Jul 26, 2017
Executives
Marty McKenna - VP, Investor and Public Relations David Neithercut - President and CEO Mark Parrell - EVP and CFO David Santee - EVP and COO
Analysts
Nick Joseph - Citigroup Nick Yulico - UBS Steve Sakwa - Evercore ISI Conor Wagner - Green Street Advisors John Kim - BMO Capital Markets Vincent Chao - Deutsche Bank Robert Stevenson - Janney Montgomery Scott LLC Dennis McGill - Zelman & Associates Juan Sanabria - Bank of America Tayo Okusanya - Jefferies Rich Hill - Morgan Stanley Neil Malkin - RBC Capital Markets Daniel Santos - Sandler O'Neill James Sullivan - BTIG
Operator
Good day ladies and gentlemen. And welcome to the Equity Residential Second Quarter 2017 Earnings Call.
Today's conference is being recorded. At this time I'd like to turn the conference over to Marty McKenna.
Please go ahead sir.
Marty McKenna
Thanks, Keith [ph]. Good morning and thank you for joining us to discuss Equity Residential's second quarter 2017 results.
Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law.
These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
And now I'll turn the call over to David Neithercut.
David Neithercut
Thanks, Marty. Good morning everyone.
Thank you for joining us for today's call. We were pleased to continue to experience very deep and resilient demand for premier living across our markets.
And as David Santee will explain in more detail in just a moment, most of our markets should meet or exceed our original expectation for revenue growth this year. It was driven by very strong occupancy, retention and renewal rates, despite elevated levels of new supply which continue to pressure lease rates in some markets.
Across our portfolio, we see the benefits to our business of a growing economy, producing jobs, loans, unemployment, and rising incomes which continue to drive strong and steady demand for rental housing in our core markets. We also see the benefits of the remarkable customer service provided to our residents and prospects by our teams across the country.
Their hard work and dedication really do drive our business and they inspire all of us each and every day. So now I'll let Dave Santee go into more detail about how our markets are performing during the extremely important leasing season, and then Mark Parrell will give some color on operating expenses and our guidance for this year.
David.
David Santee
Okay. Thank you, David.
As we discussed on the last call, our relentless pursuit of delivering remarkable service to our current residents and getting them to renew with us in the phase of elevated deliveries is our number one goal. Our teams continue to deliver outstanding results achieving renewal increases of 4.8% for the quarter and a 100 basis point improvement in retention.
Year-to-date annualized retention improved by a 150 basis points. Our Q2 revenue growth of 2.1% was driven by better-than-expected renewal rate growth and a 250 basis point increase in the percentage of residents who chose to renew with us.
For the quarter, new leads over lease growth of 1.4% was shy of expectations, driven mostly by a choppy leasing environment in Washington D.C. Demand across all of our markets continues to be very good as evidenced by our reported occupancy for the quarter of 95.8% and a 96.1% occupancy we enjoy today.
And despite the elevated deliveries that we are experiencing across our markets, we see no indication that demand has softened beyond the normal seasonal trends through the balance of the year. The percent of people in America who choose to rent versus own is now at a 50-year high.
With a resurgence in job growth and more visible signs of upward wage pressure among the highest field and highly educated, we remained cautiously optimistic that our markets would continue to absorb new deliveries in an orderly fashions and continue to exhibit strong pricing discipline. As we sit here today with our projected full occupancy, we expect to be 40 basis points higher than same period last year and an exposure that is 60 basis points lower than last year, we are well positioned as we exit the peak leasing season.
Renewal rates achieved should be 5% for July with August currently at 4.8%, with rates mostly baked for the full year, should we continue to experience better-than-expected occupancy through year end, full-year revenue results would be closer to the high end of our original guidance range. Moving on to the markets, Washington DC is our only market that we failed to meet or exceed our expectations, as job growth came to a grinding halt in April, while at the same time new deliveries were the highest of any quarter on record.
Uncertainty around the new administration's ability to deliver on its agenda and a sharp falloff in procurement spending caused many government contractors to hit the pause button on hiring. As a result occupancy for the quarter was 70 basis points below Q2 of 2016.
As a result of the choppiness in pricing, DC was our only market to see an increase in turn over for the quarter and flat quarter-over-quarter results of the percentage of residents renewing, as renters took advantage of attractive rental rates at newly delivered communities. While renewal rates achieved in DC in the quarter were up 4.8%, our new lease over lease results were minus 80 basis points.
Well we remain cautiously optimistic that DC maybe getting back on track. The market is expected to have few deliveries of new units in the back half of the year, and currently we are achieving occupancy and exposure results that are better than the same time last year, and today our July billings show a 1.7% revenue growth versus July of 2016.
This activity supports recent reports of job growth in DC being expected to reaccelerate. While we originally believed that Washington DC would be our only market that would deliver better results in 2017 than last year, we now see Washington DC delivering results similar to 2016.
And New York City is exceeding our expectations, in that it is not as bad as we had planned. Despite the level of luxury product being brought to the market, owners have been remarkably disciplined with their pricing.
However few '17 deliveries will not occur until Q3. Move-in concessions continue to be utilized mostly at new lease ups.
The stabilized communities remained committed to net effective rents with minimal targeted concessions. From the dollar-volume perspective, year-to-date same-store concessions have averaged $485 per move-in or 3.8 days of free rent per move-in, which is down from first quarter of $575 per move-in or 4.5 days of free rent.
Renewal rates achieved in New York were unchanged in Q1 of 2.3% and lease over lease pricing improved from negative 6.2% in Q1 to negative 1.8% in Q2. Factoring in the use of concessions year-to-date, net effective rates are down 2.3% from a year ago.
Boston is on track to meet our full-year expectations as the expected new deliveries in the financial district in Cambridge put pressure on new lease rates. Student churn is still in process, but based on our current occupancy and exposure we should come out of peak season better positioned than we were in 2016.
In Boston renewal rates achieved in the quarter were 4.4%, while new lease over lease rates were up 1.4%. With deliveries evenly spread across the quarters and peak season just about buttoned u, we think Boston has the potential to do modestly better than our original expectations.
