Essex Property Trust Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

Key Takeaways

  • Essex delivered a core FFO per share beat of $0.09 in Q1, prompting a 55 bps raise in full-year same property revenue growth to 2.25% and a $0.20 per-share uplift to its 2024 core FFO forecast.
  • The company cites structural benefits in its West Coast markets—housing permits remain below 1% of stock and owning a home costs 2.5× more than renting—supporting strong rent growth and low homebuying turnover (down from 12% to 5%).
  • Q1 blended lease rates rose 2.2% (new leases +1.0%, renewals +3.9%), with April occupancy at 96% and concessions averaging only 3.5 days; excluding Los Angeles and Alameda, new lease growth would have been 1.6%.
  • On the transaction front, Essex acquired its partner’s interest in a $505 million joint venture, adding nearly $2 million of FFO accretion in 2024, and its private equity platform has generated a 20% IRR and $160 million in promote income.
  • Essex strengthened its balance sheet by issuing $350 million of 10-year bonds at 5.5%, plans no common equity raise, has $400 million of available internal equity sources, maintains net debt/EBITDA of 5.4× and holds over $1 billion of liquidity.
AI Generated. May Contain Errors.
Earnings Conference Call
Essex Property Trust Q1 2024
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day, and welcome to the Essex Property Trust First Quarter 2024 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.

Operator

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 Kliman, President and Chief Executive Officer for Essex Property Trust. Thank you, Ms. Kleinman.

Operator

You may begin.

Speaker 1

Good morning, and thank you for joining Essex's Q1 earnings call. Barb Pac will follow with prepared remarks and Rylin Burns is here for Q and A. We are pleased to kick off our 2024 earnings with a notable increase in our full year guidance. This was primarily driven by solid first quarter results with core FFO per share of 4.9% exceeding the high end of our original guidance. Barb will provide more details on our financial performance in a moment.

Speaker 1

Today, my comments will focus on market fundamentals and operational highlights, followed by an update on the investment market. Heading into 2024, consensus forecast was a slowdown for the U. S. And so far, U. S.

Speaker 1

Job growth has trended better than initial forecast. Job quality on the other hand has been concentrated in government and low wage service sectors. In the West Coast, the tech industry is a primary source of high paying jobs and job growth in this industry has led because of evolving business strategies as companies reallocate resources to artificial intelligence opportunities. However, we have seen encouraging signs, including a steady increase in job openings in our markets by the top 20 tech companies. As for our near term outlook, recent inflation data and Fed commentary have resulted in elevated uncertainty regarding the path of interest rate cuts.

Speaker 1

With this in mind, we do not anticipate an imminent improvement in job growth in the high paying sectors, which is typically the key catalyst to accelerate demand for housing and rent growth. While job growth on the West Coast has remained soft, our steady performance year to date is attributed to 2 factors. First, limited housing supply. This is a significant structural benefit and a pillar of our California investment thesis. Lengthy and costly entitlement process effectively deters housing supply.

Speaker 1

To this point, total housing permits as a percentage of stock continues to remain well below 1% in Essex, California markets. Our performance today demonstrates this supply advantage. It is a key stabilizer during soft demand periods and a driver of rent growth outperformance over the long term. The second positive factor is rental affordability, which is driven by wages growing faster than rents in Essex markets. Additionally, the cost of home ownership continues to rise.

Speaker 1

The median cost of owning a home is 2.5 times more expensive than renting in our markets. Likewise, the percentage of our turnover attributed to purchasing a home has fallen from around 12% historically to 5% today. Accordingly, rental affordability supports a long runway for rent growth in the Essex markets. Turning to 1st quarter operations. We achieved a 2.2% growth in blended lease rates, which consists of 10 basis points on new leases and 3.9% on renewals.

Speaker 1

Our new lease rates are tempered by delinquency related turnover in LA and Alameda, which comprise of approximately 25% of our total same store portfolio. If we excluded these two regions, new lease rates would have been 150 basis points higher at 1.6%. Moving on to regional highlights. Seattle was our best performing region, achieving blended rates of 3.6% with new lease rate growth of 1.3%. New lease rates turned positive in February led by the Eastside and the positive trend has continued.

