Oct 25, 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 Yulico - UBS Nick Joseph - Citi Rich Hightower - Evercore Conor Wagner - Street Advisors Juan Sanabria - Bank of America Dennis McGill - Gilman Associates Alexander Goldfarb - Sandler O'Neill John Kim - BMO Capital Markets Drew Babin - Robert W. Baird Vincent Chao - Deutsche Bank Richard Hill - Morgan Stanley Tayo Okusanya - Jefferies Wes Golladay - RBC Capital Markets
Operator
Good day and welcome to the Equity Residential 3Q 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.
Marty McKenna
Thanks, James. Good morning and thank you for joining us to discuss Equity Residential's third 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
Thank you, Marty. Good morning everyone.
Thank you for joining us for today's call. We were pleased that across our markets we continue to experience very deep and resilient demand for apartment living.
As David Santee will explain in more detail in just a moment, despite elevated levels of new supply our portfolio performed very well during the lease confusion. Driven by great property management and operational support teams that will now deliver results for the full year that will meet or exceed our original expectations for revenue growth in every markets day one Across our portfolio we see the benefits to our business with an expanding economy producing jobs, loans, unemployment, and rising incomes which continue to drive strong and steady demand for rental housing in our core markets.
As a result we now expect to achieve year-over-year growth of same store revenue and net operating income towards the upper end of our original expectations and our year-over-year growth in normalized funds from operations will be the upper end of the range we provided last February as well. So I’ll let David Santee go into more detail about how our markets performed during the extremely important third quarter and then Mark Parrell will give some color on operating expenses and our guidance for this year.
David Santee
Okay. Thank you, David.
I am extremely pleased with the performamce of our property teams during our busiest quarter of the annual business cycle as they continued to deliver remarkable service and renewal results despite elevated deliveries across all of our markets. In addition to the 4.7% renewal rate increases achieved for the quarter, our annualized year-to-date retention improved 230 basis points which was up 80 basis points from Q2.
In addition to renewing 54% of our expiring leases for the quarter, occupancy improved by 40 basis points sequentially and was 20 basis points better quarter-over-quarter. And as I said on the previous call, physical [ph] occupancy continued to hold which it has, we would deliver full year results at the high end of our original guidance which we will.
With 2017 deliveries peaking in the second half of the year across most of our markets, our results demonstrate that demand for quality, urban apartments, continues to be very good. And as I’ve stated last quarter, we see no indications that demand will soften beyond the normal seasonal trends for the balance of the year.
Renewal rate thus far for October are 4.6%, with occupancy 20 bips higher than same week last year at 96.3% and available inventory flat we are in a good position to end the year and deliver full year revenue growth of 2.3%. Moving out of the markets, again no different than last quarter, Washington DC is our only market that will fail to meet or exceed our original expectations.
As peak deliveries from Q2 led into Q3, rates have stabilized community further deteriorate in the Central district sub market. Federal job vacancies and weak government procurement further pressured this sub market as new development came online in a lot of front sub markets.
However, the fall-off in demand that we experienced late in Q2 did recover allowing us to achieve a fully basis point increase in sequential occupancy to 96.2%. Renewal growth moderated to 3.8% for the quarter as DC is our only market to experience an increase in year-to-date turnover.
New lease pricing was a minus 2.6% driven mostly by the Central DC and the FAS [Ph] to submarkets. While all indicators signal an improving local economy, the pace of improvement is only sufficient to absorb new units at market rental rates that were below expectations.
Better clarity on federal initiatives and improving job growth will be the necessary catalyst to absort future deliveries with positive late growth. New York city was stable in the quarter and continues to outperform our relatively pessimistic expectations.
Today, we enjoy a very strong occupancy of 96.9% an exposure that is 30 basis points better than same week last year. Renewal increases were 3% for the quarter and combined with higher retention mitigate the minus 4.1% renewed lease over leased results that combine to achieve the positive 10 basis points revenue growth year-to-date.
Compared to Q2, these results are very good as New York had more leads available in Q3 than any other quarter in 2017. Moving two sessions of one month or more are still mostly limited to new lease ups, concessions on stabilized assets across our portfolio which again are very targeted to certain properties and unit pipes ticked down slightly from $485 per move in to $436 per move in or from an average of 3.8 days to 3.5 days per move in for the quarter.
Our net effective rents which factor in concessions are currently flat from the same time last year which is an improvement from last quarter when they were down 2.3% compared with the same time the previous year. Additionally, we have not the need to use non revenue incentives such as gift cards.
And as a result New York City list in advertising cost are down almost 39% for the quarter. These have been positive signs thus far but we acknowledge that the market still faces a significant amount of supply and slowing job growth.
For Boston, the summer student churn proved to be a little more challenging than previous years, but recovered quickly to deliver a 30 basis point quarter over quarter improvement in occupancy. Renewal growth of 5.2% was very strong in addition to 130 basis point improvement in retention.
New lease pricing was positive 30 basis points for the quarter. New deliveries and downtown in Cambridge continue to weigh on new lease rents, however recent annoucments with large office space leases by Facebook, Bristol-Myers Squibb in these sub markets are encouraging for demand and above average led growth in the future.
Seattle remains on track to be our top performing market and will exceed our most optimistic expectations. Renewal increases for the quarter were 7.8%, however new leased pricing weakened either in quick reaction to the news of Amazon HQ2 or due to rate pressure as new deliveries peaked in Q3.
New lease rate increases were 2.6 for the quarter which was down from the 10.4% increase realized in Q2. Occupancy also dipped 50 basis points, but this reaction proved to be short lived.