Moving over to the West Coast; Southern California, which represents almost 60% of our expected growth at the original midpoint of our guidance is on track to meet our full-year expectations. As expected Downtown LA and Pasadena are producing the weakest revenue growth as few submarkets have the greatest concentration of new supply.
With new deliveries peaking in Q4 in both LA and Orange County potential speed bumps remain ahead, although both submarkets make up a very small percentage of our total revenue for the region. West LA revenue growth is accelerating as we had hoped as Silicon Beach continues its growth with virtually no new supply insight, and San Diego will exceed expectations with only a thousand units left to be delivered this year.
For our South Cal portfolio, Q2 renewals achieved were 6.6% and lease over lease results were 2.4% with both LA and San Diego sitting today with 100 and 180 basis points less exposure respectively than last year, and Orange County flat for last year it is clear that today demand remains very strong across the entire region. San Francisco has certainly found its footing and should exceed our best case expectations for full year revenue growth.
Despite delivering more units in 2017 than in 2016, the lease up environment appears to be significantly more accommodating. Like many of our markets San Francisco renewal increases are driving better-than-expected top-line growth, while year-to-date move-outs are down 12%.
Renewals achieved for the quarter were up 4.4% with forwards months accelerating. Lease over lease results were up 1.5%, which was better than expected, and occupancy was right on target.
While job growth in San Francisco has slowed compared to previous years, it still remains above the national average. With most - almost a 40% decline in expected deliveries for 2018, we see no reason why San Francisco won't continue to move up from here.
Now we always believed that Seattle could deliver another year of very strong revenue growth, but with peak deliveries of almost 7,900 units we hedged our bets in our guidance. However, like last year Seattle continues to absorb units without a flinch.
Amazon continues to try and rule the world and Microsoft is still a major player in cloud computing as evidenced by the Q2 results that we reported last week. Renewal rates achieved were up 7.8% on lower turnover, continue to drive top-line growth that will exceed our full year most optimistic expectations.
Our lease over lease results were up 10.4% for the quarter, so all across our markets demand remained strong. Markets are absorbing new supply, some that bring minimal pricing pressure, some none at all.
Our occupancy is better today than last year and our exposure and turnover are both lower than last year. So in closing, I'd just like to give all of our folks out there a big shout out for your focus, your commitment, and most importantly, delivering rate results.
Mark Parrell
Thank you, David, and good morning. I want to take a couple of minutes today to talk about our same-store expenses, our revised plans for the year and our full year normalized FFO guidance.
First off regarding our same store expenses, we have raised slightly the midpoint of our full-year same store expense guidance from 3.5% to 3.625% to reflect increased payroll costs as well as costs associated with the severe rains in California this year. And these costs were on both in payroll, in the form of higher property-level overtime, and through the repairs and maintenance line item.
These elevated costs have been somewhat offset by our expectation of lower gift card spending in 2017, due to the strong renter demand that David Santee just discussed, and this should lower our leasing and advertising costs. Our year-to-date same store expense grow of 3.9% was primarily driven by increases in real estate taxes and in on-site payroll.
We also had a relatively difficult comparable period. First half expense growth in 2016 was 0.9% and we will benefit from an easier company in the back half for 2017.
Now I'll give you some color on some of the major expense items. We saw a 4.7% increase in real estate taxes in the second quarter that was driven by increases in Boston, Seattle and New York, with the New York increase in turn driven by the burn off of 421a tax evasions.
For the year, we still expect same store expense growth for real estate taxes to be between 4% and 4.5%. Away from same store, we had a change in our estimates of the assessed value of several of our California development properties as well as a change in the expected timing of these assets going out on - going on the California tax rolls at their full value.
This will increase non-same store real estate taxes for the full year by approximately $5 to $6 million. Turning back to same store and discussing payroll expenses, we said on several prior calls that we expect pressure in this category throughout the year.
This is due to a combination of wage pressure to retain our property level employees in a very competitive market and the addition of staff in some markets to provide even better service to our residents and support tenant retention. These factors drove our original estimate that onsite payroll would grow by 4% to 5% for the full year.
We now expect to increase about 6% in this category and that change is due primarily to higher estimates for certain employee medical insurance and Workmen's' Comp claims. We now expect leasing and advertising expense to decline 6% for the full year versus our prior estimate that this expense would be flat for 2017 versus 2016.
L&A spending increased 2% in the second quarter of 2017 and 7.5% for the six months - first six months of 2017, so we expect a meaningful deceleration in L&A expense growth in the back half of this year. Please recall that we spent approximately $1 million in gift cards in 2016 all in the second half of that year.
Driven by strong retention, low turnover, and high occupancy that we are now enjoying, we now anticipate that we will use less than 200,000 of the 700,000 in gift card spending we'd previously budgeted for 2017. In fact as of June, 30, we have spent almost nothing in this category.
Moving on to the balance sheet, as you may have seen, we were upgraded by Moody's to A3. We are pleased to be recognized for our rock solid balance sheet and proud to be one of only a handful of REITs across all of the asset types to carry A ratings from all of the rating agencies.
In our earning release, we raised the midpoint for our anticipated unsecured debt offering to $500 million from 400 million, as we consider a larger and earlier offering to take advantage of the opportunity to lock in today's favorable rates. We had planned to use the proceeds from an offering to pay down on our outstanding commercial paper and revolver balance, which today stands at a combined $900 million.
So moving on to normalized FFO, in our earning release we raised the midpoint of our full-year same store revenue guidance to 2% from 1.6%, driven by all the positive factors David Santee just enumerated. I just went over our expectation of the modest increase in same store expenses, which collective caused us to raise the midpoint of our same store NOI guidance to 1.25% from 1%.
On the normalized FFO side, we are picking up a bit more than $0.01 per share from higher same store NOI and smaller amounts from our expectation of less transaction dilution, due to the timing of our acquisition and disposition activity this year, and higher non-same store revenue; though this better non-same store revenue is more than offset by the increase in California development asset real estate taxes that I previously mentioned. Put all this in the blender and the result is a modest increase to our normalized FFO guidance midpoint going from $3.10 a share to $3.11 a share.