Speaker 1

Northern California was our 2nd best performing region with 2.1% lender rate growth and flat new lease rates. San Mateo was our strongest market offset by the East Bay, which remained challenged primarily from delinquency impact in Alameda County. Excluding Alameda County, new lease rates in Northern California would have been 70 basis points. As for Southern California, this region continues to be a steady performer generating blended rate growth of 1.7% with negative 30 basis points in new lease rates caused by delinquency in Los Angeles. Excluding Los Angeles, average movies rates would have been positive 3.1% in Southern California.

Speaker 1

Along with the improvement in eviction processing time, our operations and support teams have done an excellent job recovering long term delinquent units at a faster pace, which has led to lower delinquency. We welcome this trend and continue to proactively build occupancy in anticipation of recapturing more units in this region. We view this temporary trade off as net beneficial to long term revenue growth. As for current operating conditions, at the end of April, we are in a solid position with 96% occupancy heading into peak leasing season. Concessions for the portfolio average only 3.5 days and aside from areas with delinquency headwind discussed earlier, we see opportunities to increase rental rates throughout our portfolio.

Speaker 1

Lastly, on the transaction market, Deal volume remains thin compared to recent years and we continue to see strong investor demand for multifamily properties in our markets, with cap rates ranging from mid-four percent for core to mid-five percent for value add communities. Against this backdrop of limited transaction volume, we have created external growth opportunities generating FFO and NAV per share accretion through our joint venture platform. In the Q1, we purchased our Perna's interest in a $505,000,000 joint venture portfolio that will produce almost $2,000,000 of FFO accretion for us in 2024. In fact, since inception, our private equity platform has delivered a 20 percent IRR and over $160,000,000 to promote income for our shareholders and remains an attractive alternative source of capital. In conclusion, we intend to pursue growth through acquisitions, while our disciplined capital allocation strategy and our core principle of generating accretion to create significant value for our shareholders.

Speaker 1

With that, I'll turn the call over to Barb.

Speaker 2

Thanks, Angela. I'll begin with comments on our Q1 results, provide an update on key changes to our full year guidance, followed by comments on investment activities, capital markets and the balance sheet. I'm pleased to report core FFO per share exceeded the midpoint of our guidance range by $0.09 in the first quarter. The outperformance was primarily driven by higher same property revenue growth, which accounted for $0.06 of the $0.09 beat. The Q1 also benefited from one time lease termination fees within our commercial portfolio totaling $0.02 which are not expected to reoccur for the remainder of the year.

Speaker 1

Turning to

Speaker 2

our full year guidance revisions. As a result of the strong start to the year, we are increasing the midpoint of same property revenue growth by 55 basis points to 2.25%. The increase is driven by 2 factors. 1st, delinquency has improved faster than our original expectations, which accounts for 40 basis points of the revision. We now project delinquency to be 1.1 percent of schedule rent for the year.

Speaker 2

To higher other income as we have been successful at optimizing our portfolio through various initiatives, which has led to 15 basis points of better growth. While we are trending slightly ahead of our expectations on blended lease growth so far this year, especially on renewals, we have not factored any revision into our guidance as we want to get further into peak leasing season when we sign the bulk of our leases. The other key driver of our full year guidance revision relates to the consolidation of our partnership in the VEX AEW joint venture, which accounts for $0.03 of FFO accretion. As Angela highlighted, this acquisition reinforces the value Essex has created for shareholders through our joint venture platform as well as our ability to grow externally in an otherwise challenging market. In total, we are raising core FFO by $0.20 per share, a 1.3% increase at the midpoint.

Speaker 2

Turning to our preferred equity investments. Subsequent to quarter end, we assumed a sponsor's common equity interest affiliated with a preferred equity investment. This investment was previously on our watch list and was placed on non accrual status in the Q4 of 2023. As such, this transaction is beneficial to our 20 24 FFO forecast. The property is located adjacent to an existing Essex community, which will allow us to operate it efficiently within our collections model.