Today, new leased rates are now back up to 6.9% versus same week last year and renewal increases for October are 8%. They have averaged 8% going all the way back to May.
Today, both occupancy at 95.7% and normal seasonal exposure are now back to the same levels that we’ve experienced in 2016. Estimates are that Amazon still has approximately 10,000 new jobs to fill before they begin to level off in 2018.
The Jury is still out on the full impact of the HQ2 decision, but given the City has not kept pace with infrastructure and transportation needs perhaps a few years of moderation is the best interest of everyone for the long term. Recent announcements of large office space leases other than Amazon or related entities is welcome news in the interest of a more diversified economy.
More down to San Francisco, San Francisco continue to be steady through the quarter as deliveries reached their lowest level in seven quarters, while job growth was near than the national average and the lease up environment remained accommodating there was little momentum to overcome the rental rate hangover we experienced in 2016. New leased rents improved modestly resulting in a leased over lease decline of 1.9%.
Renewal rates continued to improve and increase to 4.6% for the quarter. This combined with a 260 basis point increase in retention drove revenue growth of 1.6% that far exceeded our original expectation.
Southern California still remains the story of submarkets and the story is playing out as we expected. The LA region downtown in Pasadena was weakest as new supply pressured new lease rents.
West LA, this valley in Santa Clarita delivered exceptional results as new supply is nonexistent. Job growth remains healthy and economy that relies heavily on the film industry is being bolstered by outsized demand for original content as code cutters sneak out alternative forms of entertainment.
While leased out release rates were up 80 basis points, renewal rates were up 5.9%. We also had a 100 basis point improvement in retention and a 30 basis point within occupancy.
In both Orange County and San Diego, new deliveries fell off significantly in the back half of the year. This helped drive lease over lease growth of 2.3% and 2.5% respectively and renewals were second only to Seattle at 6% and 6.9% respectively.
So all-in-all we had a very strong quarter, given the level of new deliveries across our markets. I am extremely proud of our team’s ability to achieve the renewal results in both rate and retention and know that all of our employees out there are the secret sauce that allows us to happen.
So thank you all. Mark?
Mark Parrell
Thank you, David and good morning. I want to take a couple of minutes to talk today about our same store expenses, our revised full year normalized FFO guidance and our capital markets activities.
Our same store expenses were up 1.7% for the third quarter and this was driven by a relatively modest increase in payroll and utilities and an increase of 2.9% in property taxes. On the plus side, the third quarter property tax increase was considerably less than we had expected due to favourable results we obtained on several property tax appeals.
Our annual property tax expense guidance included an estimate of appeal success based on the many years of experience of our in house property tax team and we had a few large appeals that were resolved sooner than we had anticipated in our guidance. And as we discussed on the July call, leasing and advertising expense growth has as expected turned negative for the quarter and year-to-date , newly non-existent spending on resident gift cards as David Santee mentioned is driving the reduction.
Switching to the year-to-date numbers, our same store expenses are up 2.9% for the first nine months of 2017, again increases in real-estate taxes and onside payroll continue to be the primary drivers of this growth. Same store payroll expense was up 4.7% through the first nine months of the year.
As we have discussed on previous calls we continue to be impacted in this category by 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 the support resident retention. These factors and a higher estimate for certain employee medical insurance and workmen’s comp claims have caused us to maintain our estimate that on-site payroll will grow about 6% for the full year.
We have revised our full year same store property tax expense increased guidance to 3.4% and that’s down from our previous 4% to 4.5% growth expectation all for the reasons I just mentioned. This improvement in our estimate of real estate tax expense growth in turn drove the reduction and our same store expense growth guidance to 3.2% which is slightly below the low end of our previous guidance range.
Moving onto normalized FFO, in our earnings release we provided a full year same store revenue increased guidance expectation of 2.2% and that’s at the high end of our previous range driven by the factors that David Santee just discussed. This revenue number and our new expense growth guidance of 3.2% will lead to an increase in same store NOI of 1.8% which is slightly above the top end of our previous range.
For our annual normalized FFO guidance we are picking up two pennies per share and higher property NOI with a contribution from both our better same store performance and strong performance from our leased up properties. We will see a one penny offset to this improvement due to slightly higher interest expense due to the size of our debt issuance as well as other items including a slight increase in corporate overhead.
Combining all of this the result is a modest increase to our normalized FFO guidance midpoint to $3.12 per share from $3.11 per share. Now going to the balance sheet, as we discussed in our earnings release, we issued $700 million of unsecured debt in August and that consisted of $400 million of 10-year notes and $300 million of 30 year notes.
Our July guidance included an assumption that we would issue about 500 million in tenure notes this year, recognizing the strength of a third year market, we decided to add a third year issuance while slightly pairing down to 10 year note issuance and indeed overall demand was exceptional for us. We were over four times oversubscribed, our tenure was down at a coupon of 3.25% and an all in rate of 3.32% and the third year has a 4% coupon and an all in effective rate of 4.11%.
The third year was our lowest cost third year issuance ever and one of the lowest third year unsecured bond coupons and REIT industry history. We used the proceeds to pay down our outstanding commercial paper and revolve the balance.
We thank our many strong supporters in a fixed income community for this terrific result. So all-in-all better than expected revenue, expense and NOI results, a slight increase in our normalized FFO and a very good unsecured debt issuance.
I’ll turn the call back over to David Neithercut.
David Neithercut
All right thanks, Mark. Just a moment, a quick moment in capital allocation.
