Essex Property Trust Inc (ESS) — Q1 2024 Earnings Call Transcript

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, the consensus forecast was a slowdown for the U.S. and so far, U.S. job growth has trended better than initial forecasts. 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 two factors: first, limited housing supply. This is a significant structural benefit and a pillar of our California investment thesis. Lengthy and costly entitlement processes effectively deter housing supply. To this point, total housing permits as a percentage of stock continue 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 2.5 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 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 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 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.

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 one-time 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 two 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 the 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 assumed 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 the 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 a 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.

You mentioned the effects that certain submarkets are having on your new lease rate growth this year. I’m wondering if the challenges in L.A. and Alameda have improved, or if the ongoing issues with long-term delinquencies are still affecting the market. Do you think those markets will continue to hinder new lease rate growth in the future?

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

Yes, that's correct.

What we're expecting is that L.A. will continue to influence the delinquency rate. The improvement in Alameda is consistent, but it's a smaller part of our portfolio. The greater impact is really from L.A. because of the large volume we are managing, which will take longer to resolve. The positive aspect is that this situation isn't affecting other markets, which are performing well.

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 two of those trend from here?

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 L.A. drag. And so because it's not a huge outperformance relative to the plan at this point, the outperformance is really mostly in the benefits from delinquency that we're getting in 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.

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.

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 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 the same as before. We are setting market-appropriate pricing with the goal of maximizing revenues.

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.

Daniel, that's an insightful question. We're noticing that hybrid workers are relocating closer to their offices to mitigate commute times due to increased traffic. Additionally, the top 20 tech job openings are gradually rising. Last year, during the first quarter, job openings hit a low of about 8,000. As of March, that number has increased to around 16,000, which is double but still significantly below our pre-COVID average of about 25,000. This information indicates that fundamentals are improving, but for a notable acceleration, we need to see a stronger increase in high-paying job opportunities. We believe the underlying conditions are right for this to happen; it's just a matter of timing, which remains a key question for us.

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?

Sure thing, Daniel. We are predominantly 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'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 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 two in our markets, but that's what we're expecting at this point in time.

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?

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

Nick, I think there's a higher degree of caution as it relates to what we're seeing in L.A. Thankfully, a double-edged 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 two, 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 the L.A. market, but it is something that we're certainly factoring in.

Yes, Nick. Regarding the tenant underwriting for leasing activities, we have not needed to make any significant changes. There are always specific details from building to building, including tenant backgrounds and credit. We maintain a strong standard for our credit assessments. The recent delinquency issues are not related to our underwriting but are due to legislative changes, as the eviction moratorium lasted a long time, causing a backlog in the courts for processing evictions. This is why the timeline for removing nonpaying tenants has been extended. As for new tenants going delinquent, we are not experiencing that as a significant issue at all.

Okay. Yes, that's exactly what I was asking about. So you're not seeing anything from new tenants? This is definitely more 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.

Yes, that's correct, Nick.

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 California 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.

Alex, you bring up a great point, and I appreciate your attentiveness. What we're experiencing is that the supply is indeed a major advantage for our markets, which we've highlighted for several years. We don't require much demand to meet our objectives and maintain a healthy market performance. The additional benefits, like a return to office, are encouraging signs. We're seeing ongoing improvements in both domestic and international migration, and for the first time in three years, we're witnessing positive population growth. All these small pieces of data are promising. However, for a significant acceleration, we will need to see growth in high-paying jobs. Nevertheless, our markets are positioned to do well.

Okay. The second question is an update on your third attempt to overturn Costa-Hawkins, which is about six months away. What is the current state of advocacy regarding this issue? Where do both sides stand? Gavin Newsom has been actively promoting new housing, but are there significant political forces supporting the initiative to lower Costa-Hawkins, or is most of the political support in Sacramento aimed at maintaining Costa-Hawkins against the ballot initiative?

Alex, that is an important question. What we are seeing is that the vast majority of the legislature is not in favor of overturning Costa-Hawkins, so they are aligned with us. They recognize that, particularly in our market, we are facing a severe housing shortage. This initiative is not supportive of growth. We have maintained our coalition to advocate for reasonable legislation related to housing. Furthermore, this proposal has been overwhelmingly rejected twice, and we have not observed anything that suggests this time will be different.

