エセックス・プロパティ・トラスト（ESS）2026年第3四半期決算説明会：売上高およびNOIの見通しを上方修正

要約

• エセックス・プロパティ・トラストの2026年第3四半期コアFFOは1株当たり4.00ドルとなり、ガイダンス予想の中央値を0.01ドル上回った。一方、同一物件増収率は前年同期比3.0%増となった。
• 経営陣は、通期の同一物件増収率ガイダンスの中央値を10ベーシスポイント引き上げて2.9%とし、同一物件NOI成長率ガイダンスの中央値を20ベーシスポイント引き上げて3.0%とした。
• 北カリフォルニアが引き続き最大の成長要因となった。総合賃料成長率は7.3%に達し、シアトルの2.1%や南カリフォルニアの0.9%と比較して高い水準となった。
• エセックスは通期の総合賃料成長率をガイダンス範囲の上限に近い約2.9%と見込んでいる。また、コアFFOガイダンスの中央値を1株当たり0.02ドル引き上げた。
• 同社は2022年に建築されたイーストベイの474戸のアパートメントコミュニティを2億ドル超で取得した。経営陣は初期利回りを5%台半ばと見込んでいる。
• エセックスの当期末時点の純有利子負債対EBITDA比率は5.4倍で、利用可能な流動性は10億ドルを超え、2027年の持ち分比例ベースの償還予定債務は約5億7,500万ドルとなっている。

主要財務データ

事業および営業業績

北カリフォルニアは引き続きエセックスのポートフォリオを牽引した。9月まで続いた好調な賃貸シーズンに支えられ、第3四半期の総合賃料成長率は7.3%となった。新規賃貸料率は第2四半期から前期比で20ベーシスポイント改善しており、通常の季節的な減速傾向を考慮すると異例の結果となった。

経営陣によると、サンフランシスコ、サンマテオ、サンタクララ各郡の総合賃料成長率は7%を超え、イーストベイ市場は5.5%程度となった。北カリフォルニアの賃料対所得比率は25.7%と、20年平均の30%弱を下回る水準だった。9月時点のポートフォリオ全体のロス・ツー・リースは1.4%で、北カリフォルニアでは8%近くに達した。

シアトルは年初の低調なスタートからの回復を続けた。イーストサイドが牽引し、第3四半期の総合賃料成長率は2.1%とプラスを維持した。経営陣はまた、供給の減少やテック関連の求人数がコロナ前の平均に達したことを前向きな指標として挙げたが、より本格的な回復は2027年後半頃になると見込んでいる。

南カリフォルニアの総合賃料成長率は0.9%となり、同社の計画通りの水準となった。オレンジ郡とサンディエゴが同地域を牽引した。ロサンゼルスの稼働率は95%台半ばで推移した一方、市場供給量は過去2年間で40%以上減少した。

経営陣は、航空宇宙および防衛分野への投資が、特にサウスベイを中心に、ロサンゼルスにおける長期的な需要の触媒になるとみている。ただし、雇用増やアパート賃貸需要として具体化するには時間を要すると強調した。

フリーレント等の値引きは安定して推移した。ポートフォリオ全体では第3四半期平均で約10日分となり、前年同期の6日分から増加し、第4四半期初めは約1週間分となった。北カリフォルニアでは実質的に値引きがなく、太平洋岸北西部は1週間未満、南カリフォルニアは1週間を超えていた。

経営陣によるガイダンス

エセックスは通期の同一物件増収率中央値を2.9%に引き上げた。この上方修正の全額は契約賃料成長の拡大によるものである。同社は営業費用増加率の中央値を据え置いた。

経営陣は、下半期に予定されていたプロジェクトの完了に伴い、第4四半期の管理可能支出が増加すると見込んでいる。これにより、同四半期の費用は前年同期比で約5%の増加になると予想されている。

同社は通期の同一物件NOI成長率中央値を3.0%に引き上げ、コアFFOの中央値を1株当たり0.02ドル引き上げた。

第4四半期の契約更新時の賃料上昇率は、募集賃料の引き上げ率が5%台前半から半ばであるのに対し、4%台半ばで着地する見込みである。地域別の更新時の賃料成長率は、北カリフォルニアで8%近く、シアトルで3%〜4%、南カリフォルニアで2%〜3%となっている。

エセックスは現在、2027年の賃料成長へのキャリーオーバー効果を概ね155〜160ベーシスポイントと試算しており、以前伝えていた約150ベーシスポイントから上方修正され、前年の85ベーシスポイントを大きく上回っている。