As we know it in last night’s press release, our transaction activity picked up some in the third quarter with the acquisition of three assets. A stabilized 301 unit property completed in 2016 in the Wiltshire Center submarket in Los Angeles was acquired for $117 million at a cap rate for 4.5%.
During the quarter we also acquired two brand new assets that were both nearing completion of their initial lease up, one in Boston, 160 unit property acquired for $116 million has stabilized cap rate of 4.5%. We also acquired a 350 unit property in Bellevue, Washington for $178 million at a stabilized cap rate of 5.3.
During the quarter we disposed off one asset a 120 unit property in [Indiscernible] California built in 2002 for $53 million at a disposition yield of 4.3% and we realized a 10.1% unleveraged IRR on that investment. Now at the present time we do not expect to acquire additional assets before the year is up.
So as a result the $468 million acquired through the end of the third quarter will most likely be our number for the full year, but that could change if the seller needs to complete a transaction by year end and we are incentivized to help make that happen. We also continue to actively work on the disposition of a handful of assets that could close yet this year, so we have every expectation that we will get closer to the original guidance and dispositions of $500 million for the year.
On the development side, in the third quarter we were very excited to essentially complete the construction on our new 398 unit high rise tower in Seattle, just two block from high place markets. Rents and absorption rates are well above our original pro forma and we expect this asset to stabilize at a yield on cost of about 5.6%.
You’ll note that the budget for this development has been increased by the $11.5 million and this represents changes in scope that have occurred since construction began on this asset in 2014. As rents continue to increase across the Seattle market, we were compelled to increase the quality of the unit appliance packages and the overall finishes of the property including the amenities in the common areas.
We could not be more pleased with the job our team in Seattle did delivering this asset and the market reaction to it has been tremendous thus far. But during the quarter, we also completed our 178-year development in Washington DC's Mt.
Vernon Triangle Submarket, this asset is also been very well received by the marketplace. Since occupancy began in June they’re already 69% occupied and 80% leased as rents that are very much in line with our original expectations.
We expect to realize the stabilized yield on cost of this new development of 5.7% this was a job well done by a DC team. During the third quarter we started our first new development of the year, a small one, 137 units in the Capitol Hill market in Seattle.
This project has a $62 million development cost and we project a high 5% stabilized yield on cost in this transaction. And it remains possible that we will start construction and one more development project before the year is out, also small 84 units in Cambridge Massachusetts.
This is adjacent to an existing 186-unit asset we have in that market in the construction budget and this deal would be about $50 million and the yield on cost currently projected in the mid-5s. So before we open the call to Q&A I just wanted [Indiscernible] one additional time on having been recently recognized by GRESB for the fourth consecutive year as a leader in environmental, social and governance performance.
We take our responsibilities and our commitments on these matters quite seriously here and everyone at Equity is honored that we recognize that this year's global residential listed leader. My thanks to everyone at Equity for helping, make that happen again this year.
So with that James we’ll open the call to Q&A.
Operator
Thank you, sir. [Operator Instructions] And we’ll take our first question today from Nick Yulico with UBS.
Nick Yulico
Thanks. I wanted to start with the topic of supply.
In your view is this year the peak supply impact for your markets overall? And then I was hoping to break down which cities are still are seeing your supply ease versus get worse.
I think New York City, Seattle and San Francisco are couple controversial markets that come to mind?
David Neithercut
Okay. Nick, this is David.
I’ll just kind of give you a higher, lower by market. Starting with Boston, 18 deliveries slightly lower, New York slightly higher, but -- or higher but some of that is push from 17 and 18, Washington D.C.
pretty much identical to 17. San Francisco little bit lower.
Seattle lower, Los Angeles significantly higher 8000 up to 14 14,500, Orange County about the same 5,000, San Diego just a little bit more at 3,500 units. Just to be clear Nick this is the way we look at the – with our competitive set those projects in these marketplaces that we look at that would compete with us.
So this would not be a holistic amount across an entire marketplace, but those that are within that, so defined boundary that we look as competitive to us.
Nick Yulico
Okay. That’s helpful.
So I guess, David putting this all together. It has been several years of him slowing growth -- revenue growth and multifamily.
You’ve gone to this year you're seeing some stability in your markets. There is some supply pockets of pressure still next year.
Hoping to just get any earlier thought you’ll be willing to share on next year and whether your same-store revenue growth could excel a great next year? And what would be a driver for that with certain markets or not?
Thanks.
David Neithercut
Well, I guess I would say, job with full employment it's probably difficult to expect outsized job. And then when we go across the markets we just look at where the supply is going to impact us.
So, as an example Boston 50% of the new deliveries will be in the urban core and 20% are going to be in Cambridge. But there’s announcements of Facebook taking a sizable office spaces in Cambridge which I discussed previously.
So even though there is elevated supply there we expected to be absorbed with minimal impact to rate. You know, D.C.
is really, it's pretty much everywhere, but 45% of those deliveries are very concentrated in the Riverfront D.C. Central and NoMa Submarket, so places like RBC corridor where we have little – where we have a lot of product we’ll see little deliveries.
Kind of going on to New York, I mean, when you look at the deliveries or even the delayed delivery, 57% of those numbers both really this year and next year are in Long Island City will we have no presence. And then Midtown West where we don't have a large presence, adding that in Jersey Waterfront is 23%, so 70%, 80% of the deliveries in New York are really not directly competing with our assets.
So, I mean, I can go on through the rest of the markets, but I think that’s how we’re kind of looking at next year and our ability to drive rates and retain our residence and grab good renewal rate growth.
Nick Yulico
Okay. That’s helpful.
