Good morning, and welcome to the EastGroup Properties fourth quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during a question and answer session. To register to ask a question, you may press the star and one on your touchtone telephone at any time. Please note, today's conference may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead, sir.
Thank you. Good morning, and thanks for calling in for our fourth quarter 2017 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. 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 describes 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, subject to the safe harbor statement included in the news release, is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which may be found on the company's website at www.eastgroup.net.
Thanks, Gina. The fourth quarter saw a continuation of EastGroup's positive trends. Funds from operations came in above guidance, achieving a 5.6% increase compared to fourth quarter last year. This marks 19 consecutive quarters of higher FFO per share as compared to prior year. 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. In summary, our increasing FFO and dividend prove the success we're seeing in all three prongs of our long-term growth strategy. At quarter end, we were 97% leased and 96.4% occupied. While we're pleased with these numbers, they would each be 50 basis points higher but for a largely vacant value-add mid-December acquisition.
Drilling into specific markets at year-end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Phoenix, San Francisco, and Los Angeles, were each 98% leased or better. In Houston, our largest market with 5.5 million square feet, down from over 6.8 million square feet in early 2016, was 95.7% leased. Supply, and specifically shallow bay industrial supply, remains in check in our markets. In this cycle, supply is predominantly institutionally controlled. As a result, deliveries remain disciplined, and as a byproduct of the institutional control, it's largely focused on big box construction. Rent spreads continued their positive trend for the 19th consecutive quarter on a GAAP basis, rising over 15%. Further, for the year, our GAAP re-leasing spreads were up almost 17%. Overall, with roughly 95% occupancy, strengthening markets, rise in construction pricing, and disciplined new supply, we continue seeing upward pressure on rents.
Fourth quarter same-property NOI rose on a GAAP basis by 5.2%, and average quarterly occupancy was 96.4%, up 40 basis points from fourth quarter 2016. We expect same-property results to remain positive going forward, though increases will reflect rent growth, as with mid-'90s occupancy, we view ourselves as fully occupied. 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 the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is below $10 million. In 2018, we plan to develop in a broader range of cities than we historically have. Finally, we target 150 basis point minimum projected investment return premium over market cap rates.
At December 31st, the projected return on our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low fives. Further, we're continuing to see cap rate compression in the majority of our markets. During fourth quarter, we began construction on four buildings in three cities, totaling 352,000 square feet, with total projected investment just under $32 million. As of December 31st, our development pipeline consisted of 18 projects in 11 cities, containing 2.2 million square feet with a projected cost of $185 million, which is 48% leased. For 2018, we project development starts of $120 million and 1.4 million square feet. One of the things I'm excited about this year is a greater number of our development markets. This reduces our risk and also raises our chance of growing the development pipeline during the year.
More specifically, you'll see us continue developing within our successful parks in markets like Charlotte, Dallas, Orlando, and San Antonio. In addition, we restarted Phoenix development mid-2017, and we've recently broken ground in Houston for the first time since 2014. The final and third leg of this stool is we'll have active developments in new markets such as Miami, Austin, and Atlanta. In mid-December, we acquired Gwinnett Progress Center, a newly completed project in Atlanta for $29.3 million. Gwinnett Progress Center consists of four buildings totaling 392,000 square feet along with 10.5 adjacent acres for future development, which is presently 17% leased. On January 26, we closed the sale of World Houston 18, which was an EastGroup-developed 33,000 square foot older building on the edge of our World Houston Park for $2.5 million.
Brent Wood will now review a variety of financial topics, including our initial 2018 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 at $1.14 compared to $1.08 for the same quarter last year, an increase of 5.6%. FFO per share for the year ended December 31 was $4.26 per share as compared to $4.02 last year, an increase of 6%. Operations have benefited from the continual conversion of well-leased development properties into the operating portfolio, an increase in the same-property net operating income and value-add acquisitions. Debt to total market capitalization was 26.6% at December 31, well below our long-term target. Floating rate bank debt amounted to only 2.8% of total market capitalization at year-end.
From a capital perspective, in the fourth quarter, we issued $30.6 million of common stock under our continuous equity program at an average price of $91.95 per share. In December, we closed on $60 million of seven-year senior unsecured private placement notes at a fixed rate of 3.46%. In December, we closed on an amendment to an existing $75 million unsecured term loan that reduced the effective fixed rate by 30 basis points to 3.45%. The maturity date was unchanged. FFO guidance for the first quarter of 2018 is estimated to be in the range of $1.10-$1.12 per share and $4.45-$4.55 for the year. Those midpoints represent an increase of 12.1% and 5.6% compared to the prior year respectively.
The first quarter estimated increase is influenced by our lower G&A cost in first quarter 2018 as a result of the change to computing executive compensation on a bright line test basis. G&A guidance of $13.2 million for 2018 reflects a normalized year. Our G&A to revenue ratio was a sector-leading low of 5.5% in 2017. The leasing assumptions that comprise guidance produce an average quarterly same-store growth of 3.3% for the year. Other notable assumptions for 2018 guidance include $50 million in both acquisitions and dispositions, $50 million in common stock issuances, $140 million of unsecured debts, and $700,000 of bad debt net of termination fees. In summary, our financial metrics and results continue to be some of the best we have experienced. We anticipate that momentum continuing throughout 2018. Marshall Loeb will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong, healthy balance sheet with improving metrics, as evidenced by the equity we raised during 2017. I'm proud of our team's results last year, especially during a time of transition. I'm also excited about the foundation we laid as we move into 2018. As we begin the year, we're in a solid operating environment, as last quarter's results indicate. We're also stronger as a team, have an even better portfolio of properties, and a stronger balance sheet. This combination has us optimistic about our future, and we're now happy to take your questions.