2027年の費用について、経営陣は現在、大半の項目が2026年の増加率に沿って推移する可能性が高いと述べた。主な例外は固定資産税であり、異議申立ての成功による恩恵を受けた2026年の0.6%増に対し、過去の歴史的範囲である3%〜4%に戻る可能性がある。

貸借対照表および資本配分

変動金利負債は持ち分比例ベースの債務の約12%を占めた。2026年中に、エセックスは今後6ヶ月間に満期を迎えるスワップを借り換えるため、全コスト込み固定金利4.9%で約6億ドルのスワップを実行した。

ジョイントベンチャーのポートフォリオでは、同社は満期を迎える3件のスワップの80%を全コスト込み固定金利5.3%でヘッジした。経営陣は、スワップのリセットと残りの変動金利エクスポージャーにより、2027年の持ち分比例ベースの支払利息が1株当たり約0.10ドル〜0.12ドル増加すると見込んでいる。

エセックスは、リスク調整後リターンや1株当たりFFOおよびNAV（純資産価値）の増大可能性に基づき、買収、開発、優先株投資、物件再投資、自社株買い、債務削減の各分野に引き続き資本を配分していくと述べた。

最近取得した474戸のイーストベイ物件は、5%台半ばの初期利回りを生み出すと期待されている。エセックスは、近隣のコミュニティを活用してコスト削減と店舗リーシングの改善を図る計画である。経営陣はまた、買主と売主の間の調整がまだ続いているものの、金利上昇と金融引き締め環境により、追加の物件買収や優先株投資の好機が生じる可能性があると語った。

リスクおよび注視事項

• 経営陣は、2027年の全米のマクロ経済および労働市場の見通しについて不透明であると説明した。
• 金利上昇は、ジョイントベンチャーにおけるスワップのリセットや残りの変動金利負債を通じて、2027年の支払利息を増加させる。
• 最近の米国債金利の上昇により、売買市場における買値と売値のスプレッドが拡大しており、第4四半期の取引量が減少する可能性がある。
• シアトルでは失業保険申請件数が長期平均を下回っているものの、テクノロジー部門の人員削減・再編の動きやビジネス関連法案への懸念による不透明感に直面している。
• ロサンゼルスの需要は依然として広範な経済状況に依存している。航空宇宙および防衛分野への投資は潜在的な触媒となるが、経営陣はそれが雇用や賃料の成長に結びつく時期を特定できていない。
• AB 1482による制限を含むカリフォルニア州の賃料規制により、北カリフォルニアの一部地域において、契約更新時に市場賃料の成長を取り込むエセックスの能力が遅れる可能性がある。

アナリスト質疑応答のハイライト

北カリフォルニアの伸び代：経営陣は、サンフランシスコの市場賃料は長期的な成長軌道への回復プロセスの半分程度に過ぎない可能性があると述べた。また、賃金上昇がなくても、北カリフォルニアの賃料はコロナ前の購買力水準に戻るまでに20%以上上昇する余地があると付け加えた。

10月の賃貸動向：10月の北カリフォルニアの新規賃貸成長率は10%超を維持した一方、その他の地域は通常の季節要因に沿ってマイナス圏へ推移した。

稼働率戦略：エセックスは稼働率96.3%で季節的な減速期に入り、大半の市場で稼働率の維持を優先している。北カリフォルニアは例外であり、強い需要を背景に引き続き賃料成長の追求を重視することができる。

供給見通し：経営陣は、エセックスの事業市場におけるアパート供給量が2027年に約20%減少すると見込んでいる。この予測には、建設の遅延や予想されるテナント募集のタイミングが含まれている。

イーストベイ投資の根拠：エセックスは、賃料の成長がサンフランシスコ、ペニンシュラ、およびより好調なサウスベイ市場から、オークランドや広域イーストベイへと波及すると予想している。この見通しは、新規物件の取得と、サンノゼのジョイントベンチャー資産についてパートナーの持分を取得せず売却するという決定の双方を後押しした。

開発パイプライン：セブン・サウス・リンデン（Seven South Linden）プロジェクトは引き続き順調に推移しており、北カリフォルニアの賃料上昇に伴ってアンダーライティング利回りが改善している。また、エセックスはミドルフィールド（Middlefield）プロジェクトの許認可手続きを進めている。

決算説明会（トランスクリプト）全文

---

決算説明会の完全なトランスクリプト

経営陣による説明

Operator

Good day, and welcome to the Essex Property Trust Third Quarter 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's third quarter earnings call. Today, I'll cover our operating performance for the quarter, considerations heading into next year and conclude with a transaction market update. Our path will follow with prepared remarks, and Rylan Burns is here for Q&A. We are pleased to achieve another increase 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 the second quarter and remained positive in the third quarter, generating 2.1% growth. This improvement has been led by the E side, 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 reading the performance across this region. Our blended rent growth of 90 basis points in the third quarter was in line with plan.