I mean, just a follow-up here. So is it, when you look at everything you look across your markets right now and everything you talked about supplies is just too early to get a read on 2018 showing you better rent growth and revenue growth for your markets?
David Neithercut
It just too early, we’re not prepared to give guidance at this at this juncture, Nick.
Nick Yulico
Okay. Thanks.
Operator
Next we’ll hear from Nick Joseph with Citi.
Nick Joseph
Thanks. David, you talk about the acquisitions in the third quarter, but just more broad there, are you’re seeing more opportunities for acquisitions that you have over the past few years?
And what do you think is driving that, if so?
David Neithercut
I’ll be careful with the use of the term opportunity, Nick. Are we seeing more product?
No. I think the volume is, I guess, okay.
It’s still down from a year ago. I don't think we’ve seen the same amount of product that we had seen kind of in the past.
And I wouldn't characterize any of it’s from an opportunity. I think there’s a lot of capital that’s maybe backed away maybe from core product, but there's still enough out there that what is getting done is getting done at the same kind of cap rates and valuations that we’ve seen first for some time.
But I would not suggest that we’ve seen anything would represent as opportunities.
Nick Joseph
David, you had talked with Michael Bilerman and its probably going back 18 months that there were as more merchant development or the potential for merchant development deals to start to crack and that was in the serve potential as an opportunity to put a lot of capital to work sort of within this timeframe. Is that not coming to fruition at all?
David Neithercut
Well, I guess I'm not sure, my comments Michael should have interpreted expecting something to crack, but more that there just would be deals that one could acquire that been recently built that might represent better sort of risk-adjusted opportunity to deploy capital rather than develop oneself at least in the marketplace today. Now as I noted, what we acquired in the third quarter two of those were deal that had been recently completed and that were in their final stages of lease-up.
So we have executed couple of those. I think we got decent going in yields relative to what stabilized product might have traded for.
So I wasn’t -- I'm not sure we expected anything to sort of crack, but rather there might be a flow of product. We demonstrated by buying two and my guess is that there will be opportunities for us to look at more of that product from 2018.
Nick Joseph
Thanks. And then, just one more follow-up.
In terms of the free cash flow for next year I think you talked about the 275 million or so. Just curious what is most attractive where we stand today for the use of that in terms of additional acquisitions, development, paying down debt, raising the dividend.
Just your thoughts on that where we stand today?
David Neithercut
Well, I guess, I’d say, we will consider all of those, Nick. We had board meeting in September and Mark Parrell laid out that exact situation and the options we might have with that free cash flow now that our development spend has decrease considerably over the past several years.
So, we’ll consider when the time comes what we think is the best execution on behalf of our shareholders and won’t be afraid to buy if it make sense, address the dividend if it makes sense, or think about development if it make sense.
Nick Joseph
Thank you.
Operator
Next, we’ll hear from Rich Hightower with Evercore.
Rich Hightower
Hi. Good morning guys.
David Neithercut
Good morning, Rich.
Rich Hightower
I wanted to quickly follow-up on Nick Yulico’s question about New York. Just with respect to your outlook for submarket supply next year, but does your experience in 2016 where I think you sort of discovered that renters were submarket agnostic in many ways in New York.
Does that sort of temper your view on what New York could be next year in terms of rent growth despite the fact that you're fairly well protected from a submarket perspective currently?
David Neithercut
Well, I think the biggest most obvious discussion for our portfolio would be Long Island City and we just haven't seen – our concern was with value hunters be willing to move out of the city into Long Island City for a better value. And we just really haven't seen that materialized.
And then when you look at a big portion of what's being delivered in Brooklyn is further east. Brooklyn pretty much held up reasonably well for us.
So we don't see a big chunk of these new deliveries next year really impacting us if the market continues to be disciplined the way it has this year.
Rich Hightower
Okay. That's helpful.
And then back to third quarter results really quickly in Seattle. So pretty strong on the rent growth side, but there was a pretty significant delta between rent growth and in total revenue growth.
Can you tell us what was going on in some of those other revenue categories during the third quarter in Seattle?
Mark Parrell
Hey, Rich, it’s Mark Parrell. So just going over to the quarter-over-quarter numbers and giving you a little bit of background.
Average rental rate physical occupancy and turnover are all numbers we compute solely with regards to the residential portfolio which is 96 plus percent of our income. We do have as you know, retail in the base of our buildings as tenant amenities dry cleaners and the like.
That number that we report, the revenue number for the quarter for Seattle which was 4.9%, that number does include retail garage than anything else. So we had some retail vacancy in the third quarter in Seattle.
We also had some stuff that was really a timing issue that will correct itself in the fourth quarter. So if you would've look at that number, 4.9 it would have in the 6% number just on residential.
But again it's not anything particularly material and a great deal that will reverse itself in the fourth quarter.
Rich Hightower
That’s perfect. Thanks Mark.
Mark Parrell
Thank you.
Operator
We’ll move to Conor Wagner with Street Advisors.
Conor Wagner
Good morning.
David Neithercut
Good morning, Conor.
Conor Wagner
David Santee on the bay area can you give us some color on the difference between the performance in Oakland, San Francisco and then San Jose?
David Santee
Sure. So we don't have anything in Oakland.
Conor Wagner
I mean the East Bay in general.
David Santee
Okay. So, the downtown market continues to be under pressure.
That is the b bottom performing submarket. The best performance is in the Peninsula, and then East Bay, South Bay, Berkeley kind of all in between, but very similar.
Conor Wagner
Okay. And then in South Bay, that's your in San Jose there in Silicon Valley?