Thank you. As a reminder, it is the star and one if you would like to ask a question. If you find that your question has been answered, you may remove yourself from the queue by pressing the pound key. We'll go first to the line of Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you, and good morning. I'm hoping you guys can focus on the same-store guidance. We're getting a lot of questions about just the overall rate that you put in the 2018 numbers. Can you talk about what's driving Well, it sounds like you think full occupancy, but it's driven by kind of leasing spreads and hopefully some margin improvement. Can you talk about the moving pieces there? I know last year your 2017 full year number was a lot higher than your actual guidance when you started the year. Just maybe some thoughts about how you came to that number.
Yeah. I'll jump in first, Jamie, then give it to Marshall. I would point out a couple of things. One, that is to our midpoint, the disclosure that we give, the 2.3% and the 2.7%. I'd also point out that we disclose now the average quarterly same-store, which is more of a four-quarter trailing type concept. That's 3.3%. We're budgeting basically a similar occupancy year-over-year. It really becomes incumbent on pushing the rents. As you mentioned, Jamie, we proved to be conservative in 2017. We finished over 200 basis points better in 2017 than our original projection. We hope we have that opportunity again. When you're budgeting 95%, 95.5% occupancy, it's just hard to push that to, say, 96.5%. Along with that, I would point to what we're really pleased with that's pushing our growth is our development pipeline.
With $170 million converted last year, that is 7.7%, and another $185 million in the pipeline currently, either under construction or under lease up at an 8% yield. We are predominantly a development company, and that pushes the bottom line, and we are very pleased with the bottom-line growth that we are projecting for next year.
Jamie, good question. I am glad you raised the topic because we get that question as well. I agree with what Brent said. Again, I would say that annual same-store NOI, at least with us, it leaves so much out with our development pipeline of what we delivered in 2016 or completed in 2016, what we worked on last year and this year, dispositions. It is really an incomplete metric, or as I compare it to here, it is like picking a player out on a team, that it leaves so much out of our metric. We think core FFO is a much better driver or way to measure us. I guess if I say core, we do not have a non-core and a core. Our FFO growth really captures our development, and annual same-store leaves so much out.
I wish our number. Our projections are higher. They are what they are. We are projecting a little more bad debt, a little lower term fee, a little lower occupancy this year, a little more return to normalcy on occupancy, although we are still optimistic about the environment. It is a dial on the dashboard, but it is not the driver that, to us, seems to get the attention that it does.
I would just add to that one thing. I know same-store has been a topic. An example of what Marshall is referring to. Our Park North project in Fort Worth converted during first quarter 2017. We bought that $40 million, 33% leased. We have raised that to almost 90% leased. That project won't be in same-store until 2019 because it wasn't hit in the year-to-date because it wasn't held 1/1/2017. It is not eligible for the same all-year pool for 2018. We will have held that 23 months before that even gets into a year-to-date same-store pool. As Marshall said, we view that as just a metric that at times is incomplete unless you are really looking at the trailing quarters.
Okay, that's helpful. Just my second question or final question. Just thinking about Houston and the pickup you've seen there. Oh, I'm sorry. I'll ask a different one. Can you just talk about rent growth? What's your expectation for rent growth in your markets, and how shallow bay industrial is probably differing from big box?
Sure. Good question. It's hard for us. I hesitate to speak on big box just because we really aren't in that field. We read about it probably like you and things. On the shallow bay, supply does not particularly worry us. There are people that do what we do, but as we go and look at markets and sub-markets, so much of what's being delivered is big box deliveries. I was reading in Atlanta, the average size of the spec buildings under construction, I don't think Atlanta's that different than any number, is over half a million sq ft. So it may as well be a multi-family project. Right now, we're building a 180,000-foot, 100,000-foot building, that it's so much larger. We like GAAP rent growth because you capture the free rent and the rent bumps that we negotiate on.
Just for example, we were about a 12% increase in 2015 and 2016, and last year at 2017. With industrial land prices rising, and we've seen a jump in construction pricing really in the last six or seven months especially, that all that logically has led us, it's stressed us some on our development yields as we go to our own committee. We're still well north of seven, but those are putting pressure with construction pricing. We think all that's got to lead to higher rents over time, logically, that the markets are all full with rising prices, has to lead to further rent growth.
Okay. Did you say 17% rent growth last year?
That was our GAAP number, roughly. Yes.
Oh. No, I meant market.
Oh, market. Okay. In our markets, I'm trying to get Atlanta or Miami was up about 6%. Atlanta's up 7%. I think it's harder. We usually look at it lease to lease. We were 17% re-lease and spread. It'll probably be about that, if not a touch higher this year. It's harder for us to pick market by market, but it sure feels like there'll be 5%-7% in most all of our market rent growth because supply just simply isn't there, and we're also seeing many more expansions than we used to within our own portfolio, and I would imagine our peers are as well.