So, all-in-all revenue has improved, expenses are generally on track, normalized FFO slightly improved, and positive news in relations to our credit ratings and our anticipated capital activity. And I'll now turn the call back over to David Neithercut.
David Neithercut
All right. Thanks, Mark.
Really quickly, before we open the call to questions, just a bit on capital allocation. As we noted in the press release last night transaction activity was modest in the second quarter when we acquired one asset and disposed off two.
The property acquired was a 136-unit asset built in 2016, located in West Seattle, acquired for $57 million with 418,000 of unit at a cap rate of 5%. During the quarter, we disposed off a 312-unit property, a secondary submarket of Cambridge, Massachusetts for $168 million or $535,000 a door at a disposition yield of 4.5%.
And a 288-unit property located in Franklin, Massachusetts for $51 million or $177,000 a door at a disposition yield of 6.7%. Now year-to-date, the $267 million of dispositions have the weighted average disposition yield of 5.3%.
This compares favorably to the recent acquisition at a 5% cap rate. We've also got several other deals we're currently underwriting, which we believe could be acquired at cap rates ranging from the mid-fours to low fives.
As a result, while we've maintained the guidance of $500 million of acquisition activity, a $500 million of disposition activity for the year, we've narrowed that - the spread of that activity from 75 basis points to 50 for the year. So right, operator, we'd be happy to open the call for questions at this time.
Operator
Thank you. [Operator Instructions] And we will take our first question from Nick Joseph with Citi Group.
Please go ahead.
Nick Joseph
Thanks. How much of year-to-date revenue outperformance do you tribute to better-than-expected demand versus benefiting from some of the expected supply being delayed and delivered a little later than probably you originally anticipated?
David Santee
This is David, Nick, David Santee. When we look at our deliveries there's only a couple of markets that have really had any significant delays, specifically New York, but that's only 700 units that kind of got shifted from the first half to the back half.
And then the only other market of any significance would be DC, again only 700 units that moved from the front half year to the back half. So I would say that most of this performance is driven by continued strong demand.
Nick Joseph
Thanks. And then in terms of development, how does the four seven stabilized yield on the Freemont deal compare to your original underwriting?
David Neithercut
David Neithercut here, Nick. Generally the ballpark, that property was impacted significantly by the - this downturn or step back at San Francisco we experienced a year ago.
We started lease up of that property in April of last year and you know that it was just around that time in the spring time that San Francisco began to weaken. So that number - essentially sort of met our expectations.
I can tell you that in 2015 or early 2016 we had thought we'd do significantly better but it generally met our original expectations, which frankly if you think about it were Type-1 construction, in such a phenomenal location that those are lower expected going in years.
Nick Joseph
Thanks. And just finally, what's the expected stabilized yield on the remaining projects, and maybe if you can provide a range on the low-end and the high end?
David Neithercut
Well, the other product excluding Freemont would have a weighted average yields in 5.5 to low 6's.
Nick Joseph
Thanks.
David Neithercut
You're very welcome.
Operator
We'll take our next question from Nick Yulico with UBS.
Nick Yulico
Thanks. I was hoping you could give updated thoughts on the submarket revenue growth projections.
I think you had last updated them on the 4Q call?
Mark Parrell
Okay. So I'm going to give you the likely full year revenue growth expectations.
Boston remains at 1.5. New York remains - improved to minus 30 basis points.
Washington DC, 1.4; Seattle, 5.75; San Francisco, 1.8; Southern California, I'll give it to you by major market, LA is - remained steady at 36; Orange County, 4.5; and San Diego 4.25.
Nick Yulico
Okay, appreciate that. Just going back to the supply topic, we looked at it today; it looks like the second quarter and third quarter of this year, just using Axiometrics data was the largest amount of supply completions in this cycle.
And we've gone through first half of the year and seen some of the impact on fundamentals and you've talked about a couple of other markets like New York, DC and parts of Southern California where the supply impact actually hit deliveries' pick up a bit in the second half of the year. How should we be thinking about where we are versus the supply in this cycle?
And because I think we're trying to - a lot of us are trying to wrestle with of have we gone through this supply or - and we've seen the impact to rent growth or is there still kind of this lingering issue in the back half of the year and into next year where there's still a fair amount of supply that could pressure rent growth. Just I'd love to hear your thoughts on that.
David Neithercut
On - and it's David Neithercut here. There's certainly supply coming this year and we expect supply next year.
Nick, in some markets we expect supply to diminish next year, in other markets we expect there - it will be so modestly more. But fortunately and as we've already discussed, demand remains strong, occupancy is strong and retention very strong.
So, so far the market has demonstrated enough depth to absorb that supply. And while it's too early to call 2019 in many markets, our expectation is that we will see a decrease in supply beginning in 2019.
Nick Yulico
Thanks.
David Neithercut
You're welcome.
Operator
We'll take our next question from Steve Sakwa, Evercore ISI.
Steve Sakwa
Thanks. David Santee, I appreciate all the color that you gave on the new and the renewals by market.
Do you sort of have a rolled-up blended number for the portfolio on sort of renewals and new just for the whole portfolio?
David Santee
So the combined number for the new lease and renewals for Q2 was 3.2%.
Steve Sakwa
Okay, thanks. And then maybe just kind of coming back to New York for a minute, could you just talk a little bit more about the new supply, the impact, maybe some of the submarkets?
And are there projects that you either see being put on hold or perhaps have been delayed or cancelled at this point that maybe give you a little more confidence about the outlook, say 18 to 24 months from now in New York?
David Santee
We update our supply or our expected deliveries every quarter. Obviously, we wouldn't expect any cancellations in 2017.
These deals are pretty much ready to open the doors. Certainly, the concentrations in New York are specifically Brooklyn and Long Island City.