David Santee
Yes.
Conor Wagner
Okay. And then on that transaction activity, David Nethercutt, can you just remind me, the numbers you are putting in cap rates, is that one year forward nominal or on the lease-up what rent is that on?
Is that on the assumption of stabilization?
David Neithercut
The transactions that are stabilized that would be our forward 12 across the acquisition. And on the lease-up it would be the second 12 month period of ownership.
Conor Wagner
And on that second 12 month are you assuming some rent growth in that interim period? Or is that based on today's rents?
David Neithercut
Depending on the marketplace it would either be – that could include some combination of burn off of perhaps what the developer might offered in concessions, as well as some sort of rent growth. Yes, there would be some view as to what would be taking place on the rent side in that second 12 month period.
Conor Wagner
Okay, great. Thank you very much.
David Neithercut
You’re welcome.
Operator
Our next question comes from Juan Sanabria with Bank of America.
Juan Sanabria
Hi. Good morning.
I was just hoping you could talk to the concession environment for lease-up across your major markets and whether you've seen any step up in the amount of free rent or other forms of concessions into the fourth quarter today?
David Santee
Juan, its David Santee. As far as concessions on lease-up, I mean, it’s been very stable and within expectations places like Seattle, even our Brannan deal in Downtown San Francisco.
We had very strong demand, so we didn't come out of the chute with the standard one month concession. And everywhere else it's pretty consistently.
I mean, there's not no markets that are giving more than one month on lease-up at least in the lease for our portfolio and we don't we haven't seen any change through the peak season.
Juan Sanabria
So its fair to say you aren't seeing the same panic that we saw in 2016 at least to date despite the peak supply at this point in 2017?
David Santee
Not even close, no, very stable.
Juan Sanabria
Okay. And then just on the new lease growth.
Could you give us a sense of the trend throughout the third quarter, and kind of where you are fourth quarter to date for the portfolio as a whole?
David Neithercut
Well, all I could give you today would be kind of a snapshot of our market rents relative to our exposure and today across the portfolio, market rents versus the same week last year are up about 2.5% which bodes very well considering we’re in the entering the slower time of the year.
Juan Sanabria
And the churn on the new lease signed during the third quarter decelerate throughout the third quarter given seasonality?
David Neithercut
Well, I guess that would be a market by market discussion, but I gave you all of the Q3 lease over lease numbers in my prepared remarks.
Juan Sanabria
Great. Thanks.
And one last quick one from me, any reason for that we saw a couple of development delays in the expected delivery dates, any reason for that it seem to be more on the West Coast?
David Santee
Well, there is several reasons. I can tell you that our property in San Francisco our Brannan asset is just having some issues getting sufficient labor to close out the last 122 or so units on that property.
And then on property cascade in Seattle, we had some issues completing some of the exterior work because of some work that we'd be done – being done across the street that was sort of closing down some streets or some sidewalks that caused delay. But its very important sort of note with respect to these two deals.
Each of them have been pushed back maybe one or maybe one a couple of orders, but that did not push back at all the date upon which those properties were first made available for lease. So I think it’s a very important thing we get ask a lot of questions about what's happening with – is your performance and the result of property being pushed back or completion being pushed back and this is a perfect example of why we don’t really pay a lot of attention to those being pushed back.
These deals were pushed back but did not affect when they open and available in the marketplace, and it will not affect the overall leasing velocity and overall performance of these assets despite that one being pushed back a quarter and I think being pushed back a couple of quarters.
Juan Sanabria
Thank you.
David Santee
You’re welcome.
Operator
Dennis McGill with Gilman Associates has our next question.
Dennis McGill
Hi. Thank you, guys.
First one, just for the portfolio as a whole do you have the new on the renewal rate increases in third quarter? Sorry if I missed it.
Mark Parrell
The renewal for the portfolio was 47 and the lease over lease was minus 90 basis poins.
Dennis McGill
Okay, great. Thank you.
And just back to the supply conversation. When you noted the different increases across markets are increases or decreases, as you said, it was on how you define the boundaries and what’s competitive with you.
Can you maybe just elaborate on how you do define those boundaries? Is it a distance from the property?
Is it qualitative at the market level? Any thoughts there would be helpful?
David Neithercut
Well, I think if you look at some of the data stops, they’re using the statistical MSA which if you use New York as an example goes all the way down to almost Philadelphia far west into New Jersey, further up into outer New York almost Connecticut. And in our portfolio in New York is really Manhattan, a little bit on the Jersey waterfront and then a little bit in Brooklyn.
So we just kind of draw a circle around all of that and focus on the deliveries within that boundary. This year or last year we decided to include Long Island city which really is a different price point probably a different -- a little bit different demographic knowing that new submarket could draw residents from the city.
So, I think we’re very conservative in giving ourselves, being intellectually honest withdrawing these boundaries plus we’re going all the way down to kind of five level – five-unit communities, so we’re including everything knowing that anything that's on the market for lease could impact demand in our footprint.
Dennis McGill
So that the radius of that circle is defined at each level with the local teams, or is there uniform definition?
David Neithercut
Yes.
Dennis McGill
Okay.
David Neithercut
So, we – go ahead.
Dennis McGill
Okay. So on New York specifically earlier you had said in New York that the supply in 2018 would be slightly higher, I think are higher versus 2017.
But then later you said that about 80% of what's being delivered is not directly competing with your assets? So the increase encompassing some of those areas like Long Island city that you mentioned are not directly competing or is that slight increase versus 2017 just in your competitive set?
