Essex Property Trust Inc

NYSE:ESS

Earnings Call Transcript 2024-Q1

[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. 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, executive]

Good morning, and thank you for joining Essex's first quarter earnings call. Barb Park will follow with prepared remarks and Rylan Burns is here for Q&A.

We are pleased to kick off our 2024 earnings with a notable increase in our full year guidance. This is 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.

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. 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 information data and Fed commentary have resulted in elevated uncertainty regarding the path of interest rate cuts.

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. 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 outcomes over the long term.

The second positive factor is rental affordability which is driven by wages growing faster than rents in FX markets. Additionally, the cost of homeownership continues to rise. The median cost of owning a home is 2.5x 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 FX markets.

Turning to first 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. 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 2 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 east side and the positive trend has continued. Northern California was our second best performing region with 2.1% blended rate growth and flat new lease rates. San Mateo was our strongest market, offset by the east side, 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 new lease rates would have been positive 3.1% in Southern California. 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 averaged only 3.5 days. And aside from areas with delinquency headwinds discussed earlier, we see opportunities to increase rental rates throughout our portfolio.

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-4% for core to mid 5% 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 first quarter, we purchased our partner's interest in a $505 million joint venture portfolio that will produce almost $2 million of FFO accretion for us in 2024. In fact , since inception, our private equity platform has delivered a 20% IRR and over $160 million to promote income for our shareholders and remains an attractive alternative source of capital.

In conclusion, we intend to pursue growth through acquisitions while maintaining our disciplined capital allocation strategy and our core principle of generating accretion to create significant value for our shareholders.

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

[Barb Pak, executive]

Thanks, Angela. I'll begin with comments on our first quarter 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 first quarter also benefited from onetime lease termination fees within our commercial portfolio totaling $0.02, which are not expected to reoccur for the remainder of the year.

Turning to 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: First, 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% of scheduled rent for the year.

The second factor relates 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 BEXAEW joint venture, which accounts for $0.03 of FFO accretion. And 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.

Turning to our preferred equity investments. Subsequent to quarter end, we assume the sponsor's common equity interest affiliated with a preferred equity investment. This investment was previously on our watch list and was placed on nonaccrual status in the fourth quarter of 2023. As such, this transaction is beneficial to our 2024 core FFO forecast. The property is located adjacent to an existing Essex community, which will allow us to operate it efficiently within our collections model. 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 million in 10-year unsecured bonds to refinance the last remaining portion of the company's 2024 debt maturities and to partially fund the BEXAEW transaction. We are pleased to have locked in 5.5% 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. 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 million 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 at 5.4x, and we have over $1 billion in available liquidity. As such, we are well equipped to act as opportunities arise.

I will now turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

You guys flagged the impacted select submarkets are having on your new lease rate growth this year, but I'm just curious if that overhang has been lifted in L.A. 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?

[Angela Kleiman, executive]

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?

[Austin Wurschmidt, analyst]

Yes, that's correct.

[Angela Kleiman, executive]

Okay. Great. 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 L.A. just because when you have such a large volume that we're working through, it's going to take a longer period of time. 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.

[Austin Wurschmidt, analyst]

So how should we think about, I guess, when you guys underwrote at 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?

[Angela Kleiman, executive]

Yes, sure thing. No, 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 planned, but there is an LA drag.

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.

[Austin Wurschmidt, analyst]

Maybe more specifically, I mean trying 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 would be helpful. And then that's all for me.

[Angela Kleiman, executive]

Sure thing. So renewal rates for, say, May and June, they're going out in kind of that low to mid-4% range. They 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. But keep in mind, our approach on renewals is still same as before. We are setting market appropriate pricing and with the goal of maximizing revenues.

[Operator]

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

[Daniel Tricarico, analyst]

It's Daniel Tricarico 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. Just want to understand the current state of the demand backdrop that many are hoping, obviously, including yourselves to drive an acceleration in the recovery within the Northern California and even Seattle markets.