Okay, great. Thanks, guys.
Sure. You're welcome.
Thank you. As a reminder, it is the star and one if you'd like to ask a question. We'll go next to the site of Alexander Goldfarb with Sandler O'Neill.
Good morning.
Morning.
Hey. Just a few questions here. First, just given the commentary and the broker reports out about compressing cap rates, clearly you can see the larger PE shops buying in the market. I'm assuming that the bid for stabilized assets or stuff that's near 80-plus % occupied is probably significantly tighter than where you guys would bid. But you did buy the Atlanta deal, which is a lease-up. Just curious if you're seeing growing competition for those sorts of assets, then why those assets would sort of exist at the pricing that you're getting it at if the market is so good and underwriters could figure they could lease it up fairly quickly.
We've done really four of those in about a year and a half. As Brent mentioned, Park North, Atlanta. There's Jones in Las Vegas, and then Weston in South Florida. We view it as a nice, really shadow pipeline for development. We've bought about $120 million. There's a few of those out there, but not a lot. Typically, now that I think about it, every one of those but one has been an off-market transaction. Typically, it works where it's a regional developer working with an institutional partner. Our offer gets them mathematically into their promote with their financial partner, and they can move on to the next deal. It's always a development that they intended to exit, either upon stabilization or if our offer is attractive enough to them. Sometimes they're worried about the economy and interest rates and things like that.
There's not a lot of those out there, but it's a niche we've found that we're thankfully able to buy quality product at a yield somewhere usually in the midpoint between development yields and core yields. That once they finish leasing up, say, Atlanta, we're seeing the market cap rates are both sub five now in Atlanta, and we think we'll be in the low sixes on this project, assuming some carry, and then that we get it leased up. We like this opportunity because core acquisitions are, as you mentioned, just about impossible to get right now.
Marshall, do you think If you've done four of them in the past year, it sounds pretty good that you've been able to dig up. We should expect more of these, or was it just that you were able to get four, but what you're seeing in your markets right now doesn't give you hope that you can do an equal number of those this year?
I'd like to think we could do more. I don't know that we'll get as many dollars out as we have, but we're always looking at a few things, and a lot of them More don't line up than do. I'd be disappointed if we couldn't pull one or two off.
Okay. Brent, in your guidance, you have a $1 million placeholder for bad debt. Last year, you only had $500,000. Is there a reason that you're doubling it versus last year?
There's not a specific reason, Alex. We don't have anything identified that's driving that up. That number can, depending on the size of a tenant in any particular year. We had $1 million in 2016. We dropped to $500,000 last year. $250,000 a quarter is just, frankly, a rate that we're comfortable with. We certainly hope that it proves to be conservative, but you get a 10,000 sq ft guy versus 150,000 sq ft guy, and that number can move quite a bit. It's just a guidance budget number that we hope that we beat.
Okay. Thank you.
You're welcome.
Thank you.
Thank you. We'll go next to the line of Manny Korchman from Citi. Please go ahead.
Good morning, everyone. Brent, while I've got you, can you tell us more about your disposition plan and what assets and what markets you're thinking about selling?
Yeah. The $50 million that we have in guidance, we have a couple of projects earmarked, say, the $12 million for first quarter. That's a specific project that we view kind of non-core holding in Florida that we hope, if everything goes well, would close in the next couple of months. Throughout the rest of the year, we announced we closed the one small project in Houston that, I think around $3 million. Another potential small, we're a Houston building, later in the year. Beyond that, it's to be identified. I think one thing we've seen Marshall do over the last couple of years as he's had taken the reins is to be a little more forward-looking at potential dispositions and that type thing. We'll play that through the year.
Sometimes an opportunity just presents itself kind of unexpectedly, and it's something that we keep our ears open for. It's, I would say $15 million of that specifically identified, and then the rest is just, like I say, to be determined throughout the year.
Here's how I color these. Typically, as Brent Wood said, it's some service center-type projects that we acquired in the mid-1990s in Florida, then it's really the bottom of our portfolio. As you saw us kind of sell in Houston, it's typically our oldest buildings. We've got an older building in Phoenix, which we have some brokers helping us kind of opinion of values on. Again, when the market is this anxious for industrial product, we're trying to really come up with that batting order each quarter of what the best properties, based on where our leasing stands and where cap rates are, what we can push out the door.
Great. Maybe, could you give us an updated view on Mattress Firm as one of your biggest tenants and all the news around that company?
Yeah. We were frankly surprised as anyone else, I guess, when the news came out about their parent, some of the troubles they were having. They're in four locations with us. They're current in every location. No feedback at all from them in terms of any difficulty. From what I've read and seen, it's no more than what you guys have, I think there will be some consolidation of some of their retail stores as they aggressively bought other companies and had duplicative retail stores. In our locations, as long as they're still selling mattresses and have a need to distribute them, we're optimistic that they'll continue to remain current, continue to push mattresses out of our warehouse. We're aware of some of their parent difficulties, but that has not dripped down to them with us.
