Morning. Welcome to the EastGroup Properties fourth quarter 2016 earnings conference call. At this time, all participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star and one on your touch-tone phone. Please note this call may be recorded. I will be standing by if you should need any assistance. It's now my pleasure to turn the conference over to Mr. Marshall Loeb, President and CEO. Please go ahead, sir.
Good morning. Thanks for calling in for our fourth quarter 2016 conference call. As always, we appreciate your interest. Keith McKey, our CFO, and Brent Wood, Senior Vice President, are 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's 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 can 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 exceeded our guidance, achieving a 14.9% increase compared to fourth quarter last year. This marks 15 consecutive quarters of higher FFO per share as compared to the prior year's quarter. Per share FFO was the highest in the company's history in 2016, breaking the records we set in 2015 and 2014. Furthermore, our 2017 guidance is projected to break this record. The strength of the industrial market is demonstrated through a number of our metrics, such as another solid quarter of occupancy, leasing volumes, positive same-store NOI results, and continued positive 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 97.3% leased and 96.8% occupied. Occupancy has exceeded 95% for 14 consecutive quarters.
As market commentary, we've never achieved this level of occupancy for this long. Drilling into specific markets at December 31, a number of our major markets, including Orlando, Tampa, Charlotte, San Francisco, and Los Angeles, were each 98% leased or better. Houston, our largest market with over 5.9 million sq ft, down from over 6.8 million sq ft in January 2016, was 93% 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 also as a byproduct of the institutional control, it's largely focused on big box construction being over 300,000 sq ft. Rent spreads continued their positive trend for the 15th consecutive quarter on a GAAP basis. Overall, with 95% occupancy, strengthening markets, and disciplined new supply, we continue seeing upward pressure on rents.
Fourth quarter same property NOI flows on a cash and GAAP basis. Average quarterly occupancy was 96%, up 30 basis points from 2015. We expect same property results to remain positive going forward, though increases will continue to reflect rent growth as at 95%-96% occupied, we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion. We thought it appropriate for Brent to again join today's call. Brent is one of our three regional Senior Vice Presidents and is based in Houston with responsibility for EastGroup's Texas operations. Brent?
Good morning. Our Texas markets finished the year at a combined 95.2% leased, while our Houston portfolio finished the quarter at 93% leased, which was unchanged from the prior quarter. The Houston industrial market exhibited solid fundamentals at year-end. The market vacancy rate decreased 20 basis points to 5.1%, which is near a record low. There was 2.1 million sq ft of positive net absorption in the fourth quarter, which marked a 23rd consecutive quarter of positive absorption and raised the year-to-date total to 6.7 million sq ft. Developers continue to show restraint with the construction pipeline containing only 2.4 million sq ft of speculative space, which is down to a level not seen since 2011. Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market.
We have not been immune to this trend. For example, last year, we signed a total of 30 leases, 20 were new tenants, and only 10 were renewals. A more typical year would be the inverse of those results, two renewals to one new lease. Our activity so far this year has continued in this same manner. In January, we signed four new leases totaling 175,000 sq ft to two renewals totaling 63,000 sq ft. The good news is that there continues to be prospects in the market. Our early leasing efforts have already reduced our scheduled expirations for 2017 from its peak of 17.7% down to 12.8% as of January 31st.
With the number of known move-outs throughout the year, we will continue our focus on maintaining occupancy. As a result, we have been cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions for 2017 reflect occupancy reaching a low of 88% in third quarter before gradually rising to end the year at 92%. Looking into 2018, only 7% of our Houston portfolio is scheduled to expire, which is less than half of the square footage we faced in 2016 or 2017. The diversification of our development platform within Texas continues to produce results. Our 2017 potential development starts include additional phases to existing parks in Dallas and San Antonio, while the combined occupancy at year-end for the Texas markets, excluding Houston, was 97.1%. In summary, the fundamentals remain strong for the Texas markets outside of Houston. Marshall?
Thanks, Frank. 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. We develop in numerous states, cities, and submarkets. Finally, we target 150 basis point minimum projected investment return over market cap rates. At December 31, the projected return on our development pipeline was 7.6%, whereas we estimate the market cap rate for completed properties to be in the low to mid fives. During fourth quarter, we began construction on 2 100% leased buildings totaling 441,000 sq ft with a total investment of $34 million. These starts were in Orlando and Tucson.
Meanwhile, we transferred Parkview, a Dallas development totaling 276,000 sq ft into the portfolio, also at 100% leased. As of December 31st, our development pipeline consisted of 17 projects totaling 2.9 million sq ft with a projected cost of $235 million, which is 55% leased. This is a large development pipeline for EastGroup compared to recent history. While large in size, it includes 3 100% leased developments, as well as 3 construction complete projects we acquired. Removing the leasing risk on a portion of our pipeline and the construction risk on others should allow us to more quickly stabilize the properties, create incremental NOI, and ultimately move them into the portfolio. For 2017, we project development starts of approximately $95 million. What's gratifying about these starts is we can reach this level again in 2017 with no Houston starts, demonstrating the value of our diversified Sun Belt market strategy.
During the year, we closed 15 sales consisting of over 1,250,000 sq ft of operating properties and 25 acres of land, generating over $81 million in proceeds. 4 of the property sales were in Houston, representing 906,000 sq ft and $52 million in sales. Our asset recycling is an ongoing process. We're pleased with the 2016 closings and continually evaluate our options, including additional Houston sales. As we recycle capital and diversify, the portion of our NOI coming from Houston has declined while the quality of our Houston portfolio rose. Specifically, at the beginning of 2016, Houston represented over 20% of our NOI, with 3 properties in our development pipeline. Today, Houston represents roughly 15% of our 2017 projections, with nothing under development. Meanwhile, the average age of our Houston portfolio is now 8 years versus an average age of the dispositions of 38 years.
While the first half of 2016 was spent on dispositions, later in the year, we found a number of promising acquisitions. In fourth quarter, we closed on the 416,000 sq ft, two-building Jones Corporate Park in Las Vegas. Jones was completed in April of 2016 and is 50% leased. We've been seeking growth opportunities in South Florida for a number of years and closed two in November. First, we acquired the 134,000 sq ft Weston Commerce Park in Broward County, Florida for $14 million. Weston's presently 29% leased and is undergoing redevelopment. We also acquired 61 acres in North Dade County for $27 million. We're projecting 850,000 sq ft of development on the site, which has frontage along the Florida Turnpike, adjacent to the Calder Casino and immediately north of Hard Rock Stadium. Finally, we're excited to announce our entry into the Atlanta market.