[Angela Kleiman, executive]

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 first quarter, and the opening was only about, say, 8,000 jobs. Today, in March, it's about 16,000 jobs. 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. It just it's all about when, and that's the big question on our mind.

[Daniel Tricarico, analyst]

Yes. 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, 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?

[Angela Kleiman, executive]

Sure thing, Daniel. We are predominantly in -- on the east side, so over 60% of our portfolio is more suburban in nature and 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. And where things are trending right now, we are seeing some demand -- some demand growth, which is healthy, which is a good indicator at this point.

Downtown seems to be doing okay. It's holding its own. And what we expect is the cadence of supply to occur some more time between now and next quarter in terms of the bulk of the delivery. But as we've all experienced in this market that can get slightly pushed by a month or 2 in our markets, but that's what we're expecting at this point in time.

[Operator]

Our next question comes from the line of Eric Wolfe with Citi.

[Nicholas Joseph, analyst]

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. Just curious if you've changed the underwriting in that market specifically to make sure you're rented to tenants that are going to be paying the rent?

[Angela Kleiman, executive]

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

[Rylan Burns, executive]

Nick, I think there's a higher degree of caution as it relates to what we're seeing in L.A. Thankfully, a double edge or we have a lot of exposure to that market. So I think we have pretty good data. 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 L.A. market, but it is something that we're certainly factoring in.

[Angela Kleiman, executive]

Yes, Nick. And as it relates to the actual tenant underwriting itself for leasing activities, we have not needed to make any material change. Obviously, from building to building, there are always nuances and 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. 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 time line 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.

[Nicholas Joseph, analyst]

Okay. Yes. That's exactly what I was asking about. So you're not seeing anything from new tenants? This 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 first quarter.

[Angela Kleiman, executive]

Yes, that's correct, Nick.

[Operator]

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

[Alexander Goldfarb, analyst]

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. 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.

[Angela Kleiman, executive]

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.

We are seeing continued improvements in both domestic and international migration and in fact, we're showing a 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. But our markets are going to do just fine.

[Alexander Goldfarb, analyst]

Okay. And then the second question is just an update on the whole -- you have a third attempt on overturning Costa-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 low returning Costa-Hawkins? Or the majority of the political might out of Sacramento is supporting -- keeping Costa-Hawkins against the ballot initiative?

[Angela Kleiman, executive]

Alex, that is an important question. What we are seeing is the vast majority of the legislature are not supporting overturning Costa-Hawkins. So they're on our side. And because they recognize, especially in our market, we have an acute shortage of housing. And so that is not -- that is an antigrowth initiative. We have maintained our coalition to support reasonable legislation and especially relating to housing. And of course, this proposal has been defeated overwhelmingly twice, and we just have not seen anything that shows that will be different this time.

[Operator]

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

[James Feldman, analyst]

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 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?

[Barb Pak, executive]

Jamie, it's Barb. Yes, that's really driven by L.A. and Alameda between March and April. And once again, it's 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 L.A. Alameda.

[James Feldman, analyst]

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. Can you just talk about 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. So curious what you're seeing on the ground and your thoughts on putting capital to work.

[Rylan Burns, executive]

Jamie, Rylan 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. So at the start of this year, this was a joint venture that was maturing, and we had the opportunity to purchase our partner's interest and it made sense. It was accretive for our shareholders, and 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 one 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. The volumes continue to be very low as they were all of last year approximately 1/5 of the transaction volumes we saw in '21 and '22. 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. 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. So we're tracking a couple of deals right now. We have very deep bidder 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.

[James Feldman, analyst]

Great. Does that motivate you to sell more?

[Rylan Burns, executive]

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

[Operator]

Our next question comes from the line of Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

I want to go back to your comments, Angela, about where you're sending out May and 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? And just like how should we think about like the cadence for the rest of the year?