That's where - we have nothing in Long Island City, but we are monitoring any potential impact that Long Island City could have on surrounding submarkets. New supply in Brooklyn is more north than in east of us in Downtown, but nevertheless we are feeling some of the pricing pressure and Brooklyn would be our lowest performing submarket in the metro area.
David Neithercut
In - Steve, in New York City I believe with a competitive product which is all high-rise kind of product. We've got a 40-or-so-month sort of building cycle in that marketplace.
So anything later than 2018 we've sort of known in there. Anything that's a surprise in '18 only slips from '17 or a surprise in '17 yes, will be moved up from '18.
And it's going to be very soon before anything that's going to be delivered in 2019 got to be underway. And so we've got a pretty good handle we think in New York City as to what the supply is this year and next year, and we expect a - based upon what our guys in the field are monitoring, a meaningful decline in new deliveries in 2019.
Steve Sakwa
Okay, and I guess last question, David just in terms of capital allocation and thinking about development, I know you've really taken your foot off the gas. Are there any kind of land parcels or any potential new developments that you guys are exploring or looking at, at this point or pretty much deliver these four projects and kind of wait for the next cycle?
David Neithercut
Yes. We've got a couple of projects that could begin yet this year, which are frankly quite small.
We've got a deal in Seattle that we expect, that we've already given approval to the guys to build, which is just $62 million. We've got a small deal of less than $50 million on a - sort of a site adjacent to an existing property that we got in the Archstone transaction which could begin yet this year.
So that's just a $100 million or so. Beyond that we've got some sites that we currently have in LA and in the Bay Area and in Boston that we could do something on but we're not going to pursue those very aggressively at the current time.
I mean the teams continue to work on them, but I - we'll just sort of see how things play out. We're not - we're looking - I mean we continue to underwrite new land sights, the guys continue to look at what's out there but there's nothing that we find attractive, given where costs are today and the pressure on land costs, the pressure on construction cost and where yields are today.
And I guess I'd tell you that the product that Alan George and his team are looking to acquire today, products built in 2016 or 2017, we believe there's opportunity to buy some of that product at current replacement cost or maybe even a modest discount there too. So in present time we just don't look at that development as particularly compelling, yes, then we do have some things in the pipeline as I said that we could start this year, some other product that we'll continue to keep the close eye on but should not expect to see us be taking down new land sights in the near future.
Steve Sakwa
Okay, thanks. That's it for me.
Operator
We will take our next question from Conor Wagner, Green Street Advisors.
Conor Wagner
Thank you, good morning. Good, thank you guys.
David Neithercut, could you comment on the transaction market a bit more? Have you seen any change year-to-date, given that some of these markets have recovered?
Has buyer or seller expectations - have they changed at all?
David Neithercut
Well, transaction volume is down meaningfully from a year Conor. But as we talked a lot about with various investors that we met in New York, in June, those transactions which are taking place continue to take place sort of at cap rates and valuations that I think remain very solid and within - generally within the same valuation range as of a year or so ago.
So transaction volume is down but valuations and cap rates are pretty much where they've been. Now I can tell you that the brokerage community will constantly tell us that we're working on a lot of opinions or value and that they know a lot of owners that are interested in selling product, and we expect to see product but at the present time it's down considerably from a year ago.
Conor Wagner
Great, thank you. And then maybe David Santee, if you could comment on how the rehab program has been going year-to-date in terms of the type of returns you've been getting on your kitchen and bath upgrades, and then, if you can refresh me if those - if that's been focused on any particular markets or if it's been evenly spread across the portfolio?
Mark Parrell
Hey Conor, it's Mark Parrell. No, it's pretty well spread out throughout the portfolio.
We continue to see cash returns on at - in the 12%, 13% or so range. We are doing a little more this year than we have in past years.
So this year it's more like 8 % of revenue and typically it's been more like a 7%. And we mentioned, I think a couple of quarters ago, we're going to have to sort of accelerate some things in terms of customer facing improvements like clubhouses and the like, and expect that to kind of go back down next year.
So just in terms of geography, it's pretty well spread out throughout the portfolio.
Conor Wagner
Great. Thank you.
Mark Parrell
You're welcome.
Operator
We'll take our next question from John Kim, BMO Capital Markets.
John Kim
Thank you. I'm interested in your commentary on the demand in DC weakening this quarter.
I think last quarter you alluded to it and now it's a little bit more pronounced. In your opinion, is confidence in the Trump administration the key driver of future demand?
And if the approval ratings remain low, is there a chance that your 2017 figures in DC will not meet 2015?
David Neithercut
Well I - based upon things that I've read, I think a lot of it just has to do with actually filling jobs of - in positions that actually can approve procurement contracts. So I think last call there was probably almost 400 vacant positions across all departments and many of these positions were folks that approved procurement contracts.
So certainly, it appears that the market has rebounded, although it's not going to see the rate growth that we had hoped. But the rate growth has improved, occupancy has improved, demand has improved.
But yet there are still potential obstacles ahead and procurement is going to drive the strength of DC.
John Kim
Okay. And then I'm not sure if you have disclosed this in the past but what percentage of your leases are backed by guarantor?
And I'm wondering, if you have tracked this, how this has trended over time?
David Neithercut
It's a very small percentage. Typically, we're talking about more student-oriented properties and then where we have most students or in the case of international students, we actually refer these folks to a third party that they can purchase guarantee insurance that insures us for the full balance of the lease should they default.
John Kim
And are these excluded from the rents-to-income figures and can you also just update that on - that figure for the - this quarter?
David Neithercut
Yes. We do exclude guarantors certain - we actually exclude income below a certain level I think - and above a certain level.
So we kind of chop off the extremes so that we get at a more well-rounded number. The revenue - the rent-to-income ratios really remained unchanged.
I think what is more interesting is just how we kind of look at the total income of our residents that moved in last July versus the total income of the residents that moved in - up to this year data…
David Santee
Yes, it's David. So I mean - we've looked at close to 30,000 new leases for the 12 months ending July '16 and the 12 months ending July '17 of the same store set.