Later this month, we plan to close the acquisition of a three-building, 238,000 sq ft, 100% leased property along Georgia 400 in North Central Atlanta. Keith will now review a variety of financial topics, including our updated 2017 guidance.
Good morning. FFO per share for the quarter increased 14.9% as compared to the same quarter last year. Our growth in FFO is from development, acquisitions, same property results, debt refinancing, and reduced G&A costs. FFO per share for the year increased 9.5% compared to 2015. One way we measure total return from operations is to add the FFO growth to the dividend yield to obtain a return to the shareholders. For 2016, net return was 13.9%, and the last five years has averaged 10.5%. Our outstanding bank debt was $192 million at year-end. With bank lines of $335 million, we had $143 million of capacity at December 31. Debt to total market cap was 31% at 12/31 compared to 36.4% last year. For the year, our interest and fixed charge coverage ratios were 4.8 times, an improvement from 4.4 last year.
The debt-to-EBITDA ratio was 6.6 for the year, adjusted debt to adjusted EBITDA was 6 times, and page 13 in the supplemental package shows the adjustments. In December, we paid our 148th consecutive quarterly cash distribution to common stockholders. This quarterly dividend of $0.62 per share equates to an annualized dividend of $2.48 per share. This was the company's 24th consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend to FFO payout ratio was 61% for the year, rental income from properties amounts to almost all of our revenues. Earnings per share for 2017 is estimated to be in the range of $1.78 to $1.88. FFO for 2017 is projected to be in the range of $4.21 to $4.31 per share. The midpoint of $4.26 per share represents an increase of 6% compared to 2016.
A few of the assumptions we used for the midpoint are occupancy rates are projected to average 94.9%. Same-property NOI increase of 0.6% for GAAP. We are adding a new disclosure for same store by showing same-store change without Houston. Without Houston, same-property PNOI growth is projected to be 3.2%. Total G&A up $12.3 million, with $4.8 million projected for the first quarter. The first quarter is lumpy because of the accounting for stock grants, which is consistent with prior years. G&A for the year is less than 2016, primarily due to transition costs in 2016 and capitalized development fees. Historically, the Compensation Committee preset performance metrics and total shareholder return targets and would evaluate the results and make awards in the first quarter of the following year.
The accounting resulted in expense in the short-term and long-term incentives beginning in the first quarter of the following year. That's why it was lumpy that we had. These incentives are restricted stock grants and not cash. The Compensation Committee anticipates approving a new plan in March for 2017 and following years that will be forward-looking and include bright line tests such as FFO per share as compared to target FFO per share. The new plan is projected to provide compensation similar to past years. We will start expensing estimated 2017 awards beginning in 2017, and as a result, 2017 will include some double counting that 2018 and following years will not have. After the plans are approved by the Compensation Committee, we will compute the impact on compensation expense and disclose the effect.
We estimate the double counting amount to be approximately $0.05 a share but point out that the final plan has not been approved. The $0.05 is a one-time catch-up number and will not be in a run rate for G&A. Guidance does not include the estimated $0.05 expense. In summary for 2017 guidance, we project strong results in FFO growth and same-property growth absent Houston, occupancy close to 95%, strong development starts, attractive debt financing, and lower G&A costs on a run rate basis. Marshall will make some final comments.
Thank you. 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. Overall, we're excited about our 2017 opportunities. From a holistic standpoint, our expectations are for another solid year. Ironically, as Houston's economic prospects begin turning after a two-plus year oil and gas downturn, our 2017 Houston NOI is projected to be lower than 2016. This may cause us to compare unfavorably in any given quarter or two on certain metrics. That said, focus on our bottom line. We're the sum of our parts, and we expect to finish the year with higher FFO, a strong balance sheet, and a higher-quality portfolio. We'd now like to open it up for questions.
Great, thank you. If you would like to ask your question, please press star and one on your touch-tone telephone. You may remove yourself from the queue by pressing the pound key. In the interest of time, we ask that you limit your number of questions to two. If you'd like to ask additional questions, please reenter the queue by pressing star and one. We'll take our first question from Manny Korchman with Citi. Please go ahead. Your line is open.
Hey, good morning, guys. Marshall, just as you think about your acquisitions and entering new markets, how do you think about that opportunity of going into a market where you aren't right now and dealing with competition with people that are already on the ground there?
Got you. Good morning. Good question. Probably several ways we think about it. One, we really aren't looking at entering that many new markets. Probably Atlanta, obviously, is an exception. What appealed to us about Atlanta is it's a major U.S. industrial market. It really fits within our map. It's a major Sunbelt market. We thought, given the size of the market, I won't say it's easy, but with some patience and some optimism, we could reach critical mass there in time. I would compare it a lot to what you see us having done in Dallas the last handful of years or so. The other appeal of Atlanta to us, besides that we could get to critical mass, it's recovered a little bit later in the cycle compared to some other markets.
We think Atlanta's maybe a slightly earlier inning than some of, say, the California or some other markets. Many of us, because of its proximity, we're familiar with Atlanta. We'd all spent time in Atlanta in some form or fashion, and it goes back a little bit. John Coleman, who runs the eastern region for us, worked in industrial in Atlanta for about 14 years when it was Weeks. It is part of Duke now. John Coleman knows Atlanta and has a lot of relationships, we really felt like it's a market we should have a good reasoning of either why we're not there, because it was so much within our map, as to why we were there.
He and I started spending time there, maybe, gosh, a year and a half ago, John spent more time there than me and Nick Jones, just kind of trying to figure out what submarkets would we be interested in and which ones wouldn't. We kind of like, if it's on a map, kind of that, call it 10:00 o'clock to 2:00 o'clock, what locals would call the Golden Triangle. We're right at 12:00 o'clock is where this acquisition is. We think it's a good market. We can get critical mass, get some attractive returns while diversifying our portfolio. I never say never, but I would be surprised or maybe pleasantly surprised if you heard us announce another new market later this year or something that quickly. We've spent some time looking at Atlanta, that's really our thinking on it.