Speaker 2

Overall, we view the outcome favorably given that quality of the asset, our initial yield and our long term view on the growth in the Sunnyvale submarket. Turning to Capital Markets. In March, we issued $350,000,000 in 10 year unsecured bonds to refinance the last remaining portion of the company's 2024 debt maturities and to partially fund the BEX AEW transaction. We are pleased to have locked in 5.5 percent fixed rate debt in today's volatile interest rate environment. As it relates to equity, the company did not issue common stock to fund our year to date investments nor do we plan to issue equity at our current stock price.

Speaker 2

We have alternative sources of equity capital such as retained cash flow and preferred equity redemption proceeds from last year and expected this year that can fund up to $400,000,000 in investments, including transactions completed to date without the need for new equity. We will continue to look at all our sources of equity capital, including disposition proceeds or joint ventures in order to maximize growth in core FFO and NAV per share, while preserving our balance sheet strength. We have been prudent stewards of shareholder capital over our 30 year history, which has served our shareholders well. In conclusion, Essex is in a strong financial position. Our leverage levels remain healthy with net debt to EBITDA 5.4 times and we have over $1,000,000,000 in available liquidity.

Speaker 2

As such, we are well equipped to act as opportunities arise. 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. Our first question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Speaker 3

Hi, everybody. You guys flagged the impact that select submarkets are having on your new lease rate growth this year. But I'm just curious if that overhang has been lifted in LA and Alameda or if you think that the continued improvement in sort of the long term delinquency continues to have an impact or impacts others in the market and you could continue to see kind of that weighing on are those markets weighing on new lease rate growth moving forward?

Speaker 1

Hey Austin, it's Angela here. You kind of cracked up in the earlier part of the question, but I believe you're asking whether the LA Alameda overhang is going to continue on new lease rates?

Speaker 3

Yes, that's correct.

Speaker 2

Okay, great.

Speaker 1

What we're expecting is that L. A. Is going to continue to provide be an overhang on the delinquency. Alameda improvement is steady and it's a smaller part of our portfolio. So the heavier influence is really coming from LA just because when you have such a large volume that we're working through, it's going to take a longer period of time.

Speaker 1

The good news is that we are not seeing that bleeding into other markets. So it's really more focused in L. A. And our other markets are doing quite well.

Speaker 3

So how should we think about, I guess, when you guys underwrote the beginning of the year, you had a relatively tight spread in your new versus renewal lease rates. You flagged renewals are trending better, but that's been a little bit volatile, which I suspect is due to some factors on the comp month by month. But can you just give us a sense of or kind of updated thoughts on how you think the 2 of those trend from here?

Speaker 1

Yes, sure thing. Now we have not reforecasted yet just because it is important to see how peak leasing season activities progress and because that's where the bulk of our leases occur at that point in time. So our data is with a few months into the year and a smaller set of leasing terms is turning, it's more limited. But having said that, what we're seeing right now is that Seattle and Northern California are trending slightly ahead of our original market rent forecast. Southern California is generally unplanned, but there is a LA drag.

Speaker 1

And so because it's not a huge outperformance relative to plan at this point, the outperformance is really mostly in the benefits from delinquency that we're getting the recovering the units much faster. In other income. It's once again, it's just too early to try to reforecast where market rents is going to be. I do want to say that with our performance on delinquency and our ability to essentially turn those units quickly, it speaks to the underlying fundamentals of our market. So that is quite solid.

Speaker 3

Maybe more specifically, I mean, tried to get to this in the question a little bit, but can you just give us a sense where renewals are going out for the next couple of months? That'd be helpful. And then that's all for me. Thanks.

Speaker 1

Sure thing. So renewal rates for, say, May June, they're going out in kind of that low to mid-four range, say average for the portfolio around 4.3. And we do there is some negotiations there. And what we try to do is anticipate where the market is going to be. And because we are seeing that we are trending slightly ahead, we, of course, are going to push renewals wherever possible.