So it was just those leases that had been entered into in that trailing 12 months. And the average incomes are up 4% year-over-year and the median income up almost 6% year-over-year, and in both instances, the average rent-to-income or median rent-to-income is down in seven of eight markets.
So we continue to see very strong incomes and very acceptable and perhaps even low rent-to-income levels. And even Seattle, which has experienced some of the biggest expense growth, continues to have the lowest along with Manhattan the lowest average rent-to-income and median rent-to-income.
John Kim
That's very helpful. Thank you.
David Santee
You bet.
Operator
We'll take our next question from Vincent Chao with Deutsche Bank.
Vincent Chao
Hey everyone. Just a quick question on Seattle, just continues to sort of defy gravity in terms of the performance there, even in the face of new supply.
But I was just curious, I mean the job growth there, still very strong versus the rest of the country but has been decelerating fairly quickly. I was just curious if the demands out there from a job-growth perspective has met your expectation, and then, I think last quarter you said that Seattle was expected to peak in the second half.
Is that third quarter or fourth quarter, I don't know if you maybe update us?
David Neithercut
Yes, we run into a tougher comp in the back half of the year versus last year, but - I mean we just don't see any change in demand in Seattle. I mean we project some softness that really just has never materialized, and we've kind of taken that approach over the last four years in some of these submarkets, especially when there is a community that's going up down the street or across the street and we expect to have to see some softness, and frankly, we've just never seen it.
And our barometer is the open positions at Amazon, and I think, last quarter they were 10,000 and I think last week, they were 8,500. And then with the continued growth in cloud computing, I think Seattle has created - it's created a niche as the backbone and the plumbing of all things that are generated out of in Dallas.
So Seattle remains very strong.
Vincent Chao
Okay. Just maybe if you could just remind us, I know you talked about the focus on service and the turnover ratios have been reflective of that and I think some of the increased wage growth has been part of that as well.
I was just curious; can you just remind us what you're doing at the asset level to sort of really drive that service level home with tenants?
David Neithercut
Well, I think it's really - it all starts at the top, right? And I think we've talked about our efforts on the last call.
All of our senior team, myself, Michael Manelis, people from other departments visited each and every market, jade outside of our expectations, we continued to try and experience - tried new approaches with resident experiences. We have a very deliberate and active kind of activity program that we're piloting in New York City.
Our - we're focusing as well on our employees, giving them the training that they need. Certainly, we are watching compensation.
Mark talked about our wage pressure in our industry. But I'm also pleased to report that turnover through the first quarter of all onsite employees was down a 120 basis points versus same time last year.
So I think everything that we're doing is providing a very significant return on investment in our time. I also like to say that Tom Lebling, who is our Senior VP of Property Management, is very instrumental in making sure that all of our folks are all on the same page and that our messages are very clear and we're all going in the same direction.
Vincent Chao
Good thanks a lot.
Operator
We'll take our next question from Rob Stevenson with Janney.
Robert Stevenson
Good morning guys. David Santee, given your comments about the weakness in DC, you've seen any meaningful performance differential between the various Northern Virginia submarkets, between themselves, and then also versus the district proper?
David Santee
We had more supply in the RBC corridor in Q2. We have a large percentage of our portfolio there.
But I would say just in general the entire region seemed to have hit pause button. There's numerous - even for [indiscernible] there's numerous publications that you can read, but I think of it just this dark cloud over the entire region, partly fueled by a short fall off in procurement spending.
Robert Stevenson
Okay. And then David Neithercut, how would you characterize your relationship today with Airbnb?
You guys working with, trying to combat stuff, I mean where does that stand today?
David Neithercut
We continue to work with Airbnb on a handful of properties that have a - that we've earned only because of our working with them. We've got a high share, a large share of the activity to work with them till we get some transparency and understanding and control as to a lot of activity that's taking place on our properties.
So far we think that that's working fairly well and is a better approach than what others are - have decided to tackle themselves.
Robert Stevenson
What type of control are you getting relative to when you don't know that somebody is renting? I mean are you getting approval process - how do you characterize it?
David Neithercut
Because of what we're doing with them we do know what's taking place on our property. And the only way one does know is by working with them.
And so we have absolute understanding about what's taking place on our properties and have control of being able to turn people on and turn people off and limit the amount of activity that's taking place on any given property at any given time. So because of what we're doing with Airbnb, we do have knowledge and then will have control of it, that those who do not work with Airbnb won't have.
Robert Stevenson
Okay thanks guys.
Operator
We'll take our next question from Geoffrey Liu [ph] with Goldman Sachs.
Unidentified Analyst
Hey thanks for taking my question. Just wanted to go over the Bay Area and if you could talk a little bit about the performance of the CBD versus the submarkets, if there is any differences there?
David Santee
Well I guess I would say that certainly last year the CBD, especially our same store CBD which were all the assets spread in great locations went head-to-head with all of this new supply and the concentration in Downtown. But let me - so year-to-date, Downtown is performing all on par with our full-year expectations.
So I said our revised number was I think 1.8 and today San Francisco is currently doing positive, Downtown is doing positive that 1.9.
Unidentified Analyst
Great thanks and then just also on the Bay Area, the concessions, if you can maybe talk about Rincon Hill versus the Design District in your asset, 100 items there, what you're seeing maybe in terms of concessions and then also if you're seeing anything kind of towards the San Mateo Peninsular area, if you're seeing any concessions there?
David Neithercut
So as a general statement we are not utilizing concessions at any stabilized properties across the entire San Francisco MSA. I would tell you that demand at Henry Adams has been very strong.
We - depending upon our lease-up pace, we have kept concessions in place but at the same time raised the suite rate. In some situations we have removed concessions.
So it's, - leasing up a building a very dynamic process and you want to - we don't set it and forget it, and we're always trying to optimize revenue by pulling the levers that are appropriate given the pace of lease up. So we are seeing very good results at Henry Adams, and while we see very few concessions in the submarkets that we're in, we are not utilizing concessions.
Unidentified Analyst
Thank you.