[Angela Kleiman, executive]

Josh, we are slightly ahead of schedule. And what we haven't done is because we have not reforecasted, 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 L.A. and Alameda. So I do want to caveat that. But the things are doing fine right now.

[Joshua Dennerlein, analyst]

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 before you send them out?

[Angela Kleiman, executive]

Yes, 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, a whole host of things.

[Operator]

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

[Haendel St. Juste, analyst]

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?

[Angela Kleiman, executive]

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

[Haendel St. Juste, analyst]

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

[Angela Kleiman, executive]

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

[Haendel St. Juste, analyst]

I 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?

[Barb Pak, executive]

Haendel, yes. It's Barb. So on our last call, we had 5 that were either on nonaccrual status or on our watch list. And then we've obviously taken back one of those in the first quarter. So we're down to 4. 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. Nothing new was added. The book continues to perform. None of them -- none of our sponsors are in default with the senior lender or with us. And so the sponsorship really does matter here and we have really good sponsors. So no new updates.

[Haendel St. Juste, analyst]

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

[Barb Pak, executive]

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

[Operator]

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

[John Kim, analyst]

Barb, just following up on that. So what is the earnings impact of consolidating Sunnyvale. I realize there's no impact from the impairment, but you've already had that on nonaccrual. So I would imagine be accretive going forward?

[Barb Pak, executive]

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 $0.05 benefit this year. Keep in mind, it's a small asset and then growing from there as we see better rent growth.

[John Kim, analyst]

Okay. And can you quantify how much of the first quarter blended spreads benefited from reduced concessions on a year-over-year basis? And just remind us how that trends for the remainder of the year.

[Angela Kleiman, executive]

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

[Barb Pak, executive]

Yes, it's about the same.

[Angela Kleiman, executive]

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

[John Kim, analyst]

So second and third quarter -- end of second and third quarter last year is when you started to really reduce concession?

[Angela Kleiman, executive]

Yes, yes, which is typical. And definitely second quarter and into -- a little bit into the third quarter, and then it picks up again in the fourth quarter.

[Operator]

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

[Adam Kramer, analyst]

I wanted to ask about maybe a little bit about some 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 some of the higher-paying jobs having 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 whether it's your tech exposure, whether it's the type of renters that are renting with you guys 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?

[Angela Kleiman, executive]

Yes. Sure thing, Adam. Our tech exposure hasn't changed too much. it's about somewhere around mid 5% 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 a job is coming through all the different industries. And so recently, the growth -- in job growth has really been in government and health and education services. And so we see that the impact throughout our portfolio.

[Adam Kramer, analyst]

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

[Angela Kleiman, executive]

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

[Adam Kramer, analyst]

Got it. That's really helpful, Angela. 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 an issue in your 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 the other potential capital sources and cost of capital there, whether it's -- and again, financial a little bit, but just kind of capital allocation strategy from here? Is this more kind of an asset-light approach in asset late year, if you will?

[Barb Pak, executive]

Yes. This is Barb. No, it's a good question. I mean you have seen us in the past, buy back stock when we're trading at significant discounts to NAV. And 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 or common stock in many years because of where we're trading relative to where we think the value is trading.

And to Ryland's 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 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 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 will remain disciplined on that front.

[Operator]

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

[Brad Heffern, analyst]

A 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?

[Barb Pak, executive]

Yes. So our yield is 4.75%. It is a high-quality condo-style property. And Essex because we own the property next store, we can operate it much more efficiently than the prior owner. And then in terms of the debt payoff, it was about $32 million in debt that was paid off.

[Brad Heffern, analyst]

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?

[Barb Pak, executive]

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

[Operator]

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

[Richard Anderson, analyst]

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. 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.

[Barb Pak, executive]

Rich, it's Barb. It is very important for us to stay on the dividend aristocrat 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. And it won't be 6% 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.

[Richard Anderson, analyst]

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 set up like that?

[Angela Kleiman, executive]

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

[Operator]

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. Goodbye.