Good morning, and welcome to the EastGroup Properties First Quarter 2018 Earnings Conference Call. Please note that this call may be recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead.
Thank you. Good morning and thanks for calling in for our Q1 2018 conference call. As always, we appreciate everyone's interest. Brent Wood, our CFO, will also be participating on the call. And since we'll make forward looking statements, we ask that you listen to the following disclaimer.
The discussion today involves forward looking statements. Please refer to the Safe Harbor language included in the company's news release announcing results for this quarter that describe certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected. Also, the content of this conference call contains time sensitive information that's subject to the Safe Harbor statement including the news release is accurate only as of the date of this call. The company has disclosed reconciliations www.eastgroup.net.
Thanks, Keema. The Q1 saw a continuation of each group's positive trends. Funds from operations per share came in above guidance, achieving an over 17% increase compared to Q1 last year. This marks 20 consecutive quarters of higher FFO per share as compared to the prior year quarter. The strength of the industrial market is further demonstrated through a number of our metrics such as another solid quarter of occupancy, positive same store NOI results and strong re leasing spreads.
And as these statistics bear out, the current operating environment is allowing us to steadily increase rents and create value through ground up development along with value add acquisitions. At quarter end, we were 97% leased and 96.4% occupied, and this marks 19 consecutive quarters or since Q2 2013 where occupancy has been approximately 95% or better, truly a long term trend. Drilling into our specific markets at quarter end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Dallas, San Francisco and Los Angeles were each 98% leased or better. And Houston, our largest market with 5,500,000 square feet, down from over 6,800,000 square feet in early 2016 was 94.5 percent leased. Supply and specifically Shallow Bay industrial supply remains in check-in our markets.
In this cycle, the supply is predominantly institutionally controlled and as a result, deliveries have remained disciplined. And as a byproduct of the institutional control it's largely focused on big box construction. Rents continued their positive trend rising over 9% on a cash basis and almost 19% on a GAAP basis. Overall, with roughly 95% occupancy, strengthening markets, rising construction pricing and disciplined new supply, we continue seeing upward pressure on rents. 1st quarter same property NOI rose 4.3% on a GAAP basis and average quarterly occupancy was 96.3%, up 70 basis points from Q1 2017.
Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk adjusted path to create value. We believe we effectively manage development risk as majority of our developments are additional phases within an existing part. The average investment for our business distribution buildings is below $10,000,000 and we target 150 basis point minimum projected investment return premium over market cap rates. At March 31, the projected return on our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low 5s. And further, we're continuing to see cap rate compression in our markets.
During the Q1, we began construction on 2 buildings totaling 170,000 square feet with a total projected investment of $12,000,000 And then coming out of the pipeline, we transferred 3 buildings totaling 347,000 square feet with an investment of approximately $30,000,000 into the portfolio at 100 percent leased. As of March 31, our development pipeline consisted of 17 projects in 10 cities containing 2,000,000 square feet with a projected cost of $165,000,000 which was 51% leased. For 2018, we project development starts of $120,000,000 and 1,400,000 square feet. One of the things I'm excited about this year is a greater number of development markets. This diversity reduces risk while also raising our odds to grow the development pipeline.
More specifically, you'll see us continue development within our successful parks in places like Charlotte, Dallas, Orlando and San Antonio. Additionally, we restarted Phoenix development in mid-twenty 17 and recently broke ground in Houston for the first time since early 2015. The 3rd and final leg of this stool is we have active developments in new markets for us such as Miami, Austin and Atlanta. I'm also excited about where we stand in terms of our projected pipeline so early in the year. As a reminder, our leasing results are what drive our next start.
So the $120,000,000 in projected starts consist of 10 separate projects and I'm pleased that we've either begun or have approval for 7 of those 10 starts now. And while we're not raising our projections, it's a positive sign that development leasing is progressing as hoped. Our first quarter dispositions upgraded portfolio quality as we sold several non strategic assets. In March, we sold 56th Street Commerce Park, an older seven building, 180,000 Square Foot Service Center project in Tampa for $12,500,000 Earlier in the Q1, we sold World Houston 18, a non EastGroup developed 33,000 square foot older building on the edge of our World Houston Park for 2,500,000 dollars And finally, at the end of the quarter, we sold roughly half of our Leeroad land in Houston for 2,600,000 dollars These sales allowed us to upgrade the quality of our portfolio, improve portfolio allocation by market and freed up capital to reinvest elsewhere. Brent will now review a variety of financial topics, including our updated guidance.