Operator
We'll take our next question from Dennis McGill with Zelman & Associates
Dennis McGill
Hi, thank you guys. One question just going back to the phasing of deliveries in 2017, I think you touched on this in a few markets, but if you were to look across your markets how much of the deliveries do you guys show today being in the second half of the year versus the first half of the year, percentage wise?
David Santee
Across the entire portfolio, simply it's 30,000 units in the first half and 35,000 in the back half across the entire portfolio. Not a whole a lot of that.
Dennis McGill
Okay. And then just to clarify, I think a point you made earlier on the seasonality of business, just to clarify; when you look at the leasing trends that you've assumed within the guidance second half of the year is that reflect normal seasonality, better than normal seasonality, worse than normal seasonality?
David Santee
No, just normal seasonality in the original guidance.
Dennis McGill
Okay. And then last question, I think there was a comment on as you get out to '19 everything you can look at today would suggest you'll see a decrease in supply.
The comment on '18 though was a little bit back and forth, I guess depending on the market. Again, holistically, if you were to look at '18 today, is that more of a flattish trend in supply?
Is that what you were implying David?
David Santee
Well '18 numbers on a portfolio basis currently are pretty on par with our '17 deliveries. So you really have to kind of get down to the market level.
So New York in 2018, we would expect more deliveries. Let's see, Boston we would expect fewer deliveries; San Francisco, significantly fewer deliveries in '18; Seattle, slightly fewer.
The big pop would be LA in 2018 when contained almost 14,000 units, but that's - that hasn't been a secret. Orange County, kind of same, 5000 this year, 5000 next year; and then San Diego, call it 3000 units next year versus 2500 this year.
Dennis McGill
Okay, very helpful. Thank you, guys.
Operator
We'll take our next question from Juan Sanabria with Bank of America.
Juan Sanabria
Hi, thank you. Just on the expense side, you guys made allusion on the top plan that you could be at the high end if occupancy kind of holds in relative to where you are to date.
Any comments on the same store expense side on comfort level at the high or low end and how you're thinking about that?
Mark Parrell
It's Mark Parrell. No, I mean I think 3.6 right at the middle is kind of how we feel right now.
We don't really have a bias either way and relatively small amounts of money on a $600 million same store expense budget can move us a tenth. So I think a lot of our rate's kind a little down the middle at this juncture.
You've got a question, Juan? Operator can we…
Juan Sanabria
Can you hear me?
Mark Parrell
Now we can, yes.
Juan Sanabria
Sorry. Just with regards to new lease trends in the second quarter and in July, could you just give us a sense how those trended across the portfolio, kind of on a month basis?
If you were getting the benefits of seasonality kind of through June and into July?
David Neithercut
Yeah, I'm not really sure how to answer your question. Our new lease rates with the exception of Washington DC are trending equal to or slightly better than we'd expected.
Juan Sanabria
But was the year-over-year change in June better than April and May? Just trying to get a sense of the - how the curve looked throughout the quarter into July?
David Santee
Yeah. Well the new lease rates obviously were much better in Q1 than Q2.
From April to June, the curve generally moves up and it moved up just as it has in previous years. So really no change to what we see from previous years.
Its following the same curve just at a lower level.
Juan Sanabria
Okay. And then just one last question for me.
Are you guys doing any - have any programs or plans in place to take advantage of maybe demand for shorter term leases as some of your peers are looking to harness that demand?
David Santee
I guess I would say we used to have a corporate housing company - equity corporate housing many years ago that focused on corporate leases. We're not really looking to get - add additional volatility to our operations.
In fact, we've kind of gone the other way. When you stick with LRO and our yield management systems, I mean typically, these systems price shorter term units in many cases probably a 100% higher than a 12-month lease rate.
So if somebody wants to pay double the rent, we'd certainly entertain that but it's not a segment of the business that we're actively pursuing.
Juan Sanabria
Thank you.
Operator
And we'll take our next question from Tayo Okusanya with Jefferies.
Tayo Okusanya
Yes, good morning. I'm just trying to reconcile the same store NOI growth guidance for the year.
First half of the year you're averaging about 1.7%, for the year the midpoint is about 1.25%. So we're still kind a talking about further slowdown in same-store NOI growth in the back half of '17.
But we're talking about less supply and better demand trends at this point. So I'm just struggling a little bit to kind of reconcile why the slower same store NOI growth in the back half of the year?
Mark Parrell
Yes. So maybe can just assemble that to revenue and expense.
I think if your point is our current guidance will of course imply lower same store quarter-over-quarter revenue some number around 1.8% in each of the next two quarters. If things go as David Santee implied they may in the back half of this year and we continue to stay very well occupied and we have good renewals then that revenue number would be much closer to the very top end of our range and we won't see that deceleration, so that that NOI number will be higher.
On expenses, we just spoke to that, I mean we do have different, very different comp periods. We had a tough comp period the first half of this year, we'll have in each year once in the back half of this year but we still think 3.6 is a pretty good number.
So I guess I'd sort of look at it that way that the two pieces sort of aren't moving in sync necessarily and on the revenue side we may pick something up here as things continue to go pretty well for us.
Tayo Okusanya
Okay, that's helpful. Thank you.
Operator
We'll take our next question from Rich Hill with Morgan Stanley.
Rich Hill
Hi, good morning guys. Want to spend a little bit more time maybe understanding how your same store revenue, maybe when it will drop and when maybe when it will begin to accelerate a little bit more.
And so if I think about this in terms of guidance I think your guidance is implying around the 1.5% same store revenue for 2H, what's driving that? Because I know you already mentioned that there is really strong demand trends in place which I fully appreciate, given everything that we're seeing.
So is it really just a supply bottleneck that's occurring in 2H? We had heard some commentary previously that some of the 1H supply got pushed into 2H.
So do you see a whole bunch of supply coming in 2H and then when can we really start to see it reaccelerated - reaccelerate again? Is it maybe a 1Q '18, is it more of a 2Q '18?
I do recognize you said by 2019 things are looking a lot better. So maybe any more color about how we should think about the velocity of same store revenue relative to what your guidance is implying.
Mark Parrell
Thanks for that question. Its Mark Parrell.