Speaker 1

But keep in mind, our approach on renewals is still same as before. We are setting market appropriate pricing and with a goal of maximizing revenues.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.

Speaker 5

Hey, good morning out there. It's Daniel Trokarico on with Nick. Angela, you talked about the jobs backdrop in your prepared remarks. I was wondering if you could expand on the tech hiring trends in your markets. Are you seeing any green shoots from AI companies starting to take office space or general tech companies more active in return to work?

Speaker 5

Just want to understand the current state of the demand backdrop that many are hoping, obviously, including yourselves to drive an acceleration and the recovery within the Northern California and even Seattle markets?

Speaker 1

Hey, Daniel, it's a good question there. We are seeing anecdotally hybrid workers moving closer to the office to essentially trying to reduce the commute because traffic has picked up. And we are seeing also the top 20 tech openings increasing, although it's very gradual. And so what we're seeing is that these job openings bottomed last year during the Q1 and the opening was only about, say, 8,000 jobs. Today, in March, it's about 16,000 jobs.

Speaker 1

So it doubled, but it is well below our pre COVID average. The 3 year run rate was about 25,000. So hopefully, that gives you some sense of how things what we're seeing is that, the fundamentals are moving in the right direction. But in order for acceleration to occur, we really need to see a more robust pickup on the high paying jobs. And we do believe that we have the fundamental backdrop for that to occur.

Speaker 1

It's all about when and that's the big question on our mind.

Speaker 5

Yes. Thank you for that Angela. I wanted to follow-up on the Seattle market. It saw a nice sequential increase in occupancy and revenues in Q1. Could you talk a little bit about what you're seeing throughout the different submarkets?

Speaker 5

Maybe give a breakdown of your portfolio urban versus suburban exposure and where you're expecting to see the greatest magnitude and timing of new supply in that market?

Speaker 1

Sure thing, Daniel. We are predominantly in on the East side. So over 60% of our portfolio is more suburban in nature in the East side. And what that means is because supply is predominantly in the CBD, we are more insulated from that. And we so we're seeing much better activities coming from the east side of our portfolio.

Speaker 1

And where things are trending right now, we are seeing some demand growth, which is healthy, which is good indicator at this point. Downtown seems to be doing okay. It's holding its own. And what we expect is the cadence of delivery. But as we've all experienced in this market, that can get slightly pushed by a month or 2 in our markets.

Speaker 1

But that's what we're expecting at this point in time.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Eric Wolf with Citi. Please proceed with your question.

Speaker 6

Thanks. It's Nick here with Eric. Angela, you mentioned kind of what's happening in L. A. And the overhang and kind of getting the units back, which obviously is a good thing, medium and longer term.

Speaker 6

Just curious if you change the underwriting in that market specifically to make sure you're renting to tenants that are going to be paying the rent?

Speaker 1

Hey, Nick. Rylan will talk about how we're underwriting activities in our various markets, including LA.

Speaker 7

Yes. Hi, Nick. I think there is a higher degree of caution as it relates to what we're seeing in LA. Thankfully, double edged sword, we have a lot of exposure to that market. So I think we have pretty good data.

Speaker 7

And as we've shown over the past year or 2, we know how we are turning these delinquent units back into rent paying units and how quickly that can occur. So I feel like we've got pretty nuanced underwriting as it relates to LA market, but it is something that we're certainly factoring in.

Speaker 1

Yes, Nick. And as it relates to the actual tenant underwriting itself or leasing activities, we have not needed to make any material change. Obviously, from building to building, there are always nuances on the tenant background and credit. We set a very solid bar for our credit. What has happened with delinquency really is not related to our underwriting.

Speaker 1

It's really a legislation result because eviction moratorium went on for so long. And then all the courts are backed up in terms of processing these evictions, which is why the whole timeline to get out these nonpaying tenants became prolonged. And so in terms of if you're talking about, say, new tenants going delinquent, we're not seeing that as a material problem at all.

Speaker 6

Okay. Yes, that's exactly what I was asking about. So you're not seeing anything from new tenants. Is definitely more of a residual of what you've seen before because it seems like the bad debt has certainly been improving pretty rapidly recently. It feels like April was even better than the Q1.