David Neithercut
So the increase in New York for 2018, some of that is a push going back back to that delayed units, it's you probably couple thousand units that are being moved from 2017 in the 2018. Now when you look at where all of these deliveries are, the largest concentration and when I say concentration I mean literally within a couple of blocks of each other.
57% of the number for 2018 is 19,000 units. So 57% of those 19,000 units are predominantly in Long Island city and Far East and North Brooklyn.
Okay. So we have probably four smaller assets in Brooklyn.
We have nothing in Long Island city, but we have incorporated that into our own customized but competitive set knowing that because of the value opportunity in Long Island city that some folks could [Indiscernible] to save on rent.
Dennis McGill
Okay. That makes sense.
And then I’m just venting [ph] to compare against?
Mark Parrell
Well, we started out the year with I think a little above 15 and now were down to 13…
David Neithercut
It’s about 15 to…
Mark Parrell
15 to 17 and 19 for 18 [ph], yes
Dennis McGill
Okay, great. Thank you, guys.
Good luck.
Mark Parrell
And I’ll just, before we go to next question, I had one little other piece of information to you Dennis with respect to that lease over lease. The number that David gave you 90 basis points is our total lease over lease.
12 month lease expiring over a 12 month lease which's been writing is half that amount, so it's about negative 40 basis.
David Neithercut
Right.
Operator
Next over here from Alexander Goldfarb with Sandler O'Neill.
Alexander Goldfarb
Good morning. Dave, just going back to the comments on the lack of opportunity from the Merchant, you had to pick up deals from the Merchant guy.
Is that, you think that's more just where your portfolio is in terms of timing of deliveries and maybe those deals that you thought would crack this year getting delayed until next year or is it something else going on. Because obviously from some of your peers, they've said differently.
So, I'm trying to figure out if it's deals getting pushed that's causing the lack of opportunity versus literally in your markets, it's just you're not seeing it because of capital flows et cetera?
David Neithercut
I guess, it's perhaps all of the above, Alex. And again, I'm not sure that I ever implied there is going to be some tsunami wave of these deals coming but you also many of these markets see them all going up and our expectations is over some accretive time.
May not, maybe that's some of them had been delayed because construction has been delayed, some maybe want to get stabilized, maybe some have got some institutional capital it's willing to sit for several year. I mean, it's all of the above.
But we certainly will expect to see some of those brought to market as I know we bought two. So, certainly they, some of them are already are being brought to market.
I'm sure we've underwritten scheds more than just the two that we've acquired and I'm sure that we will look at more yes this year and certainly into 2018. But I'm not so sure that there is any reason why there's a fewer today that I may have led you to believe when we talked about this pool of potential investment opportunities have on horizon.
We're looking at them, we bought a couple and we'll certainly look at more. But I don’t think there's been any change necessarily in the flow of that product.
Alexander Goldfarb
Okay. And then, David Santee, when we look at Seattle, I mean, clearly Amazon's been the 800 gorilla as far as job worth and expansion, in all facets.
But at the property level, are your teams seeing just predominantly Amazon employees or companies that are spawned because of Amazon or it's a view that there is sufficient other tech growers and other companies that are going to Seattle that even if Amazon dials back there's still sufficient demand. I'm just trying to get a sense from you guys from what you're hearing from your local teams how much of an impact they think it's going to have?
David Santee
Well, I mean obviously the closer you are to closer to property is to it sounds like giving in the more it's going to be influenced by Amazon. But we have a wide range of people living with the works for different employers but again I mean we measure that every so often but it's not necessarily concerning at any one community.
I guess that's all I could give you for now.
Alexander Goldfarb
Okay. And then just final question.
I just saw the news item on the litigation or I guess class action whatever in California. Is there anything that you can provide some more color on this or perspective?
David Neithercut
Well, 2014 a lawsuit was brought against us because of our late rate late payments and process and procedures and I will just sort of tell you things like this and sort of standard operating procedure for a company like us and particularly in complex in California.
Alexander Goldfarb
Okay. I appreciate it, thank you.
Good luck.
David Neithercut
Very welcome, Alex.
Operator
Next we'll hear from John Kim with BMO Capital Markets.
John Kim
Thanks, good morning.
David Neithercut
Good morning.
John Kim
In Seattle, David Santee referenced Amazon HQ2 and its impact on new leases. But I was wondering with that announcement in combination with the approval of a new municipal income tax because that's impacted your underwriting for Seattle investments going forward.
David Neithercut
Well, we haven’t, we're not really underwriting anything new at this point in time. But we certainly there have been numerous city council initiatives what have you that involves fees and taxes and we always update those items when we are underwriting either an acquisition or a new development.
David Santee
Yes. David's comments about HQ2 weren't specifically citing that but just mentioning that we did see a little kind of wobble if you will of some of our pricing around that time.
But as you also noted in his prepared remarks, the markets recover and he's now operating the same levels that it had from most of this summer. But certainly as we think about looking at Seattle which represents maybe only 8% or 9% of our NOI, we take all of these things into consideration, the impact of gorillas like Amazon and Microsoft and issues with fees and regulations and all those things will be part of what we'll consider is we underwrite the future cash flow streams of the assets we want to either build or acquire.
John Kim
Okay. Next question maybe Amazon related.
But on the discussion of wage pressure, can you just clarify is this the direct result of new multi dynamic supply and also there was some commentary on additional staff needed to provide better service. And I was wondering if that was in relation to packets delivered?
Mark Parrell
Hey John, it's Mark. Some of this is just wage growth as we said because there are wage pressures in the field.