Looking ahead to 2027, the outlook for the broader U.S. economy and labor market remains uncertain. Even against this backdrop, West Coast multifamily fundamentals offer a compelling case for continued growth above the U.S. average with encouraging green shoots supporting the potential for further momentum. 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 the third quarter was generally consistent with same period last year.

Recent increases in the treasury rates is still being factored into the transaction market. We will not be a surprise if fourth quarter volume declines as buyers and sellers adjust to the new rate environment. Although historically, our data shows that rate moves have less impact on pricing and cap rates in markets with strong rental fundamentals. Lastly, I'm 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 deo acumen in a competitive environment leveraging our strong reputation and geographic scale in our market to generate operating efficiencies from day 1. 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'll turn the call over to Barb.

Barb Pak

Thanks, Angela. Today, we'll cover our third quarter results, discuss updates for our full year guidance and conclude with comments on the balance sheet. Beginning with our third quarter results. We reported core FFO per share of $4, representing a $0.01 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 our 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 the fourth quarter, which we have previously discussed. 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 the $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 SIMA index, which floats at a cheaper rate than SOFR.

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 6 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

[Operator Instructions] Our first question is from Nick Yulico with Scotiabank.

質疑応答

Nicholas Yulico

I guess just maybe starting out with the blended rate growth. I think historically, you don't typically see an acceleration in the new lease rate growth in the third quarter versus the second quarter. But at the same time, you also have like Northern California as a region being very strong right now and sort of -- it seems like it's strengthening in the third-party data year-to-date. So I guess I'm just wondering, maybe you can just talk about like what -- maybe what new lease rate growth looked like in Northern California versus the other regions in the third quarter?

Angela Kleiman

Nick, it's Angelo here, and thanks for your question. And you're absolutely right. Typically, sequential growth in blends from second to third quarter is not -- or do you typically see a deceleration because we're just -- it's just normal seasonality for this business. And 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 second quarter to third quarter actually improved by 20 basis points. That is unusual. But then again, this market has had tremendous momentum as it starts its recovery. And this is a good sign.

But if we look at our blends, this year compared to last year sequentially. This year is doing better overall, not just in Northern California. So I'll give you an example. Seattle lastly, new lease rates actually declined by over 700 basis points. This year, it's only about 120 basis points. So all other markets are doing just fine with, of course, Northern California leading the charge.

Nicholas Yulico

Okay. And then secondly, in terms of L.A., I know you're getting sort of 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?

Angela Kleiman

Yes. Nick, good question on L.A. Certainly, it's a market that we've been monitoring very closely. A couple of things, I think, have we're seeing green shoots in L.A., although these things will take time, but supply continues to decrease. So over the past 2 years, supply has decreased by over 40% in the LA market. And -- 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. .

So there's some noise there. There certainly isn't anything that we are concerned about. But what we've been really focusing on is the defense and aerospace green shoots. And that industry is expected to grow faster in GDP over the next 10 years than the rest of the economy and it's estimated to surpass over $1.5 trillion in the next 10 years. And 1/3 of that funding is allocated to Southern California.

So it's great that there's a catalyst for demand growth to come in this market. And certainly, it's the first we've seen in a long while in terms of a major industry taking its foothold in this market.

Operator

Our next question is from Steve Sakwa with Evercore ISI.

Steve Sakwa

Here. Maybe just kind of following up on the last line of questioning. I know we saw in the fourth quarter to go here, and I'm sure you're focused maybe more on just overall blended rate growth and not any 1 component, but 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 like look forward, is there a path to new lease growth accelerating next year in a, let's call it, a mixed or challenged job market given that you've got low supply? Or I guess what gets new lease growth to really accelerate kind of moving into '27?

Angela Kleiman

Steve, thanks for your question. And it's a good point that you made to not get overly focused on a particular metric like new lease growth because we are focused on the blends, and we have to be because that's ultimately what flows to the bottom line. So as I've said in the past, we can actually fabricate or even generate a fantastic news rate growth. All we have to do is pull back on occupancy or pull back on renewals, but that is not going to maximize total revenues either.

So -- and then just keep in mind, new lease rates when you leave our unit vacant, 1 week cost you 2%. So we're not going to run our business focusing on pushing new lease rate growth. That does not mean that the market fundamentals are not sound and were not improving. And if we look at new lease rate growth this year compared to last year at the same time, it certainly has done much better. And so 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. So that would tell me that we actually have improvements in the lease rate growth, and that's continuing. In terms of the overall outlook, Steve. On the jobs, for example, that's really what's 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. And when we track the top 20 tech openings, Seattle, for the first time, has reached its pre-covid average in job openings in the first time in the last 2 years.