Speaker 1

Yes, that's correct, Nick.

Speaker 6

Okay. Thanks. Thank you. Appreciate it.

Operator

Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Speaker 4

Hey, good morning out there. Angela, just going back a few questions back to the demand and jobs and tech jobs. What do you think is more the reason for this if tech is still sort of sluggish on the hiring front, would you say it's more about sort of markets returning to normalcy, more about people, let's say, in Southern Cal enjoying that lifestyle? Or is this really just a function of housing shortage? And we can talk about all these other factors, but the reality is the lack of housing, the single family slowdown, meaning since the credit crisis, the shortage, that's really the dominant driver.

Speaker 4

And therefore, all these other items that we talk about are sort of on the margin, but it's really the housing shortage that's driving the stronger than expected recovery in apartments?

Speaker 1

Hey, Alex. That is an excellent point and good job. You've been paying attention. What we are seeing is that the supply definitely is a significant benefit for our markets and it's something that we've been stating for several years now in that we don't need much demand for us to achieve our plan and to have a healthy performing market. And so these other incremental benefits are great signs in terms of whether it's moving a return to office or we are seeing continual improvements in both domestic and international migration.

Speaker 1

And in fact, we're showing positive population growth for the first time in 3 years. So all these little anecdotal data on the margin is hopeful. But in terms of really driving acceleration, the other the high paying job growth will need to kick in. So our markets are going to do just fine.

Speaker 4

Okay. And then the second question is just an update on the whole the 3rd attempt on overturning cost to Hawkins, sort of, I guess, 6 months out. Is there a sense for what's the sense on the advocacy front where both sides stand? And obviously, Gavin Newsom has been big into promoting new housing, but are there major political forces coming out in support of overturning Costa Hawkins or the majority of the political might out of Sacramento is supporting keeping Costa Hawkins and against the ballot initiative?

Speaker 1

Hey, Alex. Yes, that is an important question. What we are seeing is the vast majority of the legislature are not supporting overturning Casa Hawkins. So they are on our side. And because they recognize, especially in our coalition to support reasonable legislation and especially relating to housing.

Speaker 1

And of course, this proposal has been defeated overwhelmingly twice. And we just have not seen anything that shows that it will be different this time.

Speaker 8

Thank you.

Operator

Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Speaker 8

Great. Thank you. If we ran our numbers right, it looks like your new lease rate growth was flat or even slightly declined month over month from March to April. So I guess the first question is that correct? And secondly, if it is correct, we're just wondering what drove the lower acceleration and how do you expect that to trend into May?

Speaker 2

Hi, Jamie, it's Barb. That's really driven by LA and Alameda between March April. And once again, it's that delinquency related challenges, which is ultimately a benefit to our revenues because we get those units back and can lease into a rent paying tenant. And but if you pull out those 2, we did see a sequential increase. So I think it was primarily just driven by LA Alameda.

Speaker 8

Okay. And then secondly, the acquisition in your JV in the quarter seemed like a great opportunity. You didn't have to reassess your tax basis. You already had majority ownership.

Speaker 9

Can you just talk about

Speaker 8

the opportunities to continue doing deals like that? And then also just more broadly, I thought your comments on the transaction market were pretty interesting. I think you said 4.5% core cap rates. Can you just talk more about what's going on in the transaction market in terms of buyer interest? I think a lot of your peers have said things have pretty much taken a pause.

Speaker 8

So curious what you're seeing on the ground and your thoughts on putting capital to

Speaker 7

work. Hi, Jamie. Ronan here. On the first point, we do have significant opportunities to continue to acquire from our joint venture partnerships. What we are going to do, however, is try to make the best capital allocation decision we can at any given point in time.

Speaker 7

So at the start of this year, this was a joint venture that was maturing and we had the opportunity to purchase our partners' interest and it made sense. It was accretive for our shareholders that's why we decided to elect that route. So we have a pretty deep joint venture business that we can continue to look for opportunities, but we are not solely focused on 1 or the other. We're trying to find the highest and best returning investments that we can find. As it relates to the transaction market, I think what you've been hearing is generally correct.