But there also are and we mentioned this on the prior earnings call as well, some adjustments that we are making that are very hard for us to predict. To work means comp and medical insurance reserves, we are self-insured.
So, as a result of that when those items run through the numbers, they can impact on the margin a bit. So, when you look at what's going on and we talk about a 6% number for the year, a fair amount of that kind of part over 4% is probably driven by these workman's comp and medical insurance reserve adjustments that we made the last few quarters.
And that we're making estimates up in the fourth quarter that could change a fair amount. We're wrong, that number could be a fair amount lower than 6% or a bit higher, it's just very hard for us to pack.
John Kim
Thanks, Mark. And any commentary on additional staff needed?
David Neithercut
Well, I think, I mean we targeted several of our larger buildings or buildings that were across the street from one and other that we may have used one manager to run two or three buildings and we felt that in this very competitive environment we want to make sure that our residents were being serviced that we had appropriate resources to administer our renewal programs, to ensure the sales were in tip top shape. And when we discussed that at the beginning of the year, most of that was put in place and we really have it made any further adjustments since then.
We don’t see we have not really added staffing solely because of packages. We are more focused on 24/7 package rooms that we have been extremely focused on delivering to our employees this year.
So, I mean when you look at the wage growth wage pressure, with the retail slowdown however you want it to categorize what's going on with retail, office employees are not really that under pressure. It's more on the service side, the guys that know how to fix refrigerators and HVACs and what have you.
So, we feel good about the changes that we made year-to-date for the most part where pretty stable right now.
John Kim
Thank you.
David Neithercut
You're welcome.
Operator
Our next question comes from Drew Babin with Robert W. Baird.
Drew Babin
Good morning.
David Neithercut
Good morning.
Drew Babin
Have you heard anecdotally from a couple of your peers that the bay area's maybe benefit as a little more than other markets from construction delays over our competitive supply this year. I just wanted to ask A) is that accurate with what through second system with what you're seeing in the Bay area.
And B) what sub markets maybe benefitting the most from projects being pushed out in the next year?
David Santee
Well again, I mean, I know there was a large buyer in the East Bay in a new development that certainly would help the East Bay. David just discussed our experience at our Brannan property in downtown.
But again the fire certainly is taking something out of the mix and pushing it out another year or two. But we have not seen anything that is categorized as delayed but has not begun to lease up.
So, the units coming to market are still coming to market as we expected when we began the year.
David Neithercut
Yes. And just to reiterate what we said earlier.
Just because projects are being quote-and-quote delayed from their final completion, does not mean their doors did not open for occupancy when originally expected and certainly they begin marketing those units 60, 90 days in advance. So, just because something gets quote-on-quote sort of delayed or its completion gets pushed back, it does not mean it was not in the competitive set during the third quarter.
That was possible but it's just and in our own experience it's been on two deals that on this press release we're notifying you for the first time have been delayed, their doors were open as we expected and first occupancies took place as we expected and the delays did not impact any of that. So, we'll just use that as an example of being careful about drawing too much out of the fact that things have completions have been pushed back.
Drew Babin
That's helpful, thanks for that. And I'm also to some Merchant did this year, there's been a lot of more discipline in the market obviously with the concessions and things like that with your competitive set.
How much of that would you attribute to kind of earlier this year maybe interest rate expectations being reigned in a little bit. Is anything changing or do you expect anything to change, should depend your treasury creep up over the next couple of quarters.
Which will determine that?
David Neithercut
I guess I'm not sure I understand about maybe you can rephrase that for me, Drew?
Drew Babin
Sure. The questions really on the correlation between kind of the urgency of merchant builders to lease up their properties and interest for short term interest rates because your interest costs are going up now.
David Neithercut
Oh, I see. Okay, I got it.
So, with respect to the urgency. I think what we saw a year ago primarily in San Francisco was people could cut rents from the marketplace and still exceed the original expectations of other rental levels, that's not the case now.
I think that people that rent today are in the ballpark of what people underwrote and they have to preserve try those levels. And so, they have to be disciplined with respect to achieving those.
And I think that may very well explain what we're seeing this year relative to what we saw in San Francisco a year ago.
Drew Babin
Okay, that's very helpful. Thank you.
David Neithercut
So, it's less the financing market and more just where rents are today relative to their original pro formas.
Drew Babin
Okay, great. Thank you.
David Neithercut
You're very welcome.
Operator
Vincent Chao with Deutsche Bank has the next question.
Vincent Chao
Hey everyone. I know this is probably more of a regional impact but just curious given that there has been labor shortages already from the natural disasters we saw this fall.
I was just curious if there is any noticeable change in that dynamic post some of the hurricanes?
Mark Parrell
We've had labor challenges particularly on the construction side across all of our markets and those continues. I noted actually in San Francisco our Brannan property has been in the last 120 so wide units have been delayed because of this challenge is getting people on site.
I have not heard anyone attribute any marginal worsening of that problem because resources have been deployed in taxes of our floor. So, I can't tell you that's the case but we continue to just see labor shortages and our contractors whereas our tradesman are all kind of continuing to sing the blues in that regard.
But haven’t heard anyone suggest it that's got worse because of the hurricanes.
Vincent Chao
Okay, thanks for that. And then just maybe from guidance from the same store revenue I mean just seem like there is an implied a modest flourishment in the fourth quarter.
Is that really just a reflection of the timing of some of this supply that had there really expected some was getting pushed out maybe into the fourth quarter from the third?
Mark Parrell
Again it's Mark Parrell. I mean, no just the map here means that in the fourth quarter, our quarter-over-quarter number could be anywhere from 1.9% to 2.3% and still map out to the two two number that we put out to you.