Good morning.
We continue to see positive results due to the strong performance of our operating portfolio. FFO per share for the quarter exceeded the upper end of our guidance range of $1.16 compared to $0.99 for the same quarter last year, an increase of 17.2%. Operations have benefited from the continual conversion of well leased development properties into the operating portfolio, an increase in same property net operating income and value add acquisitions. Debt to total market capitalization was 27.8% at March 31, well below our long term target. Floating rate bank debt amounted to only 3% of total market capitalization at quarter end.
From a capital perspective, in the Q1, we issued $14,800,000 of common stock under our continuous equity program at an average price of $82.68 per share. In February, we closed on an amendment to an existing $65,000,000 unsecured term loan that reduced the effective fixed rate by 55 basis points to 2.3%, creating an annual savings of approximately $340,000 The maturity date was unchanged. In April, we closed on $60,000,000 of 10 year senior unsecured private placement notes at a fixed rate of 3.93%. FFO guidance for the Q2 of 2018 is estimated to be in the range of $1.11 to $1.13 per share and $4.51 to $4.61 for the year. Those midpoints represent an increase of 6.7% and 7.0% compared to the prior year, respectively, and an increase of $0.06 per share in the midpoint of our guidance for the year.
The sequential decrease in FFO from the Q1 to the midpoint of guidance for the Q2 of 0 point 0 $4 per share is primarily attributable to $0.02 of non recurring gains from Q1 along with the impact of converting 60,000,000 dollars of variable rate debt to higher interest fixed rate long term debt. Our first quarter results combined with the leasing assumptions that comprise guidance produced an average quarterly same store growth of 4.0 percent for the year, an increase of 70 basis points from our initial guidance. This is the result of outperforming our budget expectations in the Q1 along with continued optimism for the remainder of the year. Other notable guidance assumption revisions for 2018 include reducing both acquisitions and dispositions by $10,000,000 to $40,000,000 each. In summary, our financial metrics and results continue to be some of the best we've experienced and we anticipate that momentum continuing throughout 2018.
Now Marshall will make some final comments.
Thanks, Matt. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on the strength, we continue investing in, upgrading and geographically diversifying our portfolio. And as we pursue these opportunities, we're also committed to maintain a strong healthy balance sheet with improving metrics. We view this combination of pursuing opportunities while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the current strong operating environment.
The mix of our operating strategy, our team and our markets has us optimistic about our future. And we'll now take any questions.
And our first question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you and good morning.
Good morning. Good morning.
So I was hoping
to focus on development starts guidance. Correct me if I'm wrong, but I think you maintained it from last quarter or from your initial guidance. I'm just curious what it would take for you to bump that number up? And in answering the question, maybe just talk about supply risk. Is that holding you back at all?
Yes. Thanks Jamie and good question. We maintained our guidance. It's 10 projects really as we dig into the details and 100 and $20,000,000 in dollar volume. I guess big picture, I'll use the analogy, a lot of our development is almost like building out a subdivision.
As one building leases, we start the next one. So it's really driven by the I love how it's driven by the field and leasing rather than by corporate. We have we were light a little bit light on our dollar volume and starts for Q1, but of the 10 starts we projected this year based on our leasing volumes, we've either started or have approval and we'll be starting soon for more. So we're that'll get us through 7 of our 10 buildings. We feel pretty good, knock on wood, about $120,000,000 kind of anecdotally where they're all early, but we're in the running for 3 different pre leases on buildings, which is a higher number for us.
Usually, we build multi tenant spec buildings. So we're seeing more demand to pre lease. We're also consistently hearing more and more. We just had our own internal leasing call about expansions. So a number of the spaces we've leased or a number of our developments like Chamberlain in Tucson and Oak Creek 7 in Tampa are really us accommodating an existing tenant who's outgrown their space.
There was an existing tenant, our last building that we're just starting in Orlando too. So cautiously optimistic that later in the year we'll be up from the $120,000,000 if the economy hangs in there. And then in terms of supply, we'll typically say we like where we fit within the food chains and so much of what we see being built. There's large numbers of starts we see in terms of volume places like Dallas and Atlanta, where each about 19,000,000 but absorption has been 19,000,000 to $20,000,000 in both of those markets. And really I'll stick with Atlanta and reading some of the statistics about the Atlanta market.