Great. Turning to Houston, because we can't avoid that. How much of your guidance is conservative with the decline next year, and how much of it is sort of known move-outs that are happening and they'll get refilled, but probably won't be in 2017, probably more of a 2018 event?
Hi, Manny. It is Groundhog Day after all, the Houston question is very appropriate. Similar to last year, we have a number of known move-outs. It's heavily weighted to the first half of the year. 80% of our remaining rollover is in the first half of the year, 20% is in the second half. With that, we just have to budget the assumptions. There's some guys that we know are going to move out, some we hope to renew. Last year, this time, we had tenants that told us they were going to vacate. They eventually didn't vacate. As I mentioned in my remarks, what we're seeing in Houston, there's activity in the market, but there are tenants downsizing, especially in the logistics arena. Those type businesses are downsizing for slower business. It's just creating some movement, and we're having to deal with that.
2016 was a pretty heavy rollover year for us. 2017, they're both in that started with 17% range. As I mentioned, looking out to 2018, we only have 7%. We view this year continuing to block and tackle and operate and perform, and then hopefully things tick up and get stronger as we get into the second half of the year into next year.
Thanks, guys.
Thank you. Next we'll move to Craig Mailman with KeyBanc Capital Markets. Please go ahead. Your line is open.
Hey, guys. Maybe just stay on Houston real quick. Brent, it was helpful for you to give us kind of where occupancy troughs, then where you guys think it'll rebound there. Could you just maybe give a little bit more color around maybe who are some of the bigger known move-outs? Is there anything chunkier? Is it several smaller guys? What gives you guys the confidence to drop almost 500 basis points, then end 4Q up another 400? It seems like a big swing.
Yeah. Craig, I would point out that when I say this year's going to be similar to last year, we had the same swing in 2016. We started the year at 97%, 98% in 2016. We finished at 93%. We had projected to go lower, thankfully, we beat our earlier assumptions, we're basically forecasting the same thing this year. It's a very similar swing. We're just starting from a lower threshold. That really results in that number. There are a couple of the potential move-outs that would be six-digit type move-outs, we don't want to get into specific tenant names. It's fluid. We might keep a tenant. The tenant that says they're going to vacate might not vacate. I will say, like I said, it's heavy weighted to the first half of the year with 80%.
That's why we show third quarter being the low point before we hopefully execute more on leasing and rebound back in that low 90s at year-end. Like I say, in 2018, we have a very low rollover year. There's optimism in the market that oil and gas-related tenants are feeling better. The new regime and changes is being viewed positively within those type businesses in Houston. Oil's held steady. The rig rate count's up. Oil and gas companies are hiring. Big producers are spending money again. The signs are there. People are feeling better. Home sales for 2016 broke a sales record. Residential housing's down to 3.2 months of inventory. Like I said, we've just got our own internal work to do with rollover, and then, like I say, we hope things are picking up toward the latter half of the year.
Just I would add, Craig, I would add just to Brent's comment, one of the things that makes me feel better about Houston, it's an interesting market of some of the negative sentiment you hear, but when we've had vacancy, they've done a nice job of, Brent and Kevin, there've been tenants that have been in line and moved back in. The rent may be a little bit lower than we were collecting before. Rents have come down, but it's stayed active. As Brent said, usually we're call it 70% renewals, 30% new leasing type thing, and it's flipped in Houston, the ratios have. I've been pleasantly impressed, surprised that whenever we have vacancy, it's still an active market and people show up and want the space.
I like, as we mentioned also too, that our average age in Houston for almost 6 million sq ft is only 8 years. We like our portfolio where it sits today, and we just will weather through this, and thankfully the other markets are doing well.
What's the mark to mark you guys have embedded for Houston on the expiration schedule this year?
We've learned that it gets very tricky to do. Obviously, if you do renewals, it's going to be better numbers than if the space vacates and you have to go to the open market. The vacancy where it puts you subject to having to compete, you get more into the free rent incentives. The obvious goal is to try to renew everyone we can. I would say, quarter-to-quarter, just like last quarter, we had double-digits down for EastGroup, and this quarter we were very small down. I would say globally for the market, if you're having to compete with a vacancy, especially in the north submarket, you may be in that 10%-15% down. Obviously, if you have a renewal, you won't be pushed that far.
Other submarkets in the city are stronger than that, and I would say are probably single-digit to closer to flat. There is a little bit of diversification of that within the market as a whole. I think our numbers could be a little choppy as it goes through the year internally for us, just depending on what space moves and what the prior history of that space was. On the whole, I think you'd see somewhere around 10% for the market up north.
Just one quick one for Keith. Helpful on the breakdown of the extra $0.05, just curious, why not even just put an estimate in initial guidance? It seems like you guys are going to have to bring numbers down when the accountants figure out the full impact.
We really don't know all the numbers yet, hopefully the $0.05 will be close to the number. We were hesitant to put it out initially, thought we ought to put something out to give some kind of range. Hopefully, in a month, our goal would be to give you another roughly press release that can firm the numbers up. We wanted to avoid surprising everybody, that's as Keith said, we debated it and put the footnote in and realized it may cause some confusion, we didn't want to surprise you. Hopefully, here in a month, it's a one-time event. We'll put out a new press release that'll have the impact. Again, I would emphasize our officer salaries, on an annual basis, won't really change. The targets are pretty similar. It's just a different methodology, which leads to a different accounting.
You may recall, one of our proxy reviewers wasn't protesting the amount of the payment, but our methodology a year ago, and so that's what precipitated this change.
Just to add, we were, for 2016, 5.2% of G&A cost to revenue, one of the lowest in the all of REITs. Our G&A costs have always been low, and that's what we will continue to try to do.
Great. Thanks, guys.
Welcome.
Thank you. Next, we'll move to John Guinee with Stifel. Please go ahead. Your line is open.
Great. Okay. Just to make sure that we understand the math, it looks to us as if you've got essentially mid threes on same store NOI, excluding Houston, but 0.6 with Houston. If you do that math and you assume that Houston's about 17% of your portfolio, your entire company, you're assuming about a 15% decrease in same store NOI for Houston only?