And really it's very small changes in occupancy and as we said a moment ago, we're really not buyers in the thesis that there are delays that are meaningful in deliveries that are impacting our numbers. So, there is a margin air in these numbers but we would generally expect the number in the fourth quarter that we report quarter-over-quarter to be reasonably consistent with third quarter number or quarter-over-quarter that we just reported.
Vincent Chao
Okay, thank you.
Mark Parrell
You're welcome.
Operator
Our next question comes from Richard Hill with Morgan Stanley.
Richard Hill
Hey, I guess it's still good morning for you guys. Hey, just a quick question on the tax appeals.
I want to make sure, was that related to the LA market and can we attribute that to the sharp declines and expenses that we saw this quarter?
Mark Parrell
There is two markets were impacted by the appeals in the same store set New York and LA.
Richard Hill
Understood, thank you. And are there any other markets where you have ongoing appeals right now?
Mark Parrell
We have ongoing appeals in every market. And we underwrite and try and guess and it's really a very good educated guess as to how many of those appeals wind up getting recognized as income received or reduction of our taxes.
But it's an estimate and sometimes things happen a little faster or a little slower than we expect.
Richard Hill
Got it. And then on your FFO guide increase, you noted that it was a combination of tax appeals and NOIs.
Do you have a breakdown or can you provide any guidance of how we should be thinking about the benefit of tax appeal versus the NOI growth?
Mark Parrell
I think you can think about the tax appeal as worth give or take $2 million and then the rest of it is a combination of revenue being better than we thought in the same store set and non-same store predominant lease up income being better than we thought.
Richard Hill
Great, thank you very much. I appreciate it.
That's all.
Mark Parrell
You're very welcome, Rich.
Operator
Next we'll hear from Tayo Okusanya with Jefferies.
Tayo Okusanya
Yes, first for all congrats on a great quarter. Following-up on Rich's question, how do we start to I know again you're not giving a lot of insight into 18 yet.
But from an operating expense perspective, how do we kind of start thinking about kind of same store FX growth kind of on a regular run rate basis, these to kind of say an opportunity it's kind of keep driving things down or this quarter was specifically unusual and you expect a higher run rate going forward for same store FX was?
David Santee
So, this is David Santee. I think we've kind of talked previously that real-estate taxes are a big driver.
It's 40% of our total operating expense and one of the key inputs to that are the increases or the step ups in our 421-a in New York which will add probably a 150 basis point to normalize real-estate tax growth up through 2020. So, for the past several quarters or year we've talked about real-estate tax growth of 4% to 5% up through 2020.
And then everything else is payroll is obviously our second biggest expense group wage pressures this year. We probably would expect a little bleed in the next year.
And then utilities we are trying to or making investments into LED lighting, a lot of energy conservation. At the same time, we kind of try to lock in future natural gas prices that add significant discounts year-over-year.
So, all in all I mean I think expenses going forward, we kind of always said three handle.
Tayo Okusanya
Got you. Okay, that's helpful.
And I know this is not part of your normalized FFO per share number but could you talk about the legal settlements during the quarter what that was about?
David Neithercut
Sure. That was a construction defect lawsuit and lawyers were able to resolve in a favorable way for us.
So, we received the money and you can't capitalize it, it has to go through an income account. And so we do exclude it from normalized FFO even though it's a benefit.
Tayo Okusanya
Got you. Thank you, very much.
David Neithercut
You're welcome.
Operator
Wes Golladay with RBC Capital Markets has our next question.
Wes Golladay
Hi, good morning guys. Could you guys give us the new rent growth for October yet?
David Neithercut
No, we did not. We do not have that number.
Wes Golladay
Okay. And then looking at the Seattle market, you mentioned the supply will be down next year.
In particular I see looking at hosted date of the CBD would be arriving next year. Do you agree with that and how do you view your trade area, do you lump it together as Queen Anne -- like Union or just a little bit more color on how you see supply going down?
David Santee
So almost all of the delivery in 2018 is going to be in downtown CBD. So that is compared to this year, it’s a pretty meaningful reduction, relative to what was delivered this year in North Seattle.
I mean the bulk of it is really CBD.
David Neithercut
And we do consider all those areas within our competitive sort of trade areas, they are going back to the conversation about sort of the boundaries, Belltown, Queen Anne, downtown Salt Lake Union Capital Hill, Belleview -- I mean they are all considered part of that trade area.
Wes Golladay
[Indiscernible] sorry go ahead. You go finish, sorry about that.
David Neithercut
No it’s just – since its a trade area, I just want to make it clear that area that we consider new product being built to compete with us, so that would, all those markets would be included in that area.
Wes Golladay
No I’d just say then that you guys have walked all those areas, the sights right. I believe you mentioned on the last call.
David Neithercut
Our local teams?
David Neithercut
Oh yes, my guys certainly are tracking all those things, they now examine, we’ve got platforms you can go online and see every potential site who owns it, what’s being contemplated to be built, when our teams expect it to start, when our teams expect it to be not just completed but available for occupancy and they track all that information absolutely.
Wes Golladay
Okay, thank you.
David Neithercut
You’re very welcome.
Operator
That will conclude the question and answer session. I will now turn the conference over to Mr.
Neithercut for any additional closing comments.
David Neithercut
Yeah well thank you everybody. We’ll see a lot of you in Dallas next month.
Thanks for your time this morning.
Operator
That does conclude today’s conference call. Thank you for your participation.
You may now disconnect.