Speaker 7

The volumes continuing to be very low as they were all of last year, approximately a 5th of transaction volumes we saw in 2021 2022. What we're seeing this year is there was an ample amount of capital looking to be put to work in particular from our focus on the West Coast in multifamily. And so there's a bit of a scarcity premium for well located suburban product that's coming to market. And so you are seeing very competitive bidding pools for the few transactions that have made it to market. And our expectation is that, that is going to continue.

Speaker 7

So we're tracking a couple of deals right now where very deep, bitter pools, both levered and unlevered buyers. And I think some of our public investors would be surprised at where these transaction cap rates are going to come out. So more to come there.

Speaker 8

Great. Thank you. Does that motivate you to sell more?

Speaker 7

It's certainly something we're considering. Again, we are trying to grow the portfolio, but we need to be cautious about where our highest and best use of capital can be. So we have both opportunities that we are evaluating.

Speaker 8

Okay. All right. Thank you.

Operator

Our next question comes from the line of Josh Stenderlin with Bank of America. Please proceed with your question.

Speaker 10

Yes. Hey, everyone. I want to go back to your comments, Angela, about where you're sending out May June renewals, it sounded like mid to low 4s. If I recall correctly on the last call 4Q, I think renewals, your guidance was assuming like a slowing to like market rent growth like the 1.25%. Is this kind of what was expected in guidance or is that ahead of schedule?

Speaker 10

And just like how should we think about like the cadence for the rest of the year?

Speaker 1

Hey, Josh. We are slightly ahead of schedule. And what we haven't done is because we have not re forecasted, it's a little too early to talk about the actual cadence. And but I will say that we're ahead of schedule everywhere else except for LA and Alameda. So I want to caveat that.

Speaker 1

But things are doing fine right now.

Speaker 10

Okay. And what's your could you remind us what your typical like negotiation spread is on those renewals, they come back to you, they're signed, where you're sending out?

Speaker 1

Sure, sure. It could range anywhere from 0 depending on market strength to say close to 100 basis points depending on what else is going on. It could be supply, it could be jobs environment, whole host of things.

Speaker 4

Awesome. Thanks for the time.

Operator

Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Speaker 9

Hey, good morning out there. A couple of quick ones for me. I guess, first of all, I'm curious if there's any remaining benefit to your renewal rates from the burn off of concessions? Or is that a tailwind that's now behind us? Thanks.

Speaker 1

Hey, Haendel. There's a little bit in May and then no more in June July.

Speaker 9

Okay. Thanks. And where is the overall loss to lease in the portfolio today? And maybe if you could break that down by region?

Speaker 1

Sure thing. So loss of lease for the Essex portfolio in April is about 20 basis points. So nothing exciting there once again, but keep in mind, we have a L. A. Alameda overhang.

Speaker 1

So if you exclude L. A. Alameda, Los Feliz will be a little over 1%. And just to compare to last year around April, loss of lease was 80 basis points. So absent of LA Alameda, things are looking slightly better.

Speaker 1

We're not talking about massive acceleration, but it is slightly better. So in terms of just the disbursement, Seattle has the best loss lease at about 80 basis points, Northern California about 10 basis points and Southern California about 10 basis points. So that gives you kind of the range where things stand.

Speaker 9

Appreciate the color. And then last one, just on the maybe talking about the health of the Mezz book, I think you put 2 loans on watch list last quarter. So maybe talk about your the book or your perception of the credit risk there and maybe your overall interest in adding to the book today, especially with rates looking to stay higher for longer? Thanks.

Speaker 2

Hi, Haendel. Yes, it's Barb. So yes, on our last call, we had 5 that were either on non accrual status or on our watch list. And then we've obviously taken back one of those in the Q1. So we're down to 4.