And with the office expansion announcements that occurred last year, we -- and supply deliveries continue to decline, we do anticipate that Seattle will have a nice rebound around towards the end of next year. And L.A. remains stable. It's gradually improving with green shoots with the defense sector and supply decrease as well. So I think all our markets are -- should actually do better than last year. If nothing else, look at our earnings, it's quite a bit better this year compared to last year.

Steve Sakwa

Well, 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 kind of for the fourth quarter and into, I guess, early part of '27?

Angela Kleiman

Yes. The renewals are going out in the mid-4% range in the fourth quarter. And so it's unplanned, and it's actually a little bit stronger than what we had originally hoped. Now that means that asking is actually higher. Just -- I know that you guys wrote a piece and you were looking at asking rents. And so asking rents are higher they're in the mid -- low to mid-5s. And we anticipate that we'll land around mid-4s on the renewal side and the actual renewal.

Operator

Our next question is from Brad Heffern with RBC Capital Markets. .

Brad Heffern

Is there any update you can give on where October spreads are trending? Obviously, I'm sure you're seeing the normal seasonal follow-up, but I know you also had the longer than normal leasing season. So I'm wondering if that's playing into it at all.

Angela Kleiman

Yes. On the October spreads, it's -- let me take a -- it's generally in line with plan. It's obviously starting to taper off. Keep in mind, we are now hitting our seasonal low here. And Northern California is leading the pack. And on the new and renewal in Northern California and a 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. And then can you just go through concessions by market and how those have changed, if they've changed?

Angela Kleiman

They're happy to. So conceptions by market. So overall, let me just start with portfolio average. So we have data here. So concessions third quarter compared to last year compared to this year, not a whole lot different. So third quarter last year, portfolio averaged around 6 days this year, a little bit more -- a few days more around 10 days, nothing to get excited about. Heading into the fourth quarter, we're around a week, so similar to last year's levels. And if we're talking about by market, let me see, so Northern California, effectively no concessions. PNW is less than a week in Southern California over a week. So 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

I didn't finish my answer. So 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. And just for context, last year, it was about 85 basis points. So it's certainly much better this year.

Eric Wolfe

Yes, makes sense. And then just second question. You mentioned some positive indicators in Seattle that could inflect late next year. I think you said late next year, so I want to confirm that. But there's also been some news around Microsoft trying to buy out 60,000 employees. Does that impact your thoughts on near-term fundamentals? Or do you think all the other sort of positive indicators that you're seeing will sort of more than offset that.

Angela Kleiman

Yes, that's a good question. Yes, we saw the Microsoft announcement. But what we've been looking at and tracking very closely is also the unemployment and continuing claims for the market, and it has remained well below the long-term average. So this tells us that layoff has been absorbed very quickly or they've been rehired -- and more importantly, with this market, employees are doing what they're supposed to do, which is moving business units, to reallocating their resources to higher profit businesses.

And so once again, this doesn't 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 this layoff announcements well they ended up rehiring a lot of the layoff employees. So 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

Two questions for you. The first question, Angela, Aerospace and defense certainly has been getting a lot of attention in 25-plus years in REIT-land never really received this amount of attention. As we think about Southern Cal, especially SpaceX and the other companies that are down there, is this more just like sort of cocktail conversation or are your communities seeing actual evidence where increased hiring is actually showing up to rent apartments in your Southern Cal. That's my first question, then I have a second. .

Angela Kleiman

Okay. 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. And so $1.5 trillion is an eye-popping number and have a stated that 1/3 of it allocated in Southern California is as far as we're concerned, really terrific indication of where that industry is headed. As far as having SpaceX headquarter in the L.A. region and of course, Anduril in the Long Beach area, having 2 major industry giants taking -- having a footprint in those markets are also good, 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 too early, way too early to see that translate to job growth. It's just never happened that quickly, that announcement and then the immediate job hire. It always takes time for feasible to find the right talent, find the right office space for them and grow that business.

Alexander Goldfarb

Okay. And then 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 East side, 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 East side and CBD or where companies are allocating they're hiring there versus Bay Area or elsewhere?

Angela Kleiman

Yes. 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 e-side, 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, they were adjustments and both sides were the table trying to work things out. And so I'm hopeful that, that will occur once again. But ultimately, with Eastside being the beneficiary, I think Essex is in a solid position. But don't forget, keep in mind, the other overhang in downtown Seattle has been supplied and supply is starting to abate. So at least there will be some relief on that end.