We'll keep an eye on it, but so far so good.
None of those leases roll this year either, is the other nice thing on those.
Thanks, guys.
Sure.
Thank you. We'll go next to the line of Eric Frankel with Green Street Advisors.
Thank you. Just to go over guidance again. Frank, can you specifically go over the difference between your GAAP annual NOI growth outlook and your average quarterly NOI growth outlook? My understanding with the new methodology is that the same property pool doesn't change starting at the beginning of the year.
It doesn't. I'll try to give a quick overview. Then if that doesn't cover it for you, we can talk offline so as not to bore everyone with the details. Basically, in our guidance of 2.3 on the straight line, that is a true year-to-date pool. One, I would say, very pleased to work with our peer group in coming with some common definitions that we'll all be implementing in 2018. I will say that none of that impacted our definition of same store as the consensus wound up being the way that we computed the metric. The 2.3% is simply property that we held. For that to be eligible for that pool, we had to have owned and operated that property January 1 of 2017 through basically December 31 of 2018, meaning it was held all of 2017 and all of 2018.
As a stabilized asset.
As a stabilized asset. What the average quarterly same PNOI growth does is each quarter we compute same store based on, for example, second quarter of this year, we will compute properties that were held, stabilized in our operating portfolio April 1 to June 30 of 2018 compared to April 1 of 2017 through June 30, 2017. The example I gave earlier of Park North, it's not in the year to date. Beginning in the second quarter, though, of this year, and for the following two quarters for the year, it will be in the quarterly same store because it was held quarter to quarter, year-over-year comparison. Obviously it won't be in the year to date because it wasn't a 1/1/2017 property. Again, I hope that covers it. The 3.3 is the average then of each individual quarter that we're projecting this year.
It's a simple average of those four, and that's more of a trailing metric and we think more of a relevant metric. Again, the example of Park North not being eligible for the year-to-date pool until 2019, and we will have owned it 23 months at that point.
Okay.
Have to get deeper into it later.
Yep, understood. It does sound like the pool changes, obviously, based on the way you described it, which is understandable. Just going to your guidance assumptions in more detailed fashion. Are there any planned tenant move-outs that are guiding your lower occupancy number versus today?
No, I would say no, there's no specific tenants. I think Marshall probably alluded to the Atlanta acquisition, for example, that had low occupancy rolled in. Part of the value-add, you have that nice upside and that true higher yield, but it comes along with that, typically a little hickey to your occupancy. We view it in the 95.2, 95.5% occupancy range. We're fully occupied, and that inherently means our lease percentage is 96, 97% if we're that occupied.
Typically when we do our budget, we'll tell our guys, even though they may not know of a specific vacancy, we'll say, almost don't paint yourself in a corner and assume nine tenants out of 10 tenants out of 10 renew. Pick here and there and assume some of those don't renew, just margin for error. I hope we're wrong again. The last few years have turned out this way, that we come budget occupancy almost a return to normalcy, and then the industrial market stayed strong and we finished the year closer to 96 when we budget 95 and down into the 94s in our different forms.
Okay. I'll jump back in the queue just quickly. Just one quick question on Houston. Obviously, re-leasing spreads were quite positive this quarter. Is that a reflection of rents growing quite rapidly, or is that just some older vintage leases that are rolling through?
Yes, good question. A little bit of it's the pool of leases that happen to roll through. We did have some older leases. I would also say Houston, the market was improving, and then Harvey came through, and it was not maybe the panacea we were hoping for, but it did improve the market. The Houston market is getting better. We saw it tightening, and then we had a nice fourth quarter. Also, always like our year to date or our annual numbers on re-leasing spreads are a little just a better sample pool than any one quarter. You can get some odd results.
Okay, thanks. I'll jump back in.
Sure. You're welcome.
Thank you. We'll go next to the line of Ki Bin Kim from SunTrust.
Thanks. Good morning, everyone.
Good morning.
Going back to the lease expiration question, you have about 4.1 million sq ft expiring and slightly under 6 million next year. For this year, how much of that 4.1 million is already kind of addressed by this point?
Probably we'll go through with our team. It really depends on when those, I guess I'm back to hesitating, when those leases roll. A lot of times tenants will be, depending the size of them, six to nine months out. We're pretty far into negotiations with an awful lot of those tenants, and typically, we'll end up renewing, year in and year out, about 70% of those. I don't know that we've really addressed those. We're probably trading paper with a lot of them and fairly close to leases, even with a number of them. I would expect us to renew about 70%. Right now, the good news, too, and some we won't renew simply because I'll use, I mentioned expansions earlier, kind of a number that surprised us in Charlotte or surprised me, and just in the last year, we've had 11 tenant expansions.
A lot of those tenants that won't renew, as our vice president over Charlotte said, his life has become a Rubik's cube of just trying to accommodate one tenant's growth and moving people around to accommodate them all. We're probably 70% of those will renew. A lot of the ones we won't renew, we'll be trying to accommodate a tenant expansion, I hope. We see the economy getting better really in 2018 than we saw in 2017.
Ki Bin, I always add to that, Keena here, who does a great job of keeping these numbers for us. We've leased 400,000 sq ft of that's down to 3.7, and occupancy stayed the same, that hasn't made its way into vacancy. 400,000 of that has been dealt with in January.