Speaker 2

And of those 4 assets, 3 of them have loans maturing in the next 2 to 3 quarters. So we'll have an outcome there sooner rather than later, I believe. On the other asset, there's one other asset that we're having productive conversations with the sponsor to contribute additional equity, which will put us in a safer position in the capital stack. On that one, we will likely have more information on our next call on that one. So net net, it's trended a little bit more favorably in terms of the amount that it's on our watch list.

Speaker 2

Nothing new was added. The book continues to perform. None of them none of our sponsors are in default with a senior lender or with us. And so the sponsorship really does matter here, and we have really good sponsors. So no new updates.

Speaker 9

Okay. And then your thought process perhaps on adding or is that not being considered at the moment?

Speaker 2

Yes, that includes adding anything new. We go through a conference review of the portfolio every quarter and we scrub it. And yes, that does include that process. So there was no new added to the watch list this quarter.

Speaker 4

Okay. Thank you.

Operator

Our next question comes from the line of John Kim with BMO

Speaker 9

earnings impact of consolidating Sunnyvale? I realize there's no impact from the impairment, but you've already had that on non accrual. So I would imagine the accretive going forward?

Speaker 2

Yes. So in our 2024 initial forecast, we didn't assume any accrual on the Sunnyvale asset. So it was a 0 in our forecast. Now given that we consolidated it, we did pay off the debt. We think it's about a $0.005 benefit this year.

Speaker 2

Keep in mind, it's a small asset, and then growing from there as we see better rent growth.

Speaker 9

Okay. And can you quantify how much of the Q1 blended spreads benefited from reduced remainder of the year?

Speaker 1

Sure thing. Hey, John, it's Angela here. So Q1 concessions pickup impacted renewals by about 60 basis points. And then what we're seeing in April Barb, do you have them

Speaker 2

in front of you? Yes, it's about the same.

Speaker 1

Okay. April is about the same, it's 60 basis points. And obviously, May, we don't know yet, but we know that we have concessions burning off. And June, July, August will be flat and slight pickup in September and into the Q4, but not much.

Speaker 9

The second and third quarter end of second and third quarter last year is when you

Speaker 6

start to really reduce concession?

Speaker 1

Yes, yes, which is typical. End of definitely second quarter and into a little bit into the Q3 and then it picks up again in the 4th quarter.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.

Speaker 4

Hey, thanks for the question. Good morning out there. I wanted to ask about maybe a little bit about kind of the demographics of your renters and thinking about the different jobs, kind of your job growth commentary earlier on in the call, in the opening comments, I think you kind of mentioned that the tech industry and the higher paying jobs haven't really recovered. I think people typically think of your portfolio as more Class B, right, a little bit more suburban, a little bit more Class B. Maybe just walk us through your whether it's your tech exposure, whether it's the type of renters that are renting with you guys?

Speaker 4

And maybe a little bit more just about the specific jobs that are within your tenant base and how has job growth fared among those different industries?

Speaker 1

Yes, sure thing, Adam. Our tech exposure hasn't changed too much. It's about somewhere around mid-five percent of our total portfolio, of course, much higher in Seattle than Northern California and very little in Southern California. And so when you look at our portfolio as a whole, it's actually quite diversified. And what that means is job is coming through all the different industries.

Speaker 1

And so recently, the growth in job growth has really been in government and health and education services. And so we see that impact throughout our portfolio.

Speaker 4

Got it. Okay. That's helpful. And the implication would be is fewer renters within your tenant base from those government and other service teacher types of industries, would that kind of be the implication?

Speaker 1

Well, Adam, I think what I was trying to say is that our tenant pool is pretty well diverse, and there's employers from all job sectors. It mirrors the U. S. Pretty well with the exception of higher professional services, generally speaking. And so we're not going to be that different.

Speaker 1

And of course, with the northern region having a higher concentration in tech, that's the one benefit.

Speaker 4

Got it. That's really helpful, Angela. Thank you. Maybe just switching gears, look, I think the commentary around, I think you kind of mentioned you didn't buy back any shares, but also been issuing equity. Maybe just walk us through how you kind of view your equity cost of capital today and kind of the other potential cost of these other potential capital sources and cost of capital there, whether it's debt, whether it's JVs.

