John Pawlowski: Okay. Thanks for the time.
Operator: Our next question is from Haendel St. Juste with Mizuho Securities.
Haendel St. Juste: Yes. Thank you. Wanted to go back, I think it was earlier question that Jana asked on the mezz book. I guess I am curious if there has been any rethink in the mezz book strategy. I think you mentioned on a prior call or two that you had a target sizing for the book of $100 million by year-end. It looks like you added a small loan at some point during the quarter. I guess, is the newer higher rate environment causing a rethink? I am curious if that book could be larger or smaller over the next year. Thanks.
Rylan Burns: Hey, Haendel. This is Rylan here. As we said for the past couple of years, we wanted to normalize the size of this portfolio relative to our business. So it has shrunk considerably, and it is going to be, as you said, $100 million at the end of this year. We are just being really diligent as it relates to incremental investments within this pref book. They have to offer significant better risk-adjusted returns than several of the other options we have to allocate capital, which I mentioned earlier. I do think with the move in rates and the tightening a little bit on the financing market, this should create some more opportunities. The other factor that has happened in the past few years with development starts coming down considerably on the West Coast. That has historically been a good engine for the preferred equity book.
Rylan Burns: I do not envision that changing going forward, but I do think you might see some more opportunities on stabilized assets if the financing market remains somewhat tight over the next few years. So, it is something we continue to engage with sponsors on, and we will continue to look for good opportunities where we are getting compensated for that risk.
Haendel St. Juste: Thank you, Rylan. That certainly helps. Angela, maybe if I could ask you, just maybe a bigger picture question on the growth profile for ESSEX PROPERTY TRUST here within intermediate term. San Francisco has been such a strong market the last year, should be strong next year as well, but the comps are getting a little more difficult. Sounds like Seattle and LA are moderating. It sounds like there are some green shoots of optimism, but certainly feels like the core is slowing. Then there is higher interest expense that you are dealing with, the West Coast JV and the mezz book being a bit smaller is less additive. So, maybe are there other offsets that perhaps we are not considering? But how do we put this all together and think about the growth profile for ESSEX PROPERTY TRUST over the next year or so?
Haendel St. Juste: It certainly does not sound like there is an acceleration story ahead of us in the near term.
Angela Kleiman: Hey, Haendel. I think this is a complicated question, in terms of what is going to happen next year and when acceleration can occur. Obviously, Northern California and what is happening there, that is clear to everybody on what the potential is and that momentum that is continuing. As far as Seattle and LA, a growth profile, we do see that there is more upside than downside as far as visually relative to past performances. Because Seattle has had a tough start to the year, but we have seen it turn positive, and LA has remained stable with a potential demand catalyst in the aerospace defense industry. In both markets, supply are continuing to decline. So if nothing happens, or I should say, if conditions remain the same between this year and next year, our fundamentals are slightly better, just from the supply picture and some potential demand catalysts there.
Angela Kleiman: Now, that is a top-line conversation, right? The question is, well, when are you going to see acceleration? I think that relates to the view on the broader economy. So when we look at third party forecasts, we are not seeing anything that is all that different than more of the same. But it is also too early to predict, because we do not know what the results of the midterm election are going to be. So hard to say, but I would go back to the West Coast does have a bull case. There is a path to that growth. Timing is difficult to predict, but I will point back to, once again, to what happened not too long ago, coming out of the Great Recession. We had 5 plus years of acceleration, and so certainly, it is possible, and there is a path to that.
Angela Kleiman: As far as bottom line, that interest rate expense pressure, I think that is not an ESSEX situation. That is not just all REITs, it is really all companies are going to be faced with that headwind. I do not think that in this itself is a call-out for the West Coast story.
Operator: Thank you. Our last question is from Alex Kim with Zelman & Associates.
Alex Kim: Hey, morning out there. Thanks for taking my question. Rylan, I know earlier this year you mentioned that the South Linden project was trending favorably relative to your initial underwriting with an expected stabilized yield around 6%. Given the continued strength in Northern California rents, is that yield expectation improving, and are you guys getting any closer to moving forward with the other development in Mountain View that you discussed in September?
Rylan Burns: Hey, Alex. Thanks for the question. Yes. As you have seen the rent growth up and down the peninsula through San Francisco into San Mateo, South San Francisco is also benefiting. The yields continue to improve on our underwriting costs. Thankfully, we are doing a great job managing that project, and we are hoping to deliver it ahead of schedule. More to come in the next couple of quarters as we continue to make progress. Everything is going to plan on the 7 South Linden project. We are making headway on the entitlement process as it relates to the Middlefield project. We will probably have more to report on that in the next coming quarters. We are looking for those select opportunities where we think we are getting compensated for the risk-taking inherent in development.
Rylan Burns: So excited about both those projects, and we continue to look for new opportunities to add value to our development pipeline.
Alex Kim: Got it. Thanks. Angela, staying on Northern California, could you talk a little bit about the differences you are seeing in rent growth between urban San Francisco and more suburban markets across the Bay Area? Are you seeing a more meaningful divergence in new lease pricing or demand between those areas, and is one outperforming the other as we head into 2027?
Angela Kleiman: Hey, Alex. Good question. On the Northern California rent growth, if we look at the blends, there is of course some diversions, as you would expect. We see, let's see, Santa Clara, San Mateo, and San Francisco counties outperforming. They are closer to, on the blends. Where is my blends? One second. Oh, here they are. So on the blends in Northern California, they are running much higher. They are closer to, say, above 7%. With Alameda and Contra Costa, so the East Bay market are lagging at about 5.5%. So that gives you an indication of kind of that probably about, say, call it 300 basis point spread between those two key areas. This is why we are leaning in on our East Bay thesis, because we have seen this all before.
Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participation.