When you look at the reasons why tenants don't renew, I know your tenant retention ratio is already high. Anything to glean from there? Reasons why people are leaving.
Sometimes they need space, and we can't accommodate. No, there's no real pattern. Every once in a while, a tenant may just be in financial trouble, and I'm trying to think of a couple of examples out west where we chose to not renew tenants. There's one in Denver where they simply just left the state. I can't really point to a great pattern. Sometimes they've had credit issues, and we've chosen not to renew, and sometimes they leave the state. Every once in a while, which is what we like about building in our parks, a lot of times we just can't accommodate their growth.
It doesn't sound like a lot of, just because the rent's too high, leaving.
No, we haven't seen that. A lot of times people will A good problem to have will be a little bit in shock, and then they go look at the market. If our rents are market, which is where we try to be, or maybe a hair above, especially on a renewal, you can get away with it, then they stay. Probably, I had one of our brokers tell us, if a tenant doesn't have a tenant rep broker, it's like a warning sign that something must be wrong. They must have financial issues or not really be serious. When all of our customers have a tenant rep broker, they're educating them on the market pretty well too, which we appreciate. Makes it easier for us to move that tenant to market.
Unless they go to a B or C product, is probably the only way they would find less expensive space.
One last quick one. How much land do you guys have, developable square feet, in your balance sheet right now?
Let's see. Page nine on our supplement will give you a pretty good idea. Let's see. We're projecting, not that we would do that all immediately, but 5.9 million sq ft of developable land.
Okay. Thank you.
Sure. You're welcome.
Thank you. Our next question will come from Craig Mailman from KeyBanc Capital.
Hey, guys. Just a kind of follow-up on Ki Bin's question on your ability to push rent. It doesn't seem like you guys have gotten significant pushback. Are you getting more aggressive on the ground to try to see where the pressure point is with tenants this cycle, or I'm just kind of curious there. Also, if you could update us on what your average annual escalator is in place and versus what you guys are kind of getting today.
Yeah, we're probably similar. A lot of times that's usually set by the market too. Again, almost with that tenant rep broker. We're probably 2.5%-3% as an annual escalator. We're probably slightly below that in the portfolio, but most new deals will have that in it. I think our guy, usually our best guys know what we're proposing to a tenant and what their other options are and how our buildings compare, pro and con. We will push rents as hard as we can. Although given the choice, we'd rather keep the tenant and keep the FFO coming in and make the best deal we can and keep the tenant, rather than, the other side is you lose the tenant, and you may get a better rent, but if you have to wait six months, you've lost that income.
Almost net effective or over a present value period, you don't make that value up. We won't negotiate to the point to just purposefully lose a tenant, but we will push. That's kind of our guidance we give people. Push as hard as you can without torching a relationship, because a number of these customers we have in multiple locations too, and push as hard as you can without losing it and hoping the market's better and we get a little bit better rent six months from now. If we were a merchant builder and trying to flip a building, that's not a bad strategy. As a REIT, we think it's probably not the best alternative.
That's helpful. Just secondly, on the decision, I guess, to sell the building in World Houston, it sound like you may have another one behind that. Can you just give us some thoughts here on where the cap rates on what you're selling are relative to the product that EastGroup has built over the years, and also the decision there to give up a little bit of control in that park?
Sure. A good question, and how we looked at it, and this is maybe the downside of a phone call. If you looked at an aerial of World Houston, it was a building on the northeast corner, so not in, call it the center of the doughnut, but the edge of the doughnut. It was a mid-'90s construction, older building, a little more office in it than typical aggregate finish versus concrete tilt wall. We sold it as we would underwrite it. It was an original roof. As we would underwrite it was a sub-six, kind of mid-fives to high-fives cap rate. I hazard a guess, I'm trying to think what the latest cap rates in Houston were. I want to say per, I'm grabbing here from CBRE, we're around a five in Houston. Yeah.
I would think we would trade as low as anything that's traded with. Brent and I were just in Texas last week with several of the national brokers, and we're still hearing that the wall of capital for quality industrial is even greater this year. I would think our World Houston would trade as low. We could either set a low water mark or be right there at a five or sub-five on our developed product that's six years old.
Yeah. I would just add to that, Craig, the building we just sold, and the other one we said we might sell over the summer, a purchase option with a tenant. Those were both buildings that we originally purchased early on in our process of growing in the park, then that's over 10 years ago, 10, 12, 15 years ago. Then since then, obviously, we've developed a lot of class A premium buildings. These two, if you were to look at them, as Marshall said, just make sense to kind of prune out. We're not foregoing any really control in the park. Combined, they're both still in total less than 100,000 sq ft, and we still totally control and manage that association and architectural control committee of that park.
Just low hanging assets that we've got a good gain in, it just makes sense to upgrade the core quality there in the park.