That's a good question, Houston is about more like 15%. Again, this year, if you looked at our NOI and you said on an annual basis. Again, that's what we were pleased to see from in the low 20s and rising to now this year, it's down to about 15%, and we expect it to be less than that probably in 2018, although we're also optimistic the market turns, and we'll start developing there. Say 15%, probably answering your question down is more like a 10% down roughly than 15.
Okay. Then what you're going to do is you're going to lose about 300,000 sq ft of occupancy on a 6 million sq ft portfolio, then hopefully lease back about 240,000 sq ft to go full cycle from 93%, to 88%, to 92%. Those are the basic numbers on Houston. Is that fair to say?
Yeah, John, I think so, yes.
Okay. If we just want to bake in $0.05 of G&A into the guidance, we should probably say the G&A will be roughly $14 million for 2017, if we just want to all save ourselves some time. Is that fair?
That's correct.
Okay. If I look at the, say, the $4.02 in FFO for 2016, if we assume the high end of G&A, we're at $4.21 G&A for 2017 with zero same-store NOI. It looks to us like about half of your FFO growth could be attributable to debt cost reduction and half of your FFO growth attributable to accretive development. Is that a rough way to look at it? Have you done that math, Keith?
Not to those percentages, also we've got acquisitions that came in also that'll above our cost of capital that will add to it.
Got you. Okay, thanks a lot.
We did have some good G&A, some debt refinancing that helped us out on interest expense.
Oh, no. Our quick calculation was you saved about $0.10 or you generated about $0.10 in FFO from your debt cost reduction. That sound right?
I have not computed that number. We had a good year in 2016 reducing interest cost.
Okay, great. Thank you.
Thank you. Next we'll move to Alexander Goldfarb with Sandler O'Neill. Please go ahead. Your line is open.
Thank you. Good morning down there. Just a few questions. Keith, just wrapping up on the comp. Is the $0.05, is that ratable through the year or are you guys taking a catch-up hit, let's say, in the first quarter or something like that?
It'll be in the, what, second, third, and fourth quarter.
Okay.
Maybe some first quarter. Little bit in the first quarter maybe. It'll be over the year.
Okay. Just so we understand. Before the old system was sort of expensing, in hindsight, the new one is expensing prospectively. Basically, the overlap in 2017 is the normal expensing of whatever was paid over the past year, plus payment on the go forward to the next year. Is that right?
Yes.
Okay. On the recycling activity, it looks like your dispositions are lower for 2017 than they were for 2016. Last year, you guys spoke about sort of getting religion and the need to be more active on the recycling front. Just sort of curious why the drop-off in dispositions versus last year.
Sure. Last year was an abnormally big year for us, as you pointed out, looking back historically. We're targeting, we picked the number $40 million, and part of that is driven that the Houston market for dispositions was pretty strong until about summer, and then we saw it slow down and buyers were much more selective, that the private market kind of matched the public market mood mid-year. We'll still try to sell some Houston assets, and I'm curious how much optimism may seep into the Houston market towards the end, the real estate market by the end of the year, based on what we're seeing in oil and gas today. We may sell some older assets in Houston and Dallas, and then the other markets we've kind of earmarked.
We've got some service center properties down in Florida and things like that we're working through pricing and getting an idea. I'd say we'll be, I don't know if it's getting the religion or not getting the religion, or hopefully we've always been faithful, but we would like to have a recycling program and maybe $80-plus million. Brent Wood and his team, they all did a good job selling a lot last year. That may be a more normal run rate, maybe about what we forecasted, $40 million-$50 million on a given year this year.
Just final question. Atlanta. For years, it seemed like a market that you guys were hesitant on, and it seemed like just the amount of supply and the inability to get pricing power kept you away from there. What has changed? Is the market just so built up that now you're seeing pricing power, or is it that the type of product that you think will actually sustain pricing power is now, there's a big enough opportunity for you guys to acquire there?
A little of both. We were looking back, Atlanta has had nice rent growth over the last 10 years. It went down like every market during the downturn, but Atlanta rents are higher today than they were 10 years ago. What we also like about Atlanta, we'll admit, it's a competitive market, but if you ask the guys in the field, I don't know any markets we're in that don't feel extremely competitive. It's another competitive market we're in. The other things we like, you're right, when we probably way back when looked at Atlanta, it was about two and a half million people. Now it's 6 million people. I was shocked when we sat in some of the brokers' offices and said, "What's for sale?" We like to develop, where can we find good infill sites? There's simply very few.
That's what we're seeing. Rents rose 7% last year in Atlanta as a market. We see it being much more of an infill market than it was probably when maybe you first started covering us, for example, or earlier. We also like our other markets. Our peers are typically on the edge of town building big box. That's where you can place a lot of dollars, and that's where demand has been a lot with e-commerce and Fortune 1,000-type companies. There's not as many people building shallow bay industrial, which is what we're acquiring. What we said to our investment committee, the buildings we're buying look just like any other EastGroup building. They happen to be in Atlanta. That's why we're excited. I think it's going to be a good path of future growth for us.
We'll be patient there, but a market that size, there's always activity, and we think we figured out exactly where we more or less want to be over time there.
Okay. Thank you, Marshall.
You're welcome.
Thank you. Next we'll move to Jamie Feldman with Bank of America Merrill Lynch. Please go ahead. Your line is open.
Great. Thank you. Good morning.
Good morning.
I guess just to understand in terms of your guidance, how do you guys approach expirations? If there's an expiration and it's not leased at this point, are you assuming vacancy across the board, not just Houston? I'm just trying to figure out how much conservatism is baked in.
It's really space by space, really kind of bubbles up from the field. What they're feeling as to odds of renewals or not. Probably the only time I would say we assume probably some vacancy. You get the leases back or the budgets back and some of the guys will have budgeted 100% occupancy or give yourself a little bit of room. One of our phrases is we have budgets and we have goals. Our budget, you hate the budget. Last year, high 95%-96% occupancy the last couple of years. That's hard to sustain. I hope in January, we're 30 basis ahead of our budget. We're a little over 96% occupied. That's a little bit, it's space by space in the field, and then we try to kind of blend in a mix of conservatism with that.