There's 19,000,000 currently under construction, which would the last year they absorbed 21,000,000. But of the 19,000,000 there's 8 buildings that are 1,000,000 square feet or above and most of that is in an awful lot of that is in South Atlanta. The statistic I also read, the average building under construction in Atlanta is over 530,000 square feet. So we're we just broke ground on an 80,000 foot building. So it may as well be a hotel being built down the street.
And in a lot cases, it's we're in North Atlanta and the construction is in South Atlanta. So we struggle to find land sites and thankfully feel pretty good about where supply is today with construction prices are going up. Rents are hopefully keeping pace, but we don't aren't alarmed about supply. And what we do see is so much of it is big box supply.
Okay. And I guess along those lines, a big picture question. If you think about the EastGroup business and portfolio and we keep hearing e commerce is driving so much demand this cycle. I mean, do you think that the types of tenants you'll have in the portfolio and do the most leasing with going forward are going to be different than past cycles? I mean, is there kind of a structural shift going on here within your portfolio as well?
We see a trend towards a little bit towards some bigger tenants, especially within our development. I mean, our average tenant size is still in the mid-20s, but we certainly see demand from the larger tenants that will take a full building for us. I don't know that I don't view it as a ship so much away. The customer uses we had 10 years ago or 5 years ago are still there. It's really thankfully being more supplemented and that we see e commerce or people with that last mile usage.
One of the leases we signed this quarter was Best Buy and it's really last mile get into their stores in North Carolina. So a little bit e commerce, I guess you could say it's physical stores there. So it's more supplementing the uses that we're seeing rather than replacing.
And our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, good morning. Good morning, Marshall. Just a few quick questions here. First, let's just go to guidance. You guys had a very healthy beat to the Street and yet your guidance increase for the year pretty much matched up to what the guidance beat was or what the beat was in the Q1.
You increased your expectations for same store NOI. So is this just usual conservatism or why wouldn't either the guidance range be increased more or it would seem to just telegraph that you guys will have continued increases throughout the year. So what would be offsets for why we shouldn't expect a bigger number?
We did, I guess, in aggregate, we beat by a nickel as you said, and then we did add a penny to that. So we did, for the balance of the year, the remaining 3 quarters did raise our guidance and I hope you're right. I mean we feel like we're our average occupancy is 95.5%. So that's a pretty healthy number for the year for us. We feel like we're we've built numbers that are reasonable and rational.
And I hope 6 months from now or better yet, Q1 next year, you can say I told you so that we were being too conservative. A little bit of you're hoping the economy stays in there and the uncertainty is there, but we feel like it's our best guess. And I hope you're right. Brent, can you give us
a call? Yes. It was a well balanced beat. We had the $0.02 we mentioned that was non recurring, but of the other $0.03 it was same store contribution. It was development leasing, a little ahead of schedule.
It was a lot of different buckets. I'd also say for the rest of the year, when you're in that 95.5% to 97% leased and occupied ranges, It's just hard to make yourself when you're dealing with budgets to really get more aggressive than that. So like Marshall said, we hope that it sets the stage for us to have upside through the rest of the year. But as we've always said, our budget is not necessarily our goal, but we just point out these are the assumptions that are driving our midpoint. And if we can continue to outperform them, then that would be to the good side.
Okay. And then the second question is, in Austin and Santa Barbara, I'm going to guess that you guys lost tenant, which is why same store NOI was down. So if you can just comment, 1, on timing to backfill, 2, what the expected rent marks are going to be on the backfill? And then finally, Santa Barbara always seems like a standalone market. So just sort of curious your long term view for holding that the assets there versus presumably those would go to really low cap rate and would provide you with some accretive capital to expand.
We had to reinvest in Southern California in California where you guys want to expand anyway. So if you can just take that 2 parter.
Okay. Sure. You're correct. Both of them in Austin, we had that went bankrupt, it's a project by the airport submarket and good activity. Thankfully, we had downsized the tenant last year and even after doing that, they still did not just a tough business to be in evidently.