Yeah. This year, Houston will be, for example, about 14% of our NOI. We're, at times, we've also said earlier when we were at 21%, we used more of a meat cleaver to kind of reduce our portfolio allocation to Houston, and this year, it'll be more, kind of the next couple of years, more of a scalpel. We're not opposed to strategically exiting a building here or there based on where it is within our park or where it fits within our Houston portfolio. We like that the market is improving, but just in terms of an allocation, we like that low teens, kind of lower double digits. At 14, we'd rather outgrow the problem than shrink to it, but we'll build a building now in Houston that'll finish up our West Road project. We'll sell one and maybe two or three later this year still.
Great. Thanks, guys.
Sure.
Yeah.
Thank you. We'll take our next question from the line of Blaine Heck from Wells Fargo. Please go ahead.
Hey, good morning. I appreciate your comments on looking at the big picture, and your point is well taken, but I did want to follow up on the topic of same-store. It looks like Houston performed better than expected in the fourth quarter at 9.8%. Are you guys expecting Houston to be above your average same-store NOI throughout 2018? If so, are there any regions that you think may do the opposite and drag the overall same-store number down in 2018?
I'll take the first half of that and maybe let Marshall talk bigger picture. Yeah, Houston was up, obviously strong fourth quarter. About half of that was the success of a property tax appeal, and we got to keep a portion of that because some of the space was vacant. It was north of 4%, just on the operating metric, positive if you took that out. Then for 2018, we're looking at about a 4%-4.1% budgeted same-store positive from Houston. It's actually above the average for the year. We're not seeing it as being a laggard. In terms of any other markets, I'll hand it to Marshall, but a lot of markets, 100% leased and you get one vacancy during the year and then you're 98, but that's a down 2018 compared to last year.
It just becomes very challenging to take the Houston benefit and then have it be just a total positive. Because again, it gets nerve-wracking when you get into 96.5% occupied projections. That's a tough spot to put yourself in at the beginning of the year.
Yeah, I'll agree with Brent. I think if you said kind of we went through market by market, thankfully, most of our markets are strong or improving. There's no specific market that really is. It's not a market, it's I'm kind of looking down our list. Those that go backwards is we've assumed a move-out of a large tenant, and it may or may not happen. We just didn't want to assume we renew every tenant in that market and things like that. Some of those larger leases are when we keep or lose tenants, or one of them that's negative this year, I'm looking, it's not a huge market for us, but Tucson, where we have a building under construction for our largest tenant. They're going to move out.
We've re-leased about 80% of their space, but that'll leave us with a vacancy there, and we were 100% leased for all of 2017. It's a negative number in Tucson. It's really a good opportunity to build, pre-lease the building for a tenant. There's some moving parts, and again, I hope we're being conservative on all of our assumptions. Maybe other than bad debt, I hope we're conservative on all of them, so.
Okay, that's fair. Maybe to just focus on one other market. There's a pretty high level of expirations coming in Tampa in 2018.
Yeah.
Can you just talk about that market a little bit and what your expectations might be for rent spreads? I think they lagged the overall portfolio a little bit this year, but do you see any improvement in that market as you look forward?
We like the Tampa market. I mean, a couple of soundbites, but I was surprised. I'll brag on our Eastern region team. We finished the year in Florida 99% leased, which has to be a record, if it's not, on almost 11 million sq ft. Our GAAP re-leasing spreads last year, again, we've talked about Tampa and looked at it. It's a little north of a 20% GAAP re-leasing spread. It's a strong market and doing well. It's not as strong within the state of Florida as probably in Orlando or Miami, but it's a solid third within the market, and really, I think it's good. I guess within all of their Tampa expirations, 14 tenants make up that. I had the same thing.
It jumped out at me and was talking to our team of what's going on with all of our expirations there, and I like that there's no one major tenant really driving it. It's 14 fairly evenly sized tenants that drive that 740,000 sq ft. I think, looking at our projections, we've renewed about portfolio average of those. One of our tenants, again, in our Oak Creek building, one of the large expirations that we'll lose is we relocated them into our new Oak Creek development. We'll get that space back, but that's one of our expirations, and one of the big spaces we'll get back this year. Like the market, and thankfully glad we're diversified, and it does have a lot rolling, but given 20% increases last year, if we can do that again, it's an opportunity, not a liability.
All right. Great. Thank you.
Thank you.
Thank you. We'll go next to the line of John Guinee from Stifel. Please go ahead.
Hello. John Guinee here. Thank you. I was just looking at your land portfolio, Marshall, and basically, over about 60% of it is Miami, Houston, or Fort Myers. Looks like Miami, you haven't started yet. It looks like your basis is a little over $500,000 an acre and about 36 sq ft buildable. Can you talk about what you're going to build out there? Then, talk about Fort Lauderdale, which looks like your basis is over $300,000 an acre, and what you're going to build there and how we should think about your land basis throughout your portfolio.
Okay. Sure. We'll try to move it, and today, everything we buy, we'll try to put in development as quickly as we can. One, it's a good time in the cycle, and at this point in the cycle, you're not stealing land from anybody, too. In Miami, we bought the 60 acres, and you're right, that's about roughly a quarter of our land holdings in terms of value today. On the site, and we're really where the intersection of County Line Road, we're in Dade County, with the other side of the road being Broward County, and the Florida Turnpike. Right there at that corner, the front seven acres is what we've designated, is really higher value than industrial.