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?

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. But if you pull out those two, we did see a sequential increase. So I think it was primarily just driven by L.A. and Alameda.

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.

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 one-fifth 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, particularly 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. Our expectation is that this 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.

Great. Does that motivate you to sell more?

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.

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 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 the cadence for the rest of the year?

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. But I will say that we are 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.

Could you remind us what your typical negotiation spread is on those renewals before they are signed and sent out?

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.

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?

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

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

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.

I appreciate the insights. Regarding the health of the mezzanine book, I noticed you put two loans on the watch list last quarter. Could you share your thoughts on the book and your perception of the credit risk involved? Also, I'm interested in your current stance on adding to the book, especially considering that rates are expected to remain high for an extended period.

Yes, it's Barb. In our last call, we noted five assets that were either in nonaccrual status or on our watch list. We have since taken one back in the first quarter, leaving us with four. Of these four assets, three have loans maturing in the next two to three quarters, so we expect to see outcomes there relatively soon. For the fourth asset, we are having productive discussions with the sponsor to contribute additional equity, which would improve our position in the capital stack. We anticipate having more information on that in our next call. Overall, the situation has improved slightly regarding the assets on our watch list, with nothing new added. The portfolio is holding up well, and none of our sponsors are in default with the senior lender or with us. The quality of sponsorship is crucial, and we are fortunate to have strong sponsors. There are no new updates to report.

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

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.

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?

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.

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.

Sure thing. John, it's Angela here. In the first quarter, the increase in concessions affected renewals by about 60 basis points. Additionally, we're looking at data for April. Barb, do you have that information available?

Yes, it's about the same.

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

So the end of the second and third quarters last year is when you started to significantly reduce concessions?

Yes, that’s typical. It’s definitely observed in the second quarter and a bit into the third quarter, and then it picks up again in the fourth quarter.

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?

Yes, Adam. Our exposure to the tech sector remains fairly stable, accounting for roughly mid-5% of our overall portfolio, with a higher concentration in Seattle compared to Northern California and minimal presence in Southern California. Overall, our portfolio is quite diversified, meaning job opportunities are emerging across various industries. Recently, we have observed significant job growth particularly in government, healthcare, and education services, which is impacting our portfolio positively.

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?

Well, Adam, I think what I was trying to say is that our tenant pool is pretty well diversified 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.

Got it. That's really helpful, Angela. Maybe just switching gears. I think you mentioned that you didn't buy back any shares, but I'm also curious about your equity. Can you walk us through how you view your equity cost of capital today and consider the cost of other potential capital sources? Also, can you share your capital allocation strategy from here? Is this more of an asset-light approach in a capital-heavy environment?

Yes. This is Barb. That's a good question. In the past, we have bought back stock when it was trading at significant discounts to net asset value. We can profitably sell an asset and take advantage of the price difference between public and private markets. Currently, we're not satisfied with our stock price. We haven't issued common stock in many years because we believe our current trading value is below its potential. As Ryland pointed out, the cost of equity capital in private markets is not appealing for us, so we are exploring other options. We have free cash flow, preferred redemptions, and we will consider selling assets or joint ventures if the stock price remains unsatisfactory. If we find alternative acquisition opportunities or other uses for those proceeds, we will act on them. Since our company was founded, we have always evaluated all capital sources and will continue to do so with discipline.

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?

Yes. So our yield is 4.75%. 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 million in debt that was paid off.

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?

I don't have the information on the four nonaccrual assets at the moment. I will need to follow up with you later on that.

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.

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.

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 are 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?

Angela here. That's a good question because when we look at the median income, it actually looks quite positive and aligns well with the profile of our properties. So, I want to emphasize that we don't have a demographic issue in terms of qualifications for our properties, as we have a diverse pool within the market. Even though we operate solely on the West Coast, each submarket has varying levels of properties where tenants can qualify. The quality of jobs I’m referring to relates to our capacity to drive rent growth, which is crucial when discussing high-paying jobs.