So they didn't survive, but good activity to backfill that space. We still are happy in Austin and like that market a lot. Santa Barbara, probably more history than you want to know, but it came in a portfolio that's 4 R and D, 2 story R and D buildings that we own in suburban Santa Barbara. We had a tenant
that had been there for
as long as I can remember when I was the asset manager in the '90s for 20 plus years that outgrew the building, built their own building and moved out last year, had good leasing activity. We leased the 50,000 feet, 12 of it. During the Q1, we have a large prospect that we're hopeful the lease is out. Hopefully, that comes back here in the next week to 2 to address another balance of it. The tricky part with Santa Barbara, it is semi office building.
So the leasing cost, as I've said to our asset manager, it makes me appreciate industrial, given the leasing cost we're looking at turning a single tenant R and D building into a multi tenant building. And then you may remember at the end of the year, of the 4 buildings, we bought our long term partner out who had a 20% interest out of 2 of the 4 buildings and really long term, you're right, we would look to probably go to more industrial buildings. I don't know that the cap rates given where they are in Southern California today and that we're selling a semi office building, R and D building that we can trade down in yields from R and D into office. But long term, by having it into 3 separate parcels today, really 1031 in our way out of Santa Barbara long term is on our long term horizon. You're correct.
Okay. Thank you, Brett and Marshall.
You're welcome.
And our next question comes from Manny Korchman with Citi.
Maybe to follow-up on Alex's question, are those same vacancies, what's sort of driving the pace of a occupancy decline in your guidance from 1Q to 2Q?
Yes. It's a little bit there's some of the moving parts, if you remember at the end of the year, it's a good question. We bought 4 vacant buildings for that progress center in Atlanta and they roll into portfolio 12 months after the developer got their certificate of occupancy. So some of that rolls into our portfolio in Q2. In Tucson, we're finishing up, wrapping up construction for an existing 150,000 foot tenant.
So they're going to relocate. So we'll get that. The building has been re leased. It's again another expansion. Great story.
An existing tenant is going to take about 80% of it, but we'll get that 150,000 square feet back. Kind of thinking just some moving parts. We were losing a tenant in Jacksonville, a little over 100,000 feet. We know we have a good prospect to backfill it. So it's some moving parts and one in Las Vegas.
I think the tricky part is Brent mentioned earlier a little bit and talking to some of our kind of guys in the field at 95%, 96% occupied as we move tenants around and backfill space, it feels a little bit like Rubik's cube. And each time we do it, we're putting an ESFR sprinkler system in one of the warehouses. You lose tenants for you lose the occupancy for 2 to 3 months as you paint and carpet and get the space ready for the next tenant. So we will bounce back during the year. We actually raised our annual occupancy by 30 basis points.
But second quarter, a little bit of acquired vacancy and then a little bit of just moving parts as we move tenants around within the portfolio.
Great. And then on just the Houston disclosure, it looks like you guys have finally pulled that out of the package. And I understand that given sort of less focus on the one market. But Phil, could you discuss how trends there are going and maybe considerations for giving us maybe not as much detail as you have in the past, but more detail than you're now giving us?
Sure. Maybe I'll good question. I'll explain our logic of a reverse order. With Houston, with oil prices rising in the high 60s and really now we're several years into when the downturn started in late 2014 and Houston also going from low 20s in our portfolio to the low teens, we felt like, okay, we won't we don't do that for every market, although Houston is still our largest market and people talk about when they think of each group that we would drop that disclosure pledge. It's a lot it's much smaller in our portfolio and much more stable thankfully within our portfolio.
So that was some of the logic at year end is where we typically like to take a look at our supplement and make changes. So it's not like a natural time to drop the Houston page as we discussed it internally. And then in terms of the market, it has I've described it as stopped falling and is really more of a recovery phase now. The word I've heard a couple of times from brokers or different people we've talked there, the green shoots, the tenants are starting to expand, the economy is moving. Houston, a couple of stats to throw at you, it's 5.2% vacant, which is actually a lower vacancy rate than Dallas and Atlanta and any number of our major markets.
Over half of the new construction in Houston is in the Southeast Valley where a submarket where we're not. They added almost 100,000 people, 94,000 people in 2017, which was the number 2, the 2nd highest growth rate in the country, 2nd to Dallas. So we feel comfortable about Houston or optimistic. It's great to see development restart in Houston. It was so much of our development pipeline several years ago and we shut that off, but we have good activity on what we're building there.