I'm going to start and we're going to kind of hand it off between us because that's a big question with different aspects. But just mathematically that implication is more like a 1.7 or 1.8 for the back half of this year.
And if things go as we sort of hope and as David Santee implied in his remarks, prepared remarks, we wouldn't see any deceleration, and the third and fourth quarter as quarter-over-quarter numbers will be the same number more or less, maybe slightly higher than the number we just reported of 2.1 for the second quarter of '17 over the second quarter of '16. So and now David if you want to comment a little bit on just the supply…
David Santee
Yes. So I mean I think the key point to remember is that this 2017 in many markets is peak supply, peak deliveries.
For the most part the expected deliveries that got pushed from the back half - the front half to the back half is really its miniscule, and we don't see it having any material impact on how we operate and our expected results. So it's just a matter of - as an example in New York as new supply continues to open the doors does pricing continue to remain disciplined or does there - is there a more dislocation that could occur in the market.
So in DC you still have continued supply expectations for full year job growth of economic performance across the MSA is dependent upon the - Congress passing the budget. So I think there's many potential speed bumps that could have an impact on performance to varying degrees in some of these markets.
But we see - but going back to demand, demand continues to remain strong regardless of these other potential speed bumps that I mentioned, and so at the end of the day it would be how the markets react to any changes in the leasing environment.
Rich Hill
Understood, that's helpful. Thank you.
Operator
And we will take our next question from Neil Malkin with RBC Capital Markets.
Neil Malkin
Thanks guys, thanks for taking my questions. First, I don't think you needed - but can you give what new lease rate growth has done to July I know it's basically over so do you have an idea on that it was at above the 1.8 that you did in second quarter?
Mark Parrell
We don't have that number yet.
Neil Malkin
Okay. And then kind of towards the West coast markets, I'm wondering if you guys think the Trump administration's sort of hard lined on H1B visas and immigration can or either potentially have an impact on some demand in some of your apartments and then secondly if you think that sort of the reduction in legal immigration has had an impact on choking further the already heavily constrained labor issues going on in the market?
David Santee
Well, first to address the H1B visa, I think when you look at what actually occurred. I think that's a net benefit to our portfolio.
I mean the only thing that the administration changed regarding H1B visas is making sure that they are used as they were intended to be used, which is for highly skilled, highly compensated labor versus many of the shops that were bringing over outsourcing employees that - these outsourced employees were coming into IT shops and they - having to train these outsourced people. So I think I mean there is no decline in the number of H1B visas and so really the only significant change was the elimination of the express approval in the H1B visa process.
So net, net, net I think the focus on the H1B visa is a strong positive for our portfolio. As far as immigration, certainly it is very challenging.
From a construction perspective, there are definite shortages in construction which is driving up labor cost. We feel that in our day-to-day apartment turnover, repairs and maintenance, rehabs, it is definitely being felt.
And hopefully it will be addressed going forward.
Neil Malkin
I agree and then lastly from me, given your balance sheet strength and that your development program is kind of idled for now, are you looking at any mass lending or loan down situations on some West Coast developments that you can get an attractive return while you wait and then possibly take out that project at a later date?
Mark Parrell
That's an interesting two-part question. As it relates to providing capital financing or loans for projects that might not otherwise get built, we're not in the business to providing said capital.
Would we be interested in providing some capital or something or some project that we might be interested in only upon completion and have some sort of option to buy, we'd certainly consider that, but have not seen much of that opportunity today.
Neil Malkin
Thank you.
Operator
We'll take our next question from Daniel Santos with Sandler O'Neill.
Daniel Santos
Hey, good afternoon. Thanks for taking my question.
Just one quick one from me, I want to go back to CapEx. It seems that's been ramping up year-to-date and just wondering if you expect that trend to continue?
And whether you would say that's allowed you to boost trends or is just keeping your units competitive?
Mark Parrell
Yeah, it's Mark Parrell. So we feel like we're sort of on track for our guidance number for the year which is $2600 unit number.
So we typically do more CapEx in the third quarter but it takes a while to get all these things going. So no, we don't feel like we're off track on that, I think at all.
And in terms of boosting revenue, all I could tell you is we took a look at the 30 to 40 projects that we have underway on the rehab side and took the rent results from those smart properties isolated and we compare them with the rest of the same store set, and it really just again because of where the projects are located and what the momentum of those deals are, meaning, how many units have already been improved and how many haven't. It made no difference to our reported number year-to-date.
Daniel Santos
Got it, thanks. That's helpful.
That's all for me.
Operator
[Operator Instructions] We'll take our next question from Nick Joseph with Citigroup.
Unidentified Analyst
Hey it's Michael calling in with Nick. Maybe another question, I'm curious if you can talk little bit about sort of the stock price you've recognized the stock is a little bit out of your control.
But more so from the perspective of now your shares of trigger of the discount to underlying asset value NAV while your peers are effectively in line. So there is both on absolute discount but more importantly a relatively discount to your peers.
And understanding from the challenges that happened last that sort of exacerbated that discount and perhaps some of the weaker same store NOI this year could be attributed to it. I'm curious when your board asks you why the stock is trading where it is and what things you can do now to help narrow that gap, what's your response?
What are you doing to help drive the relative performance?
Mark Parrell
Well, but we've spend a lot of time with investors and investment community explaining what's going on in our markets and what's going on in the transaction markets and the underlying value of our assets. It's been as much time as possible with limited success but what sounds to success having more of those conversions with generalized investors.
Well I think that have been more of an impact on evaluations and relative evaluations in the space. We've acknowledged that we stubbed our toe last year and we're working on a way out of that.
We've also have acknowledged that our strategy of having our assets primarily in the higher-density locations and probably with high lock scores are experiencing elevated levels of new supplies on a relative basis that's put us in a position this year perhaps less than the same sort of revenue growth and NOI growth as others might be experiencing. But nothing has changed in our mind nor our Board's mind about the long term move to that strategy, as demonstrated by a lot of material that we provided in our investor brochures information about the performance of these higher density markets over extended time periods.