There's another element of our occupancy, just to point out to people, if this is helpful. When we bought these newly developed projects, being The Jones in Las Vegas and Park North in Fort Worth. They're bigger projects than we typically would have built, where we build a building or two at a time. Fort Worth was four buildings. The accounting of it is, it rolls into our portfolio upon a year of when the original developer got their CO. We don't have those in our development pipeline for our budget for the full year. We need to get them leased, and that's a key part of hitting our numbers. We expect them to roll into our portfolio at some lower numbers because Park North in Fort Worth, Dallas Fort Worth anniversary's in, I guess this month now. We're into February.
Jones will be April, even though we acquired both of them in the back half of last year. Some of our pressure on occupancy comes in that we bought other people's vacancy, and it rolls into our portfolio reasonably quickly.
Okay. Are you saying into the same-store portfolio or just the portfolio?
Into our portfolio occupancy. It'll roll out of our development pipeline, may be a better way to say it.
Okay. Still not in same store.
Not same store. Even on same store, I'm taking you off topic. Just reading some of the pieces this morning where people have pushed on Houston same-store NOI being low, and it is. Houston's challenging. We think it's turning, but it's challenging. I would also add, if you think back a year ago, we sold over 900,000 sq ft of older buildings, and we picked those because they were well-leased with lease terms. Everything we sold was 100% leased. If we hadn't sold anything, that was not done that hypothetical calculation. Our same-store Houston NOI would be higher, I'd say by materially higher this year. We think we did the right thing for shareholders by exiting those. They were older buildings. The cap rates were attractive, and we sold them.
We also, one byproduct is shot ourselves in the foot on same-store NOI this year a little bit.
Okay. Then just taking a step back. Since the election, and all the trade talk, just across your markets, maybe talking to your leasing team, any interesting activity from tenants in terms of preparing for changes or thoughts on how they may change, or things may change, or changes in leasing activity? Just any anecdotes you guys could pass along to see how things look in your world?
I'll say maybe on the two parts. I'll let Brent, who's in the field, chime in. The two impacts we saw that were positive were, one, we were more active in December than we typically were. Usually, the brokers are gearing down for the holidays, or the tenants or the attorneys. Our leasing activity was abnormally high in December. We just had a leasing call with our team, and we actually had more expansion talk than I've heard in the not quite two years I've been here. As we were going through space by space, we had more tenants. Which to me, that's the most positive sign that people's businesses are doing well. Keith and I met with one of our bank line participants recently, and they were talking about their costs coming down with less regulation.
That doesn't mean interest rates are coming down, but at least people seem to be a little bit optimistic about less regulation. We're hopeful with an average tenant size of 25,000 sq ft. A lot of our local and regional tenants haven't had the access to credit coming out of this downturn they typically had. We want to be optimists, but those are some positive things we could see. I'd also say one of our build-to-suits was with our manufacturer in northern Mexico, there on the border, that stores in Tucson. I don't know how they would view it today. I'm glad we got that lease signed when we did. That was signed after the election, actually, too. Brent, what all did I?
Yeah, I would say that's spot on. It's hard to say if the activity that we did see uptick fourth quarter into this year, did it have anything to do with post-election results? Who knows? I think ultimately decisions are still based on the tenant's bottom line. How is their business doing? If it's doing better, they want to grow.
I think there's a general optimism, as I mentioned, particularly in Houston. You've got Tillerson, the former ExxonMobil, who's in the cabinet. You've got Rick Perry, the former Texas governor that's in the cabinet heading up Department of Energy. There's a general optimism amongst that sector that it's going to be less bureaucratic, a little more free to move about and do business. These companies have been spending a lot of money. There's been $27 billion of land acquired by these oil producers out in West Texas in the Permian Basin, and they're not going to spend that sort of money and just sit idle on it for a long period of time. The biggest news lately was ExxonMobil purchasing the 275,000 acres for $6.6 billion. As all that eventually ratchets up a notch or two, again, that's going to produce activity within Houston.
All that's viewed very favorably.
Okay, great. Would you say, are there certain markets, I know you mentioned Houston, obviously, but across your other markets that the expansion talk has been more focused on, or is it across the board?
It's really been a little bit, thankfully, across the board. I know we've got one in process in the Bay Area, then we had a few in Florida. It's been a nice mix. I think John Coleman would tell you the eastern region, we kid, we've said it's a Goldilocks environment, and that it hasn't been too hot, but certainly not cold. If you could push a button and keep this environment absent maybe where you said where Houston is today, we would push this button for the next however many years you want to add.
Okay. All right, great. Thank you.
You're welcome.
Thank you. Next we'll move to Blaine Heck with Wells Fargo. Please go ahead. Your line is open.
Thanks. Good morning. Marshall, on the property acquisitions during the quarter, they seemed fully priced at $100 a square foot and a little over, especially given that they're not yet leased. I guess, can you talk about the opportunity you see there and whether we should expect more of this type of deal where there's a little bit more work to do after acquisition versus purchasing kind of stabilized properties?
Sure. Let me try and answer them in order. Probably more, and the reason being, I wouldn't view it so much a change in strategy, is that when it's a fully leased building and fully marketed, we do compete on those, and we usually compete pretty badly. I'll give Brent credit. One was his, and then the one in Las Vegas were both off-market. To me, it felt more like you're trying to source acquisitions and a key on a key ring that finally works. It were both. Each case, it were developers who with intentions to build them, lease them up, and sell, and we were able to go to them and say, "You can make some of the money.
You're a little bit in the money on your promote with your financial partner, but you're taking some risk off the table, and we'll acquire it." In each case, I'm trying to remember the specific numbers, but in, say, in Broward County, and both were pricey on a per square foot, but that's really a more of a reflection, I would say of rents. In Broward County, it was on the market. The building needs to be reworked. There's no front doors or sidewalks literally out in front of where the vacancy is, that we're putting in and painting the building and a number of things. We think we can earn a low six yield, then once it's redeveloped and fully leased, probably mid-4 type cap rate for South Florida. In Las Vegas, about the same yield. It's a brand-new building.
It's more of a leasing and TI project. When that's completed, it would've been, we'll earn a little north of a six, call it a 6.2, and it would probably trade on the market at about a 5.3-5.4 cap rate. You're right, a higher price per square foot, but it's not as high a yield as, say, our development pipeline. Again, we're not taking the risk of carrying the land and zoning and all the things. It's above a core yield but below a true development yield. I don't know how many of those are out there that we'll see, but if we could find another opportunity or things like that, we like that model, and really the task is on us now. We've got to go lease this vacancy we've got.