So can keep throwing numbers at you. But overall, we feel good about Houston and feel like it's a recovering market. Rents have stopped falling and are flat for the moment, but we think they're going to start accelerating here probably in the next quarter or 2.
Thank you, Marshall.
Sure.
And our next question comes from Eric Frankel with Green Street Advisors. Please go ahead. Thank you. Can you just walk
through how your same store guidance was increased by nearly 100 basis points after just 1 quarter? I'm just trying to understand how
you guys are forecasting your business.
Yes, I'll jump in there. I mean, obviously, we had the Q1 that dialed into it that increased for the year. And then the good news there is it was really as I'm looking at it, I'm looking at about 8 or 10 of our markets that I have highlighted on a sheet here that had at least 6 digit increase in NOIs in terms of just revised numbers. So it was a combination of actual results Q1 and as I mentioned just our continued optimism as we tweak going through the year, as we revisited the budgets this past quarter, the good news is that the changes made in the field resulted in a wide based increase. It wasn't A lease, it wasn't A market.
Again, I think it speaks to the depth that it was the culmination of a lot of different markets that just uptick and all of that added together resulted in a nice
raise. Okay. Just really quickly, the $0.02 of nonrecurring gains, can you just clarify what those were? I have a hard time. I have a hard time.
Yes, it was purely nonrecurring. We had a land sale, which was an older parcel southeast outside of our Fort Houston proper park that we sold for a small gain. I think that was $85,000 $86,000 And then the larger portion of that was we sold a partial interest we've had for over 10 years now in a King Air airplane. And so the accounting for that, we had expensed it above the line. So as we sold it, it was just other income above the line.
So that's just a one time thing there where we exited that partnership and that plane. It just wasn't working for us anymore and we saw better ways to get around the country to see our properties.
I guess Southwest does the job pretty well. And then finally, can you you seem to be your company seems to be selling more, call it, non core assets. And so maybe can you clarify how much your portfolio you might consider non core or properties you probably would desire to sell in the next few years?
Sure. It's harder to quantify it other than I I guess, I always view it as part of our job, but we should always be thinking of our portfolio and as properties get older and maybe have don't can't produce the metrics that are our portfolio average in terms of occupancy, rental increases that we should always be, although they're well leased and in our portfolio, what we've been selling has been highly leased. It's just not our future. So we should always be kind of pruning the portfolio. We've done a lot of that in 20 for us, a lot of that in 2016, 2017.
In Tampa, it was a 30 year old 7 building service center, kind of the same thing in Houston. It was one of the first properties we acquired in in world Houston. It's over 20 years old. We're listing just listed a building in Southwest Phoenix. Again, we like the east side of Phoenix better than the west side.
It's a little more land constrained, but that's probably a 30 to 40 year old building that's just coming to market now. So I'd like to think you're never really done. And as they kind of position like in this asset in Phoenix, we've new paint, new carpet, retenanted it fairly recently got stability. It's a great time to take it to market when there's so much demand out there for core industrial or stable industrial. So we have $40,000,000 this year in our projections and that's probably pretty reasonable run rate.
And I kind of view it again as our job to kind of always be thinking of what 2 or 3 assets do you not want to own in the next downturn and how do we go ahead and move those to market.
And our next question comes from John Guinee with Stifel. Please go ahead.
Great, thank you. Three quick questions. First, are you using Southwest Air or did you get a new plane? 2nd, do you is it important to keep the Santa Barbara asset because you need to do 3 or 4 different site visits in the summer? And then a serious question is, if you look at all your development, how much of the tenants are coming from your existing tenant relationships and how much of them are new tenants?
Okay. Let's try to run through, we do not own an airplane. If you want to make us a deal, first of all, we'll look into it. At Santa Barbara, we have our Chairman spending part of the year already there. So we have a good asset manager in place out in Santa Barbara who goes by the asset regularly for us.
And then your last question, a good one is that it's a fair amount of our tenants. It's not the majority, but probably right now 25% to 30%. As I kind of run through my list, it's either existing tenants like Houston where we're picking up additional business from them or expansions in Tampa and in Tucson. That's why one of the reasons we like about the park development program. 1, I think it lowers our risk.