Operator

Our next question is from Jana Galan with Bank of America.

Jana Galan

Just wondering if you can go over our 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? And also curious if you're seeing increased opportunities in lending or preferred equity? .

Rylan Burns

This is Rylan here. Just starting with the capital allocation strategy. What we're really trying to do, consistent with the past is source the highest risk-adjusted returns paired with the lowest cost of capital to drive NAV and FFO per share, so you mentioned several potential investment opportunities that we've done this year. When we think about our menu of options from acquisitions, development, preferred equity, reinvestments, stock buybacks, debt paydown, we've allocated to 5 of those 6 in 2026.

So we're going to remain nimble. Our strategy is not going to change, and we're just going to -- when we see an opportunity to create NAV and FFO per share, that's where we're going to lean in. As it relates to the most recent question about the deal that we just announced yesterday, again, this is really consistent with what we're doing for the past several years, where we've 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've seen this before in previous cycles where you see really strong rent growth in the tight housing market in San Francisco and the Peninsula that's moving into Oakland and down Selter Milapitas, and we believe this is coming with a high level of conviction in the East Bay.

We're really comfortable with basis in this property. And most importantly, we think we can create value. We've got 2 communities nearby, so we can take costs out, improve the retail leasing. So this is, I think, a nice win for our investors. But bigger picture, as we think about capital allocation, all 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

And then just with the increased volatility in rates, curious if you are seeing kind of more opportunities on that lending side. .

Rylan Burns

Yes. I'd say it's still a little bit too early. I think the market is 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's going to be -- will create additional options for us in the near future.

Operator

Our next question is from Austin Wichmann with KeyBanc Capital Markets.

Austin Wurschmidt

Just with respect to the mid-4% renewal rate growth that you highlighted on achieved rates in the fourth quarter, I mean, are you guys more focused on building occupancy today ahead of next year? And I'd be curious where occupancy has trended subsequent to quarter end? Or is the move from the 5.3% renewal rate growth you achieved in the third quarter, the mid-4s. Is there some other factor that's causing you to pull back a little bit?

Angela Kleiman

Austin, it's Angela here. Thanks for your question. And so we typically favor occupancy heading into our seasonal slow in the fourth quarter. And so you'll see us continue to deploy that strategy. With the caveat in certain pockets of Northern California work, we're continuing to see strong momentum. That, of course, will allow us to continue to favor rents and we'll see how long that lasts, but we certainly will try to maximize that momentum as much as possible. .

Austin Wurschmidt

And then as far as where occupancy sits today.

Angela Kleiman

Occupancy today is 96.3%, I think. -- yes 96.3%.

Austin Wurschmidt

Helpful. And then just 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's driving the increase? And then any considerations for expenses ahead of next year?

Barb Pak

Austin, it's Barb. As we've said the last several quarters, we did expect a second half increase in our controllable expense spend. It is just timing on when we -- we're going to finish up some of the projects that we had going on this year. So that is what's really driving the Q4 expense increase of about 5% on a year-over-year basis. It's really driven by that controllable side, which has been light year-to-date. So no change from our original plan this year. And as we look to 2027, we're still working through the budget process. But as I look at things today, when I look at the key categories that we publish on [ S-10 ], I don't see too many deviations in year-over-year growth from what we expect in 2026.

With the exception of property taxes. We did have some favorable profit 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, that's going to be more in line with our historical average of 3% to 4% next year. So that's 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 .

James Feldman

Great. I guess as we're 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 million to $5.3 million and then the remaining $128 million. How do we think about the rate and timing when we're building out our models for next year?

Barb Pak

Yes, Jamie, this is Barb. It's a good question. So we do have 3 swaps maturing within the joint venture portfolio one December 1 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%. And while our rate is going up, it's obviously a byproduct of the market on sec-specific issues as rates are higher. What I can tell you is if we waited to hedge and we didn't 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. 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. And as you mentioned, there is a 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 silver rate you assume and we'll enter the market, if we see an opportunistic window to hedge that, we might. But right now, it doesn't make sense to hedge that. So all in, $0.10 to $0.12 increase next year on interest expense from the swaps at Coratta share.

James Feldman

Okay. And then the term loan, I don't think that's hedged either. Are you kind of 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

Yes. The term 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 close that terminal and we look to go swap it, it didn't make sense. It was very prohibitive. We're 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

I wanted to ask about San Francisco. It's the gift that keeps on giving. But I wanted to ask how much further do you think it has to go? We noticed occupancy kind of fell sequentially. And so when you look at rent income ratios or other metrics, where do you see San Francisco pricing versus income? And then do you think other markets like Oakland, East Bay, San Francisco, they'll play catchup to San Francisco just given affordability?