We have that listed with a broker and are actually engaged in a dialogue of purchase and sale with a group that would buy a portion of that acreage. It'll probably be a mix of office or hotel or retail, It's probably worth twice what our industrial land is. We kind of viewed it as a way to buy the land from Churchill Downs and then chip away at our basis on the balance of the 54 acres. We're excited about the Miami market. It's 3.5% vacant, which reading their stats, it was 13 consecutive quarters with under 4% vacancy. We should be with our first building coming out of the ground in Miami, really late first quarter, early part of second quarter there, and that's when We've talked ourselves into it, that we can move quickly through that land.
If we sell the seven acres, you take a good bit of that basis away, and then once we start developing, that is a place where hopefully you could potentially get a pre-lease on some of those. We'll build five buildings, a little over 800,000 sq ft, and really build it as fast or as slow as the market allows us. Fort Myers is the other one where we've got a good piece of land there. It's actually two tracts, some of it along I-75 and another tract just off of I-75. We're really under lease. Built a building at SunCoast and looking at another building. It probably won't go as quickly as Miami will, but we're active on development in Fort Myers, and that's one of the $120 million in starts this year is we think our next building in Fort Myers.
With the economy doing well and tourism doing well there, the economy feels pretty good when you're in Fort Myers. Our other biggest land holding is Houston. A lot of that's at World Houston, and we just started development, again, for the first time since 2014, at West Road. We've chased a few pre-leases at World Houston and came in second on a large one not too long ago. I'm confident, even though we've got that inactive today, that hopefully we'll get the order from somebody, and we'll start working our way through that land in Houston. I'll give Brent and the team, like with El Paso that we sold last quarter, we've really made an effort to chip away at our land holdings where we didn't have immediate plans to develop to start selling that land here or there.
We have sold about 44 acres for a little over $9 million over the last couple of years of land that we didn't foresee a near-term need for. We're trying to chip away here or there. One of our challenges is, like with Tampa and Orlando, I'm actually concerned about running out of land. That's one of our biggest fears is having enough land because we think that's where we really create our value is if we can build to roughly an 8, kind of sticking with page nine of where our land schedule is, if cap rates are 5 and do $100 million and $120 million, we love that 300 basis point spread that the market's allowing right now.
Okay. No problem. Thank you very much. Talk to you in a month.
All right. Thanks, John.
Thank you. We'll go next to the line of Rich Anderson with Mizuho Securities. Please go ahead.
Thanks, good morning, thanks for taking questions. Brent, I'm sorry, I'm going to go back to this new disclosure on the quarterly average, and I appreciate it because it helps sort of explain things. I just want to make sure I understand. It does imply, putting aside the changing pool that you described, same-store pool, it would imply something like 1% same-store NOI growth in the fourth quarter. My question is the changing pool a powerful component such that that math is not accurate in terms of how the back half of the year could look based on your guidance as it exists today?
I'm not quite sure I follow how you get 1% for fourth quarter. I assume you're meaning of 2018. I would point out page seven of the supplemental, we broke that same number out this time. You see it for five quarters there listed, and you can see how it's not an exact science. Our same-store last year ranged on a straight line basis from two and a half and as high as 5.2 in the fourth quarter.
Right.
Again, the 3.3 would just be the simple average for the year of each individual quarterly pool. We haven't given any guidance or disclosed a quarter-by-quarter computation of that. It looks similar to what you see there, where it moves in a very similar range.
Okay. All right. I guess what I was doing is, putting aside the changing pool, if your starting point is 3.7, then your ending point would be something below the 2.3 average. That's the way I was thinking about it. Your point is taken. Good.
It makes sense. I was right where you were, Rich, at one point, where I even went into one of our accountants' office, and it's like I was comparing it to grades in school. You've made two 90s on a test and a 95, and you're making a 75 as your final grade. It's like, no, they don't tie. Each pool is almost a standalone pool.
Okay.
It can give you some odd metrics, it makes me feel better that you had the same thought I had.
Okay. Well, I'm happy to be less uninformed, I guess. Thanks for the explanation. The other question I have is on the G&A ramping down relative to 2017. Is there any specific color? I know it's a positive component to the story in terms of how you run your G&A, but what's happening there to see it trend down as much as it is in 2018?
Yeah. This was a bigger topic the first two quarters of last year. We changed from more of a look-back way of compensating executive officers to the ISS preferred forward-looking bright line test metrics.
Okay.
What that did for us early last year is that's a little different accounting. The bright line test metrics are where they're more measurable, so you more evenly recognize it over the year, which we did in 2017. We also had to wrap up the old compensation of the prior year for 2016 and early 2017, which was still a heavy number. That got lumpy early first half of next year. The 13.2, like we said, is a good run rate, and it's actually a pretty comparable number to 2016. 2017 is a little bit of an anomaly with that just change in the way we were setting our goals and the way those were accounted for.
Okay. Not quite apples to apples, I guess, is the point for relative to the 2017 number.
Right.
I recall that now, yes.
Yes.
Okay. Last question, just connecting the dots to an adjusted funds from operation number. You mentioned retaining 70% of your tenants, and we know the role and all that sort of stuff, items like straight-line rent and non-cash comp, do you have any color on those line items that help or assist in the AFFO calc?