At the first five buildings in Charlotte work. There's greater odds that the 6th one will work versus a big building on the edge of town. And in many cases, a tenant will come to us and they still have a few years left on their lease and they which was the case in Tucson and they need more space and we can work through and basically have the ability to tear up their existing lease and build on typically a larger building on a longer term lease. So we're seeing many more expansions over the last 12 months than we did in the prior probably 48. And we that's a great sign.
We thought that's the best type of demand because we're not pulling a tenant out of one of our peers and it's a zero sum game that really shows the health of the economy and the market.
Great. Thank you. Have a good weekend. Thanks.
Thanks, John.
And our next question comes from Craig Mailman with KeyBanc. Please go ahead.
Hi, everyone. This is Laura Dixon here with Craig. I just want to follow-up on an earlier question regarding the cash same store NOI growth guidance. I noticed that bad debt expense came down in guidance. Is that a factor?
We don't have our bad debt reserve baked into our same store. So that was not actually a factor. We had $90,000 of bad debt first quarter. We invested $250,000 We kept the $250,000 reserve, which is not earmarked for a specific tenant, but we still have the $250,000 reserve for the remaining three quarters. Last year, we had 500,000.
The year before that, we were closer to the 1,000,000. So we like to look back and say that we're conservative, but when you've got 1500 to 1600 customers, it's hard to not project something. And then you don't know if someone does go bad, is it a 5,000 square foot tenant or is it a 100,000 square foot tenant? And given our size, that could have a swing quarter to quarter. So it wasn't in the same store, to answer
your question, it was not in
the same store upward guidance though.
Okay, great. And then just you had some meaningful rent spreads in several markets, including San Francisco, LA, Fort Myers, Dallas. Are those representative of the markets? Or were those like individual leases?
Good question, Laura. It's always in any I know we're just 1 quarter in. I typically always like to look at the if you can't now the year to date number just because given our size, I always thought we get a more meaningful sample size. In the West Coast markets, we are seeing high rent growth and actually negative supply in the Bay Area and even like Orange County was reading where there was negative industrial supply in Orange County where buildings were being repurposed. Dallas and Fort Myers are also growing.
I mean, we with things this tight, one of the and construction prices rising, that's one of the challenges we've kind of working our way through with our new developments. So just every project we put out for bid, the construction pricing comes in and surprises us a little bit. So I think that has to with a tight market and rising land and rising construction prices will continue to put upward pressure on rents because everybody else is in the same dilemma as we are in terms of adding new supply. So we are I think a good catch. Seeing those on top Fort Myers had some of the highest population growth, at least in terms of a percentage smaller base, but within the state of Florida over the last year as well.
Okay, great. Thank you.
Thanks, Largo.
And our next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Hey, guys. Good morning. Just a follow-up on Houston. Obviously, the portfolio has bounced back dramatically. Are you guys at the point where you think development could pick back up there?
I know you guys are doing the one project, but what are the prospects for more just given the amount of land you still have there ready to be monetized?
Well, in the way, again, the market's better and stabilized and we did fill that northwest submarket, it's a 60,000 foot building. We felt comfortable there that really no one was, knock on wood, building what we were building there. We have had some pre leased opportunities out near the world of Houston and are leaning more towards that if we had either a fully leased building or significantly leased building. And so we'll work our way back towards that. But right now, it feels like you're maybe a quarter or 2 or hopefully ahead and hopefully we may speed it up if the market comes back.
But especially at North, there was oversupply, but now the vacancy rates come down pretty nicely. It's just over 7 percent in the north submarket where overall Houston land is at 7.2%. So if that keeps coming down and tenants are expanding and the other thing we heard this quarter for the first time, which was nice to see were contracts with oil and gas companies that people are out looking for space. So that was a we've seen growth in tenant demand in Houston. The oil and gas industry has been quiet and we started hearing that a couple of our prospects were out chasing really 3PL contracts with oil and gas companies.
So that's the other side that could really pick things up. And the logistics companies when they need space, the good news, bad news is when they shrank, they run away quickly because they lost contracts. But as they get these contracts, our thought or belief is those will be the 1st guys back in the market and they'll need space in 60 days or in a few months, they'll need it quickly.