Angela Kleiman

Yes. John, that was -- I'll try to hit, I think, all of your questions. If I missed something, just holler. So as far as when you're talking about sequential occupancy, we took it down from 96.1% to 95.6%. That's really -- that's intentional because we were able to push rents and in that environment, that was more of an offensive play. So it's actually a good science. And landing where we land for San Francisco is actually -- it's a quite digit number. .

As far as the -- what's to come in this market or I guess, what's left in the gas tank and Rylan will talk about affordability in a second. What we're seeing is that market rent 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. And I'll give you one example. If you just take affordability, which Rylan will talk about all the other markets, but in the Northern California, just to return to the pre-COVID affordability levels, rents could actually increase by over 20% with no wage growth. And so that gives you the magnitude just from this 1 metric.

And we have seen that coming out of the great financial crisis, the strength in this market where the momentum actually lasted in many years. You have a high cost of homeownership, which continues to favor rental affordability and historical low supply that's continuing and of course, with demand catalyst. Rylan will cover.

Rylan Burns

Yes, John, just to give you some more specifics. When we look at the rent to medium income ratios in Northern California, so San Francisco, that ratio has increased with the rent growth that we've seen by about 150 basis points compared to a year ago. It's 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 2 decades. So a long way to run there. Oakland and San Jose, we're starting to see some improvements, but these ratios in Oaklands is 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's more room to run there.

John Kim

Okay. I think you hit all parts of my multipronged question. wanted to ask about L.A. You talked about green shoots in the market and it being stable. You kind of through 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're seeing in terms of 2027 in terms of rent growth and employment growth?

Angela Kleiman

Yes. Well, first of all, we don't have enough visibility when it comes to employment growth because L.A. is a reflection of the broad U.S. economy. It does have more professional services. So that is a good stable that essentially supports the overall L.A. market. And we do have, of course, supply continuing to decline. So that in itself will signal that you just don't need as much job growth to generate rent growth. So that's another thing that's good. .

And as far as my comment on the defense industry, you didn't obviously mean the cold water on Aloxi, he makes a good point. I do think that it's a catalyst. It's a future catalyst. My comment is only relates to timing, which is we really don't know. We know it's coming. We just don't know when. And it's 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 couldn't pinpoint exactly when. So it's a similar thought process.

Operator

Our next question is from Adam Kramer with Morgan Stanley.

Adam Kramer

Great. Wanted to ask about same-store expense growth in the quarter. Seattle was a bit elevated, maybe relative to the other markets relative to expectations. So just wondering if there's 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

Adam, it's Barb. No, nothing specific to call out. There's 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's planning related on the controllable expense spend. So I don't 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. And then maybe a little bit of a bigger picture one. I know we've talked a little bit about A&D sort of industry and what that can mean for broader SoCal. Maybe just for the Northeastern or on the call here, myself included, just maybe by some 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? And then maybe just talk about sort of your exposure to those specific submarkets sort of that are benefiting from the A and B spend here?

Angela Kleiman

Yes, Adam, it's mostly concentrated in the South Bay. And so I talked about Andrew having a headquarter in Long Beach and of course, SpaceX and Hawthorne. But those are kind of the 2 bookends, if you will, and 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.

Unknown Analyst

Here.So obviously, we've talked a lot about the strength in NorCal specifically. But I'm wondering, could you walk us through maybe different submarkets where you're bumping up against some of the AB 1482 limits in California? And then also add to that, maybe where your loss to lease sits currently?

Angela Kleiman

Yes, happy to go through that. So in the Bay area, let's see definitely San Francisco is bumping up against that AB 1482 and, let's say, a San Mateo, of course. And let's say, parts of Alameda is starting to get close, but not quite there yet. And, let's say, San Jose is also 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, okay. 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 that -- hopefully, that gives you a good reference point.

Unknown Analyst

That's great. Very helpful. And I guess, secondly, so that's all good news. I guess in terms of maybe cautious news, is there anything kind of in the upcoming L.A., mayoral race or other statewide ballot initiatives and thinking of the California Welte. I mean is there anything on your radar that you're sort of strategically planning ahead for if something goes the wrong way there?

Angela Kleiman

Yes, that's a good question. It's really hard to anticipate where the legislation is moving toward. And so we continue to run our business as we've always done in the past 32 years in terms of just focusing on optimizing our revenues in our allocation -- capital allocation strategy. As far as the LA Merarace, from our observations, it's a really tight race. Karen Bass has received support from major players like Rick Russo and the L.A. Police Union while Raman has gained traction to the frustrations with legacy administration. So it's hard to see where things are going to land. I do think that there's been a recognition that we have a housing shortage, and there's been certainly a focus on how to work with housing providers, and I'm hoping that will continue.