On a couple of those situations, just as a follow-up, Park North and Jones Corporate Park. Marshall, you were talking about how those will come into the operating portfolio early this year. Can you just give a little bit of an update on the leasing on those properties and whether you think you can get that leased up by the time they come into the portfolio, or if those are going to be a little bit of a drag on occupancy?
Sure. Brent, you want to talk about Park North and follow up?
Sure. Yeah, Park North, you kind of touched up on the others. Just back to the cost for a moment. We bought those four buildings for $32 million, and we show a projected all-in lease up with commissions and TI at $35 million. For Park North, that's just $78-$79 a foot. Today, I think that's pretty reflective of replacement cost, actually. We're at 42% leased. We have a couple of leases out for review in the 30,000-35,000 sq ft range. Meeting out for review means they're not signed, but obviously headed and trending in the right direction. It's another submarket where we've seen activity pick up in the last 90 days or so. That submarket is not as deep as, say, if you're right around DFW Airport or those type things. The activity may very well be a little more choppy.
I think we'll have a high success rate with the groups that look. We just may have fewer groups that do look. When we bought it, even though we knew that it would roll in not fully leased, but we just looked at it that from our ownership period, if we could lease it up within a 12-month period, within that type of frame, I think Park North is a mid-six yield if we hit our pro formas. Again, we feel like it's good value and kind of a jumpstart. We wanted to develop in that submarket, couldn't find an attractive land piece.
We viewed it as we were able to fast-forward 12 months and jump right into a nice a few more buildings than we might would've done, but a very nice project. On outline, you're right. They will both, and Park North will roll in this month, and Jones in April. They will be a drag on our portfolio occupancy. Again, that's maybe why we're sub 95% projected this year. On Jones, it's two buildings. The back building is thankfully the one that's fully leased. It leaves us the front building, our 208,000 feet, probably will be, if we get lucky, one tenant, but one to three tenants ultimately take it. We've got prospects and people we're talking to. We closed just this, right before the holidays, closed in November.
Again, it was busier this year, but it's still not a normal month in December, so it'll be a little bit of a drag. We're optimistic, and we've got people we're talking to. Whether those get signed and in by April, it would probably take a lot of luck today now that we're in February. We feel good about both assets long term.
Great. Lastly, quick, Keith, can you talk about the balance sheet strategy? You guys are now at 5.8 times debt to EBITDA. How should we expect that to trend during the year, given that it looks like you'll be a net investor during the year given between acquisitions and development spend versus dispositions in equity. Do you think the NOI coming online from development is going to be enough to keep that ratio steady, or should we expect it to creep up a little bit?
35% is kind of our goal to be in. When the stock market's good, we like to drift down around 30%. I would think somewhere between the 30% and 35% range. We looked at our debt to total market cap, and our debt to EBITDA projected at the end of the year is pretty consistent with where we are today. You're right, we kind of looked at that through the net investments, and the spend is always tricky on development. Our metrics are pretty consistent this year. I think our fixed charge actually improves, and our other metrics were pretty consistent for what we were showing at year-end.
Okay, great. Thanks for the time, guys.
You're welcome.
Thank you. We'll take our next question from Brad Burke with Goldman Sachs. Please go ahead.
Hey, good morning, guys. Just a question on the 3.2% same-store growth ex-Houston. You're currently sitting with occupancy that's pushing 98% ex-Houston. Just wanted to know if you could give us the approximate occupancy and rent growth building blocks that you used to get to that over 3% growth number excluding Houston.
That's excluding Houston on the 3.2%.
That's right.
Houston is, we're projecting to be down about 10% on same store. If you take that out, most of our other, except for Santa Barbara, are doing real well. We've got a little dip in same store there, but the rest of the markets are doing really good.
I'm just trying to understand for the excluding Houston with the 3.2%, is there any assumption for occupancy growth in that number, or is it entirely just rent growth on lease roll?
Okay. I see what you're talking about. It's pretty much rent growth because our occupancy backs up a little bit this year. It's pretty much rent growth. Too, another factor, we move our same store pool each quarter. I know some of our peers do it on an annual basis, that mix changes. With occupancy trending down, it's rent growth.
Okay. On the 100 acres of land that you bought for development in the quarter, just hoping you could talk about the attractiveness of buying new land versus just activating the 500 or so acres of undeveloped land currently on the balance sheet.
Sure. Good question. What we bought this quarter, I'm excited. As I mentioned, we've been looking for years in South Florida and have had a hard time finding it and love for you to see it sometime when you're there. We're right on the Florida Turnpike. County Line Road is our northern boundary. Churchill Downs was the seller. We're just north of Orange Bowl, where the Dolphins play. That's 61 of the 100 acres. We'll spend this year really getting our infrastructure in place. It was horse stables, so that's what it is today. We've got to put the roads in, rework the retention, do some things. We're not projecting a start at Gateway, as we've named it, in Miami this year. With a little bit of luck, we're projecting to start first quarter 2018.
With some luck, we could start fourth quarter 2017. We're excited about where that could lead us. The other, Creekview, Brent bought. It's a project we've got Northeast Dallas, Little Elm, which is a fast-growing area, land-constrained. The sellers had some additional land. It was earmarked for retail. It's got frontage along 121 there, the tollway. We were able to acquire that really as the next phase of Creekview. The 22 acres in Tucson is really the 100%. It's an existing tenant. Our first tenant in Tucson outgrew their space, came to us. We signed a new 15-year lease with them. As part of that, we acquired the land when they signed the lease. That was the last piece of the land we acquired.
All right, I appreciate it.
Sure.
Thank you. Next, we'll move to Sumit Sharma with Morgan Stanley. Please go ahead. Your line is open.
Thank you. Keith or Marshall, anyone. Regarding the acquisitions, we find it kind of interesting. I know that you've longstanding been very
Discipline with regards to acquisitions, and you have a very stringent criteria. You focus on near-term value add opportunities. Just trying to reconcile that against the raise in acquisition volume year-over-year, while the rest of your peers are actually seeing acquisitions are still muted. Just want to get a sense of whether you're seeing a lot more specific to your pipeline, or is there opportunities opening up in the market that are greater?