Okay. That's helpful. And then can you give us any cap rate assumptions for your expected acquisitions and dispositions for the year and whether you guys are targeting any specific markets on either side?
It's hard. Cap rates will be a blend. I mean, I think what we earmarked going out and this is really based on broker guidance, we're thinking we'll be 5.5 to 6. So it's been nice. We were meeting with one of the national team and overseeing the last handful of deals they sold have all been above what they had targeted their stretch pricing.
Acquisitions are a little bit tougher and then I could see us being in the really the value add model we like better than a core acquisition right now just because once something gets fully leased and is out there, as the broker said, everything seems to exceed stretch pricing. So we're hopefully we can find a building or 2. We've got a small project now that is will be as a fully leased project, but it's not a big portion of the $40,000,000 and we'll hopefully close it here in the next few weeks and that's around the 6% range. But if we buy something in Southern California where we've been pursuing things, that will be at best sub-five.
And just point out from a budget perspective on the $40,000,000 we did have about a 75 basis point higher spread on our assumed sales versus where putting the money. And that's just a reflection of selling from the bottom and then mine at a higher quality. But we do have a spread there. We're not assuming it's not built in to assume that we would go even. We would assume there'd be for budget purposes, we'd assume a 75 basis point trade down in that 40,000,000
dollars Got it. Okay, that's helpful. Thanks guys.
Sure.
And your next question comes from Rich Anderson with Mizuho Securities. Please go ahead.
Thanks. Good morning, folks. So just one kind of question for me. You had a lot of moving parts and continue to have a lot of moving parts that as you mentioned in the release kind of a lot of it is moving in your favor, but still activity. I'm curious if you're seeing tenants generally moving up or down in terms of the amount of space they're using?
And well, I guess that's part 1, if you can respond to that first.
Generally moving up in space, I mean, that's really where we good question, backfill some of our developments in Tampa and Arizona where in Arizona they doubled space and then it's actually a walk if I can walk you through the details even and this was in Tucson. We moved 150,000 foot, 20 year tenant relationship that we've had into a new 300,000 foot building. We had a public company, an auto parts supplier expanded and took 120 of their 150,000 feet. And it just shows you how tight the markets are. And then we had a 3rd tenant that was a food services that expanded into the auto parts supplier.
So really, the 2 and a broker, I've never seen, you're calling it the trifecta with 3 tenants all expanded their square footage. Charlotte, we've had it's a little bit dated, over a 1 year period had 11 tenant expansions and that's what the Airport Commerce Center made us feel better about building there and that we have 2 buildings that are fully leased there that our best prospects for it are coming from when our existing buildings that are adjacent.
Right. So the basis to the question is if rising rents are causing users to become more productive in their utilization process. And you mentioned 20,000 square feet average tenant size. I imagine you're also thinking then that number trickles up over time as well?
Yes. I would yes. I mean, we're kind of mid-20s. And I think especially as we sell some of our older assets like the Tampa building, we have a lot of small tenants that we just sold, the 30 something 1000 foot building in Houston, although that's a little above our average. I do think our average tenant size will grow.
It won't be as big as some of our peers that are more logistics centers on the edge of town. But I do think our average tenant size will evolve and grow over time.
Okay. That's what I thought. Okay. Thanks very much.
Sure. You're
welcome. And our next question comes from Rob Simon with Evercore ISI.
Please go ahead.
Hey, guys. Good morning. Thanks for taking the question. A lot of the questions I had have been answered. I guess just one quick follow-up for me on guidance.
I know you guys had the $0.02 one timer. In the revised range, are there any other kind of one time items included in the 451 to 461? Just trying to size up what the raise was attributable just to core real estate?
There's not. That generally is just something that arises. If we were, we have a few parcels of land still throughout the portfolio that we would sell or market for sale. If that were to occur, then a gain there would register in, but we don't have anything that I would describe as other income dialed into our midpoint guidance other than the actual we had in the Q1.
Got it. Thanks, Brad. Appreciate it.
Yes. You're welcome.
And it appears there are no more questions over the phone at this time.
I would like go ahead and
hand it back over to the speakers for any closing remarks.
Thank you everyone for your time. Again, we appreciate your interest in each group. If we have any follow-up questions, we're certainly available and look forward to seeing many
of you at NewRegan. This is the
next event. Thanks, everyone. Thank you.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.