Where I've seen recent legislation that's been proposed that has a the onerous antibusiness component to it. They have not has 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. And so we're hoping that, that trend toward moderation will continue. And as far as the governor's race, so far, Procera from this campaign seems to understand once again the importance of partnering with private businesses and focusing on addressing housing shortage.

And there is not a whole lot of noise coming from this camp about rent control because I think they're aware that, that is just so ineffective and actually discourages housing production. And so they've been focusing on measures to hopefully produce more affordable housing, which is great for the overall economy.

Operator

Our next question is from Amy proband with UBS.

Ami Probandt

To start maybe another follow-up to some of the previous questions on Northern California. How should we be thinking about tailwinds to blend 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. So 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 earnings 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. And the renewals were capped at AB 1482, which is inflation plus 5%, max at 10% and so there is still some -- there's still some room there or I should say, some tailwind there. On the new lease side, we -- 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. And so a perfect example is if market rent growth is growing at 13% and a tenant can stay in place where the rent is kept the 10%, well, the tenant is more likely to just remain. And so that ability to capture the 15% will just be a little more prolonged. But as far as I'm concerned, that's all good for us. Keep in mind, Essex historically has operated with our self-imposed 10% cap because we did not believe in anti-gouging either, and we've done just fine in those environments.

Ami Probandt

Great. And then in terms of the same-store revenue guidance buildup, where are you including in terms of occupancy and nonrental revenues? Were there any changes within the outside of blends within your updated guidance?

Barb Pak

Amy, it's Barb. No, the update for same-store revenues, the increase is 100% driven by scheduled rent growth, just top line. .

Operator

Our next question is from Wes Golladay with Baird. .

Wesley Golladay

Over the last few years, you made a point to allocate capital to Northern California. Can you talk about what drove the decision to sell a relatively new asset in San Jose? And did you consider buying your partner's interest? .

Rylan Burns

Wes, this is Rylan here. Yes, this was a joint venture asset, as you mentioned. And again, we thought we got a fairly good value for that asset. There's 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. So this remains an ongoing discussion in all of our joint venture assets. We do think we have an inside track there. If we want to buy some of these assets.

But again, with finite amount of capital, we're looking to allocate to the best risk-adjusted returns. And in this instance, sell this asset and redeploying into the East Pay made more sense for us.

Operator

Our next question is from Julien Blouin with Goldman Sachs.

Julien Blouin

I just wanted 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 '27. I think permitting is up from the bottom a couple of years ago. So I was just wondering I think on Page 16, you show supply coming down. Are you sort of factoring in delays? Is there something else sort of playing into that view?

Rylan Burns

Julien, this is Rylan here. Yes, this is something we've discussed for many, many years. The differences between our supply forecast, 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 don't think -- and we have pretty good conviction about where these -- 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're incrementally 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 the third quarter. being a bit a function of prioritizing occupancy. But I was just looking -- I don't think we've seen a deceleration in renewals from 3Q to 4Q over the last few years. Is there something different this time around? Or is it more just a function of how strong that third quarter renewal was? And any specific markets showing a bigger sequential step down in renewals?

Angela Kleiman

Yes. We certainly had a very strong third quarter renewal and which obviously, as you -- as Sy noted, makes it looks like there's a big deceleration. But obviously, that's 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 82% cap. And then Southern California is in the -- hovering around the 2 to 3s and Seattle, somewhere in the 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're not seeing any cracks.

Operator

Our next question is from John Pawlowski with Green Street.

John Pawlowski

I have 2 questions on L.A. The first is on operating fundamentals. Angela, I think you used the characterization as stable. I guess I don't see the stability in the revenue growth trend. And so you started the year, 1Q year-over-year revenue growth of 1.7%, it's decelerated to 50 basis points year-over-year despite easy comps, sequential revenue is pretty weak. So what are you seeing in the portfolio that gives you confidence the L.A. market is stable?

Angela Kleiman

Yes. We're seeing a couple of things. First, the delinquency in L.A. has remained stable, and it's going to ebb and flow in terms of getting back to that normalized run rate. But when we look at occupancy, it's been hovering around that growth occupancy around that mid-95%. Once again, that's a good sign, right? Because they are cracks, you would see the occupancy fall right away. But ultimately, if you look at sequential revenues, LA County, which is under S9, it's not great, but still an improvement, 10 basis points sequential revenue improvement in LA County. I'll take it.