As you see, we put information where you can do your own AFFO calculation, don't necessarily compute it, there are some moving parts, especially when you get into the capital side of it, when you get into roofs and other unexpected expenditures. I would just say that we don't see, where I talked about G&A, there's some variance between years, we don't see that much variance 2017 to 2018. We don't see it being an odd year with capital projects or anything like that. The straight-line rents, it will probably go down to some extent as we have not as much free rent and other things so that the variance isn't as much. We don't see anything or foresee anything that would be a big variance from one year over the other.
Okay. Fair enough.
Then hope the bottom line grows.
Okay, that's great. I appreciate it. Thanks very much.
Thank you. We'll go next to the line of Rob Simone from Evercore ISI.
Hey, guys. Thanks a lot for taking the question. Just a question from my end to round out the discussion on same-store. I may have missed it earlier, but is there any way or any possibility you guys could provide the range around that 2.7 on a cash basis?
Yeah, we've talked about that a lot since the feedback this time. The 2.7's the midpoint, we haven't put a pencil to it, but obviously, if you felt like we were going to come in to the higher end of the range, say 455, obviously, that would be higher than that. I don't want to put a specific number to it. I think you will see us next time change to We're actually guiding to a tenth of a % here in a very un-exact type metric. I think next time it's pretty safe to say you'll see us put more of a range concept, similar to what our peer group does, versus showing it this way. I hesitate to put that out there currently, since we just presented this information. I would simply say that is to the midpoint.
Okay, sure. Thanks, Brent. Understood. One other housekeeping question from me. Can you guys, and you touched on this earlier, obviously the theme of it's becoming harder and harder to acquire attractively or adequately priced land. In your $50 million of acquisition guidance, can you guys talk about what you have budgeted in that number? Break it down between operating properties and land. I ask that because if it's 100% land, for example, it could be, call it $0.07 or so dilutive given your disposition guidance. Just trying to break those two numbers down and understand what's embedded in your assumptions.
Yeah. For those, we would look towards operating properties or maybe value-add within that $50 million and not the land acquisitions. Again, especially right now, unless it's California or another Miami-type opportunity, typically our land is coming in smaller value, smaller parcels. It probably will end up being value-add given the state of the market. We may find a core acquisition here or there. We bought Broadmoor last year. We bought Shiloh the year before. We've done two in two years, and we may find a third or fourth one this year, that's where to fall.
Okay, great. Thanks, guys.
Sure.
Thank you. We'll take our final question from Eric Frankel from Green Street Advisors.
Thanks. Just a couple quick follow-ups here. One, it looks like your tenant improvement budget or your spend has increased pretty significantly versus priors in 2017. Can you explain that and whether that's something we should expect going forward in terms of that level of call it $354 per square foot?
That can vary quite a bit, depending on specific leases and not to be too general, but we still have maintained, and I'm looking at a chart here where we actually track it for many, many years. TI, I think we're still only at $0.70 total leasing costs with commission and TI combined per year of the lease, which is still very low. We can have some quarters, us giving our leasing volume from quarter-to-quarter, you can have a higher bump in any given quarter for us because a large single lease in a quarter would move that. On average, we've been in that $0.70-$0.80 range of total TI plus commission per year of lease, which is a pretty comfortable level for us.
Yeah. I think construction prices are rising a little bit, so there'll be some upward pressure on that. Per year of lease, it's been a remarkably consistent number over any long period of quarters.
Okay. We noticed obviously your acquisition of your partner's ownership share of your Santa Barbara portfolio. Do you have any long-term plans for that park? It's a little bit different in terms of its functionality versus the rest of your portfolio.
Good observation. I think it's four buildings that are two-story R&D buildings, really the lead in Santa Barbara, that we acquired in a portfolio in the 1990s, really a lead acquisition. Long-term, our partner was kind of managing some of his own personal life. We bought him out of two of the four buildings. That allowed us to really separate it into three separate parcels, basically. Again, probably not this year, but long, long term, I could see us 1031 our way out of one or two of those, because as you said, they're not dock-high industrial buildings. We'd love to grow in California, these are older two-story R&D buildings, it's typically not what we do. They function well, we'll take our time and exit them.
Okay. Thanks. Sorry, Brent, just a final follow-up. That tax rebate that you got in your Houston portfolio this year, can you articulate the actual dollar amount of that rebate?
It was a tax appeal. The net to us was, it was in the few hundred thousand dollar range. I don't have the exact number in front of me, $300,000. Again, that would have taken that nine-point something% down to four-point something%. We're very pleased that we won the appeal. Texas in general, Houston in particular, their taxes have pushed They brag about being a non-income for individuals, no income tax. Where they do get their money in Texas is via real property tax. The markets are strong in Texas. They've been pushing appraised values very hard, and we worked hard to recoup some of that, and it took the course of the year to get that. It was in that $300,000 range.
Okay. That's helpful. Thank you.
You're welcome.
Thank you. This does conclude the Q&A portion. I would like to turn it back over to our speakers for any closing remarks.
Thank you everyone for your time. Thank you for your interest in EastGroup. We're certainly available if anyone has follow-up questions this afternoon, and look forward to seeing you soon. Thank you.
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