I don't know if it was a change so much, and Keith chime in, as was more just maybe it was finding the opportunities really in terms of true operating property acquisitions. We had one last year, which was south side of Jacksonville, a sub-market we've been in for 20-plus years. We like that and are excited about Flagler. Atlanta will be really a core. It's 100% leased core acquisitions. The other ones were value add, and it was a little bit of a mix of probably starting mid-year, we felt like we were really able to, with the stock price that got closer to our NAV, and we found two of the three were off-market opportunities that we were able to really reach an agreement on pricing.
If we miss our Really, we've got $60 million in acquisitions this year, $40 million that's kind of blind. If we miss it, I would be fine with that. We're out looking for acquisitions. At least to me, it doesn't have the sense of a change of strategy so much as finding an opportunity or finding developers where we could get quality assets, where we could add a little bit of value, and they were willing to make that trade. I don't know that we changed strategy so much as we're able to get two or three hits in a row.
Thank you for the color. Shifting to the compensation strategy question. I really appreciate everything you've said about the $0.05 and how they amortize across the year. I guess what I am struggling with, and where you could really help us out, is understanding what the effective change in measurement was. You hinted on saying that you are moving from a shareholder-based return methodology to a bright line FFO target. Two questions related to that. What is the change essentially from a, what are your performance measures now, if you can sort of walk us through that? Secondly, why?
The performance measures are basically staying the same. What the Compensation Committee did was set preset calculations. You meet target FFO of this number. You are at the target if you go high at this. They looked at other debt metrics on the balance sheet and various metrics. The Compensation Committee made the decision of how much we should get based on all these metrics. Well, I guess the flavor of the day is that you should have bright line tests. If FFO meets your target 421 or whatever it is, you get target. If you go X above that, you get high, if you go X below that.
That bright line test in the accounting literature says if you have got subjective measurements, which the Compensation Committee was, it was subjective, but it was taking into account all these metrics, then you do not record that expense until you decide how much it is. On bright line tests, you do that, you estimate what it is all during the year, you guess at it on your call.
Understood. Okay.
It was really driven by one of the proxy review groups had recommended a vote against us based on the way we were doing it. Thanks to Keith and I spent two weeks on the phone calling institutional shareholders, explaining the same thing, asking. We did get a passing vote, we said we can't put people in that box again in 2017. It precipitated a change by our Compensation Committee that they're working through now, we expect to get resolved in March, then we'll give an update. Sorry for the confusion. It's not really a change in our pay, as Keith said, a change in our methodology, it was really probably more of a reaction to external environment than something we really initiated. Not that we're opposed to it. It just makes it complicated this year.
If you call me back, I'll really tell you what I think about it.
I will do that. I think it's got a lot to do with accounting.
I'll try to take the four-letter words out of Keith's response.
Okay. One last question. From a supply chain perspective, how does Atlanta compare to other kind of supply chain nodes like Joliet or Dallas, which is one of your markets? I guess, what drives growth in light industrial in Atlanta versus, let's say, any of your other kind of core markets today?
In Atlanta, what we're seeing is, again, most of our peers are Clayton County South. Most of our peers are building big boxes south of town. There's a few groups, but they're more local regional groups building small box. It's really driven by strength of the local economy and jobs creation. One interesting thing, kind of I-85 kind of northeast side of town is probably the traditional distribution market. We've looked at it. I-75 Northwest is a little more R&D, a little more office. Both of these are kind of that I'm kind of thinking 10 o'clock is I-75, I-85, 2:00 o'clock, where the residential growth is. Up Georgia 400, where this acquisition is, kind of the oddity with fiber optics. There's a lot of financially driven companies and check processing and back of house That's been one of the big drivers there.
Our tenants are Well, since we haven't closed on it, I hate to get into too much detail, but they're tenants serving that local economy traditionally in local area of town, convention-driven, and it's probably not a lot different. We say most of our buildings serve their local economy. Where Brent is, and it feels like Lewisville, Texas, where Creekview is, where the Toyota headquarters is going, and the new Cowboys facility, and IKEA and the Nebraska Furniture Mart. It kind of feels like we're in the path of growth of a major city in the U.S., so you get a lot of tenants that just need to distribute around that area, HVAC contractors, things like that, plumbing supplies.
Plus Just one last thought to that, this is Brent. At the end of the day, these executives want to reduce their commute as much as possible. If you get in that high path of growth, part of what factors into it is the quality of life of trying to be closer to home.
Got it. Thank you so much for the color, guys. Thank you so much.
Thank you. We'll take our next question from Rich Anderson with Mizuho Securities. Please go ahead. Your line is open.
Thanks. Sorry to keep things going, just a newsflash. Groundhog saw a shadow, at least six more months of downside in Houston. I think that's what that means. I do have a question about your same store for Houston in 2016 was down just modestly 0.4%, and that included a decline in occupancy from 98 to 93, I think you said. I'm curious as to what drives you down 10% in 2017 with a similar level of occupancy decline assumed in your numbers.
The occupancy decline last year, Rich, happened over the course of the year, and it happened more toward the back end of the year. This year, as I mentioned, we've got 80% rolling right out of the gate. When you budget some assumptions in vacancy, the occupancy is taking a more quick drop in comparison. The first two quarters of last year were slow to decrease, and then it declined at a little greater rate toward the end of the year. Whereas this year, it's accelerated from the get-go.
Okay. Fair enough. Thanks. Then, just a quick follow-up. What do you have dialed into the spread, cap rate spread between dispositions and acquisitions for 2017?
Let's see. These are assumptions, but our acquisitions were around five and three quarters, and our dispositions six and a half.
Perfect. Thanks very much.
Welcome.
Thank you. Next, we'll move to Eric Frankel with Green Street Advisors. Please go ahead.
Thank you. I'll try not to take too much of your time. Obviously, there might be some optimism among some businesses post-election, but the president has been a little bit bearish on his relationship with Mexico, and I want to understand how some of your markets are impacted by Mexican trade and what would happen if there were some significant NAFTA revisions on trade and warehouse demand.