Speaker 4

And again, it's been answered a little bit, but just kind of capital allocation strategy from here, is this more kind of asset light approach and asset light gear, if you will?

Speaker 2

Yes, this is Barb. No, it's a good question. I mean, you have seen us in the past buyback stock when we're trading at significant discounts to NAV and we can accretively sell an asset and arp the difference between public and private market pricing. I think today, we don't love our stock. We haven't issued a stock our common stock in many years because of where we're trading relative to where we think the value is trading.

Speaker 2

And to Rylance point, where we're seeing private markets trade, our cost of equity capital is not an attractive source for us and we will look to other alternatives. We have free cash flow, the preferred redemptions and then we'll look at where we can sell assets or JVs if our stock price is still not where we like it, if there's an alternative acquisition opportunity or an alternative source of use of those proceeds. So we've done this for since the founding of the company, we've always looked at all the sources of capital and we'll remain disciplined on that front.

Speaker 4

Great. Thanks so much.

Operator

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.

Speaker 11

Yes, thanks. Hey, everybody. Couple on the press book. Can you give the yield that you ended up at on Sunnyvale and also say how much debt you paid off as a part of that process?

Speaker 2

Yes. So our yield is 4.7 5%. It is a high quality condo, style property. And Essex, because we own the property next door, we can operate it much more efficiently than the prior owner. And then in terms of the debt payoff, it was about $32,000,000 in debt that was paid off.

Speaker 11

Okay, got it. And then, Barb, can you give the interest income that's associated with the assets that are not being accrued? Just what that would be if they paid?

Speaker 2

For the 4 assets that are non accrual, I don't have that in front of me. I would have to I have to follow-up with you offline on

Speaker 4

that. Okay. Sounds good. Thanks.

Operator

And our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.

Speaker 12

No, no, Wedbush. So I have a question on the dividend increase. I know you guys are a dividend aristocrat, which sounds great. But you also are counting on free cash flow as a source of capital in the absence of raising equity. You mentioned that upfront.

Speaker 12

I'm curious how married you are to this annual increase to the dividend, particularly now when cash is king and free cash flow is important to you more now so than ever perhaps. So if you can comment on the dividend policy going forward and staying on this Aristocrat list? Thanks.

Speaker 2

Hi, Rich, it's Barb. It is very important for us to stay on the dividend risk credit list and maintain the dividend and continue to increase it. We do like free cash flow, but we also have a lot of planning that goes on behind the scenes in terms of how we do raise our dividend. And we do target a certain percent of our FFO and our AFFO yield to go out as a percent of the dividend payment. So all that gets factored into how much we increase the dividend annually.

Speaker 2

And it won't be 6 percent every year. It just does depend on a variety of things behind the scenes that are going on. But maintaining the dividend and keeping our long history of increasing it every year is something that's very important to the company.

Speaker 12

Okay. And my second question is, understanding the makeup of job growth has not been your sweet spot yet to this point. But I'm wondering when you think of the jobs that are being created, do they have no shot to being a resident with you guys? Or could there be a situation where they would qualify in a doubling up scenario? I'm just curious to the extent there is some areas of the job growth market that don't immediately look great to Essex, but is there a path to them becoming residents nonetheless because of some sort of setup like that?

Speaker 12

Thanks.

Speaker 1

Hey, Rich, it's Angela here. That's a good question because when we look at the median income, it actually is pretty darn good and it matches the profile of our property quite well. And so we're it's my way of saying, we don't have an issue with the demographics and that they can't qualify for our properties because within a market, we have a diversified pool. So even though we're solely in the West Coast, within each submarket, we do have different levels of properties where tenants can qualify. And the quality of jobs I'm speaking to really more relates to our ability to accelerate rent growth.

Speaker 1

And that's the key when I'm talking about the high paying jobs.

Speaker 12

Yes, fair enough. Okay. Thank you very much.

Operator

Thank you. We have reached the end of our question and answer session. And with that, this will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker 1

Goodbye.

Powered by Quartr