So we are having conservations that explaining people what's going on. I'm happy to have this opportunity in this call to reiterate the depth of the demand we're seeing across our markets and the way that our assets are performing and the job our teams are doing out there.
But, we already have a cyclic business and at the present time because of the new supply we're a little bit more challenged on the top line perhaps other compared to others, but we remain convinced that we're in the right assets and in the right markets as the nation continues to re-urbanized and there is more and more people to live in the high density urban markets. Do you have any another question Michael?
Unidentified Analyst
Can you hear me? Okay?
Mark Parrell
I can now. Yes.
Unidentified Analyst
Okay. As you think you're going into next year, you have more free cash flow available for pipelines down.
How are you thinking strategically about potential stock buybacks as one way that if you - if you believe and the value of asset base and where the stocks trading and AB that way or two selling additional assets either into partnerships with institutional investors who appear who still have a lot of interest in the multifamily space or taking a much more aggressive disposition program in being able to take advantage of the discount that your stock trades at both on an absolute and relative basis.
David Santee
Well the stock will continue to trade at a discount NAV is that gap is narrowed over the past 90 days or so and we'd said even when it was trading it at a larger discount and we didn't think it was at a level that made stock buybacks make up a great deal of sense for us. As we experienced in the sale of portfolio to Starwood last year and as we've talked a lot about joint venturing assets or selling assets we got up a significant amount of gain built into these assets that we acquire a significant pay out should we go down in that path that does not provide a significant amount of free cash flow after the fact to make any meaningful impact on the stock price in stock buyback.
As it relates to free cash flow, I think we've mentioned on these calls in the past that after having our free cash flow for above $275 million or so million dollars a year, after having that targeted to a very profitable development business over the past five or so years, that having brought those stock down beginning 2015 and in 2016 and in this year that might by 2018, to your point we will have meaningful amount of free cash flow that will not be targeted for that development business anymore and will be available to do a handful of things. And we've sat with our board in June, continue to have a conversation with them and let them know of those various options that we might have with respect to use of that cash.
We could pay down debt, that we could buy stock back, we could increase the regular ended dividend, we could buy assets, we could start developments and we do have a lot of flexibility option with respect to that particularly in light of the recent balance sheet - the perfect sort of - as Mark Parrell mentioned. So we got a lot of flexibility there and we have socialized that notion with our board and we will continue to discuss with them that optionality as we go forward.
Unidentified Analyst
Thanks David.
Operator
And for our final question in the queue, we will go to Jim Sullivan with BTIG.
James Sullivan
Thank you. We have seen some material increases in commodity cost this year but I don't think you have raised your estimated development costs.
Are you not seeing some pressures here or is it just the costs were fixed before the recent increases in commodity costs?
David Santee
Yes, just the fact that these prices were fixed, the development that we are now delivering and those prices with contracts where they are left a long time ago. Now I can tell you and I mentioned earlier we have recently approved.
If they start a construction of the project in Seattle and we see those construction costs go up meaningfully but we will knock that down at the present time. So and certainly you have got a lot about the fires in Canada and the impact on lumber.
There was just a lot of pressure on costs lot of pressure on - lot on pressure on construction costs as David mentioned pressure on - which makes up a pretty big share of total costs which all the leases why among many that we had serve taken their foot of the gas on the development side of our business beginning in 2016.
James Sullivan
So given that the revenue projections in Seattle and San Francisco which is where I think about 80% of you pipeline is located have are improving, is it fair to conclude that the kind of the value creation spread on that development pipeline is there if anything increasing.
David Santee
We are certainly increased from when we started those projects. We just noted that we stabilized our deal - and San Francisco ad up 4.57 or so number we are in some discussion earlier about how that played out relative to original expectations but that deal would trade all day along with the - end so certainly made money there, we certainly made money on all of the developments.
But we have seen those views on new developments begin to compress considerably and personal position where we questioned at least a move of continuing development going forward. But certainly in Seattle we have done very well, revenues has grown significantly - down are significantly so the yields that we are executing there that exceed our expectation in the San Francisco at or have modestly exceeded our expectations but cap rates has played low and the value creation has been very impressive in all those transactions.
James Sullivan
Okay the quick question on Boston, you had mentioned in the prior call that you that the international student demand weakening as a potential negative variable of Boston, is there any sign of that here in the third quarter?
David Neithercut
Yeah. So we has been very aware of the potential for that and we have been asking as many questions responsible but based on the level of new deliveries and that our in the financial district and - which tend to be a little more student reliant given our occupancy, given our exposure as we come out of the student churn it think it's safe to say that we haven't seen any impact at all from that.
James Sullivan
Okay really good and then the final question for me following on from Michael Dylan's [ph] question about strategy. Apparently we may see more details on the administration's proposed tax overall this week.
I wonder David if you can give us your insights as to what the likely proposal maybe for section 10/31 and if 10/31 were to be eliminated or as proposed or as been talked about what the impact might be in your recycling strategies?
David Santee
Well we don't know what will come out of it and I am not sure the President knows what's going to come out of the proposal. Certainly there has been a lot of discussion about 10/31 and we have been one of probably the biggest user of 10/31 during the past 10 years there is anyone, in fact our transaction with Starwood, which was a $2.5 billion 10/31 in our part so much of the benefit of the 10/31's that we've already used and could certainly go forward quite comfortably even if there was a change there.
I would suggest though that if something did happen to 10/31 that the relative value in unit could become significant more valuable in the more of the real estate. It's a security that I think has not been utilized to the extent that we would have hoped in the past but I think - if 10/31 is to go away I think it would be very beneficial to reach that able to issue both the units in an acquisition situation.
James Sullivan
Okay, great. Thank you very much.
Operator
At this time there is no further questions in the queue, I would like to turn the conference back to your speakers for any additional or closing remarks.
David Santee
Well, thanks everybody for your time today, I hope you will have a wonderful summer and we will forward to see many of you come in September. Thank you so much.
Operator
Ladies and gentlemen, this concludes today's conference we appreciate your participation.