Yeah, I'll jump in, Eric. Being Texas, it's one of those things where it makes for good talking points on the news talk shows at night. Again, back to what I said earlier, the tenants at the end of the day are just looking at their bottom line, their business. If their business is doing well, they're growing, and that's what they're trying to do. If it's not, they're declining. I don't think We're not heavily automotive driven or anything like that. Within our tenant base, it's metro area based. There's no knee-jerk reaction to it. I think the general view is whatever things like that will have more of a trickle effect. I think if we owned assets in Mexico, there would be a much greater concern.
I think from what we're hearing, people in Juarez and other parts deeper into Mexico, there is much more worry and concern. We've heard stories of groups putting decision-making on things in Mexico on hold. In terms of how it impacts any of our other markets, it's not anything that you can just immediately point to.
Okay. Yes, I guess we'll see how that shakes out. Then final question. Any changes, have you seen any e-commerce related demand start to manifest itself throughout the latter half of the year and into this year?
Sure. I guess we've said e-commerce and really just changing retail formats. We've signed a lease with CVS, which is really more not e-commerce, but I guess it is. It's internet delivery of prescriptions. We see CVS Caremark. We've signed leases with them. We've pursued them in other markets. They've been a prospect. We, and this was Houston, just signed a lease where someone that will deliver online orders from Costco. That's probably that last mile and things like that. Again, the good news is we're full, but we continue to see new. Another new tenant, really, it's a tenant, and they only sell online. We're continuing to see e-commerce growth.
I guess where we viewed it is the retail format seems to be coming more and more our way, where you have fewer stores, smaller stores, and spaces within a nearby warehouse. That's coming our way. The other one, people have asked us about the impact of the election, a new source of demand. We saw it in Colorado, but when they legalized marijuana, it was 300 basis points of the total stock in Colorado, really, the C assets all got absorbed by the growers. We're reading about that more in the Bay Area than Southern California. We think there's a new source of demand in what was an already tight market in California, that will just push rents. Again, none of the institutions, including us, are leasing to the growers in Colorado, and we don't expect to in California.
It's still federally illegal, but it is kind of like e-commerce. These new sources of demand keep popping up. Okay. Thank you. Sure.
Thank you. Next, we'll move to Rob Simone with Evercore ISI. Please go ahead. Your line is open.
Hi, guys. Morning.
Morning.
I wanted to try to drill down a little bit more on the occupancy guidance for this year. If I kind of weight the ±200 basis points decline on average in Houston and look at your development pipeline and weight the occupancy by square footage that's kind of rolling in 2017 and assume that there's no lease-up, that kind of combines to about 175 basis points of the 200 decline. I know it's a back of the envelope calculation, but I just wanted to see if, A, that's the right way to think about it. B, are there any other markets that you're kind of looking at potential occupancy declines this year?
Maybe I can answer. Happy to talk. I think I follow you on the calculations. Maybe if we could look to follow up later to make sure I follow it. In terms of specific markets, it's really two. Houston will be challenged this year, as we've talked, and then in Santa Barbara, where we have the R&D buildings. We've got a large tenant that's a little over 60,000 sq ft, outgrew their space and built their own building. We've re-leased about 9,000 of their, call it 61,000, and we get 50 of it back in April. The tricky part in backfilling it, that will hit our occupancy. The tricky part of it is it's more of a small tenant market than a large tenant market, it'll be gobbling up 50,000 sq ft, 5,000 sq ft at a time.
That's probably the other part where it hits us on, again, on our same story NOI, it's R&D at Santa Barbara. Those are pretty high rents compared to our average portfolio rent. Our biggest, probably three occupancy challenges will be Houston, Santa Barbara, and then rolling in two 400,000 sq ft projects that really when the original developers hit their CO date. Those will be our three occupancies, and then maybe I followed some of your math, but not all of it. If we could circle back to that maybe post-call, if that's fair.
Sure. Yeah. Thanks a lot. Just one follow-up question on Houston. I noticed that Mattress Firm is one of your top tenants in Houston. They obviously, about a week and a half ago, announced a pretty substantial contract termination with one of their biggest wholesalers. I just wanted to inquire as to, A, is any portion of their 200,000 sq ft included in the ±900,000 sq ft of roll in Houston? Also, have you reflected any of that potential impact in your outlook for this year? Thanks.
No, the 200,000 sq ft they have with us, the expiration's further out. That 200,000 sq ft serves as the sole distribution center for all of their retail stores in the Houston Metro area, which are many. I don't know the count of the retail stores, they're on every corner. They haven't talked to us. We don't foresee a change in their need for that specific building in Houston for what they do. They're headquartered in Houston. Their offices are right around the corner from this building. I don't think it'll impact Houston. We don't anticipate that impacting that at all.
Okay, great. Thanks, guys.
No problem.
Thank you. Our final question will come from John House with Voya. Please go ahead. Your line is open.
Oh, hey, thanks. I'll keep it short. Is Houston a smaller tenant market or mixed? Assuming you have smaller spaces, does this help you as maybe tenants look to downsize? I'm not trying to be too Pollyanna-ish, but just to get a clear understanding.
That's a fair question. Houston is a smaller average size than, say, like a Dallas. The neighbor to the north is a much larger regional distribution hub. Houston's smaller. I do hope that as we have spaces turn, I mentioned there's a lot of musical chairs within the market. Obviously, when you have a vacancy, your hope is to grab someone else's shrinking tenant. I think the smaller and more flexible your spaces are, the more that works to your favor. It seems like when we've had trouble moving a building or two, it's been less typical for us, but those buildings that just aren't as divisible, and that's where you can get more into a box of meeting one particular size user. Yeah, it's a smaller tenant market, more along our main business. With downsizes, we think, and in fact, we're feeling that.
There'll be some that downsize out of our buildings, but there's some much larger buildings, and again, we've been pleasantly surprised to see how many tenants we've called. We get a vacancy, but they've backfilled. I think our buildings, we designed them on purpose to be as flexible as possible, so we've been able to catch those tenants as they move around the market.
Yeah, that was my thought.
Yeah. We've got such a new portfolio at eight years old, so it's mostly all state-of-the-art now.
Great. Thank you very much. Okay.
Thank you. That was our final question. I'll turn the call back over for any closing comments or remarks.
Thank you, everyone, for your time and your interest in EastGroup. We're certainly available post-call for any questions we didn't get to, and happy Groundhog Day.
Thank you. That does conclude today's conference call. You may disconnect at any time, and have a great day.