So I'm not seeing a meaningful backslide. I'm just seeing either stable or slight improvement and if I look at year-to-date numbers on a revenue perspective for LA County, once again, it's up 1%. So I don't know if I get too caught up on kind of quarter-to-quarter noise. But once you look at all the metrics, it points to a stable environment.

Unknown Analyst

Second question is on the transaction market in L.A. It's obviously not a loved market from capital providers right now. Rylan, I'm curious for more urban submarkets, high-rise product where you think kind of market clearing cap rates are for urban high-rise, Los Angeles apartments these days? .

Rylan Burns

John, that's -- we have not seen a ton of transactions. I think you're asking particularly about downtown LA and high-rise. I don't disagree with you. That's been -- given the vacancy in that specific submarket and some of the operating challenges we've 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's probably closer to a positive leverage number. But haven't seen enough transactions to give you a real pinpoint on where that cap rate would transact today.

Operator

Our next question is from Haendel St. Just with Mizuho Securities.

Haendel St. Juste

Yes. Thank you. So I wanted to go back, I think it was an earlier question that Jan asked on the mezz book. I guess I'm curious if there's been any rethink in the Mezzbook strategy? I think you mentioned on a prior call or 2 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. So I guess is the newer higher rate environment causing a rethink. I'm curious if that book could be larger or smaller over the next year? .

Rylan Burns

And, 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's going to be, as you said, $100 million at the end of this year. We're 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's happened in the past few years with development starts coming down considerably on the West Coast. That's historically been a good engine for the preferred equity book. I don't 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're 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 kind of the growth profile for Essex here over the intermediate term. San Francisco has been such a strong market the last year, should be strong next year as well. But the comps will get a little more difficult. It sounds like Seattle and L.A. are moderating, and it sounds like there's some green shoots of optimism, but it certainly feels like the core is slowing and then there's higher interest expense that you're dealing with the Wesco JV and the Mezz book a bit smaller, was less additive. So how do we maybe are there other offsets that perhaps we're not considering, but how do we kind of put this all together and think about the growth profile for Essex over the next year or so? It certainly doesn't sound like there's an acceleration kind of story ahead of us in the near term. .

Angela Kleiman

Hendel, I think this is a complicated question in terms of what's going to happen next year and when acceleration can occur. Obviously, Northern California and what's happening there is that's clear, right, to everybody on what the potential is and that momentum that's continuing. As far as Seattle and L.A. a growth profile, we do see that there is more upside than downside as far as it relative to past performances because it's -- Seattle has had a tough start to the year, but we've seen that turn positive and LA has remained stable with a potential demand catalyst in the aero defense industry. And in both markets, supply are continuing to decline.

So if nothing happens, between -- 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. Now that's a top line conversation, right? And the question is, well, when are you going to see acceleration? I think that relates to the view on the broader economy. And so when we look at third-party forecasts, we're not seeing anything that's all that different than kind of more of the same. But it's also too early to predict because we don't know what the results of the midterm election is going to be. So hard to say, but I would go back to the West Coast as voba 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's possible and there's a path to that. As far as bottom line, that interest rate expense pressure, I think that is not an Essex situation that is not just all read, it's really all companies are going to be faced with that headwind. And so I don't think that in itself is a call out for the West Coast story.

Operator

Our last question is from Alex Kim with Belman & Associates.

Alex Kim

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 yields 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

Alex, thanks for the question. Yes, as we've seen the rent growth up and down the Penn Southern San Francisco and San Mateo, South San Francisco is also benefiting. So again, the yields continue to improve on our underwriting costs. Thankfully, we're doing a great job managing that project, and we're hoping to deliver it ahead of schedule, so more to come in the next couple of quarters as we make progress, but everything is going to plan on the Seven South Linden project.

And then we are making headway on the entitlement process as it relates to the middle field project. So we'll probably have more to report on that in the next coming quarters. But again, looking for those select opportunities where we think we're getting compensated for the risk taking inherent in development. So excited about both those projects, and we continue to look for new opportunities to add value through our development pipeline.

Alex Kim

Got it. And Angela, staying on Northern California, could you talk a little bit about the differences you're 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

Alex, good question. On the Northern California rent growth, if we look at the blends, there is, of course, some diversions and as you would expect, we see, let's say, Santa Clara, San Mateo and San Francisco counties outperforming and they're closer to on the plan -- on the blends in Northern California, they are running much higher. They're closer to, say, above 7%. And with Alameda and Kadocasta, so the East Bay market lagging in the 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 2 key areas. And so this is why we are leaning in on our East Bay thesis because we've 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.