Eastgroup Properties Inc

NYSE:EGP

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the EastGroup Properties First Quarter 2018 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead.

[Marshall Loeb, CEO, President & Director]

Thank you. Good morning, and thanks for calling in for our first quarter 2018 conference call. As always, we appreciate everyone’s interest. Brent Wood, our CFO, is also participating on the call. And since we'll be making forward looking statements, we ask that you listen to the following disclaimer.

[Unidentified Company Representative]

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 can be found on the company's website at www.eastgroup.net.

[Marshall Loeb, CEO, President & Director]

Thanks, Kina. The first quarter saw a continuation of EastGroup's positive trends. Funds from operations per share came in above guidance, achieving an over 17% increase compared to first quarter last year which launched 20 consecutive quarters of higher FFO per share as compared to the prior year quarter.

The strength of the industrial market is further demonstrated through a number of our metrics, such as another solid quarter of occupancy, positive same store NOI results and strong re-leasing spreads. And as these statistics bear out, the current operating environment is allowing us to steadily increase rents and create value through ground up development along with value add acquisitions. At quarter-end, we were 97% leased and 96.4% occupied and this marks 19 consecutive quarters [indiscernible] second quarter 2013 our occupancy has been approximately 95% or better, truly a long-term trend.

Drilling into our specific markets at quarter end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Dallas, San Francisco and Los Angeles, were each 98% leased or better. And Houston, our largest market with 5.5 million square feet, down from over 6.8 million square feet in early 2016, was 94.5% leased.

Supply, and specifically, shallow bay industrial supply, remains in check in our markets. In this cycle, the supply is predominantly institutionally controlled. And as a result, deliveries have remained disciplined and as a byproduct of institutional control, it's largely focused on big box construction.

Rents continued their positive trend rising over 9%, on cash basis and almost 19% on a GAAP basis. Overall, with roughly 95% occupancy, strengthening markets, rise in construction pricing and disciplined new supply, we continue seeing upward pressure on rents.

First quarter same-property NOI rose 4.3% on a GAAP basis and average quarterly occupancy was 96.3%, up 70 basis points from first quarter 2017. Given the intensely competitive and expensive acquisition market, we view our development 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 part, the average investment for our business distribution buildings is below $10 million and we target a 150 basis points minimum projected investment return premium over market cap rates. At March 31, the projected return on our development pipeline was 8%, whereas we estimate the market cap rate for completed properties to be in the low 5s and further, we're continuing to see cap rate compression in our markets.

During first quarter we began construction on two buildings, totaling 170,000 square feet with a total projected investment of 12 million and then coming out of the pipeline we transferred three buildings totaling 347,000 square feet with an investment of approximately 30 million into the portfolio at a 100% leased. As of March 31, our development pipeline consisted of 17 projects in 10 cities, containing 2 million square feet with a projected cost of $165 million, which is 51% 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 development markets. This diversity reduces risk while also raising our odds to grow the development pipeline. More specifically, you'll see us continue development within our successful parks in places like Charlotte, Dallas, Orlando and San Antonio.

Additionally, we restarted Phoenix development in mid-2017, and recently broke ground in Houston for the first time since 2015. The third and final leg of this stool is we have active developments in new markets such as Miami, Austin and Atlanta.

I’m also excited about where we stand in terms of our projected pipeline so early in the year. As a reminder, our leasing results are what drive our next start. So, the 120 million in projected startups consist of 10 separate projects and are pleased that we wielded the gun or have approval for seven of those 10 starts now and while we’re not raising our projections it's the development leasing is progressing as hoped.

Our first quarter dispositions upgraded portfolio quality as we sold several non-strategic assets. In March, we saw a 56 street Commerce Park and seven building 180,000 square foot, service center project in Tampa for 12.5 million. Earlier in first quarter we sold World Houston ’18 a non-US [ph] Group developed 33,000 square foot older building on the edge of our World Houston Park for 2.5 million and finally at the end of the quarter we sold roughly half of our reload [ph] land in Houston for 2.6 million. These sales allowed us to upgrade the quality of our portfolio, improved portfolio allocation by market and freed up capital to reinvest elsewhere.

Brent will now review a variety of financial topics, including our updated guidance.

[Brent Wood, CFO & EVP]

Good morning. We continued 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 $1.16 compared to $1.09 the same quarter last year, an increase of 17.2%.

Operations have benefited from the continual conversion of well-leased development properties into the operating portfolio, an increase in the same-property net operating income and value add acquisitions. Debt-to-total market capitalization was 27.8% at March 31 well below our long-term target. Floating rate bank debt amounted to only 3% of total market capitalization at quarter end.

From a capital perspective, in the first quarter, we issued 14.8 million of common stock under our continuous equity program at an average price of $82.68 per share. In February, we closed on amendment to an existing 65 million unsecured term loan that reduced the effective fixed rate by 55 basis points to 2.3%, creating annual savings of approximately $340,000. The maturity date was unchanged.

In April, on closed on 60 million of 10-year senior unsecured private placement notes at a fixed interest rate of 3.93%.

FFO guidance for the second quarter of 2018 is estimated to be in the range of $1.11 to $1.13 per share and $4.51 to $4.61 for the year. Those midpoints represent an increase of 6.7% and 7.0% compared to the prior year respectively, and an increase of $0.06 per share in the midpoint of our guidance for the year.

The sequential decrease in FFO from the first quarter to the midpoint of guidance for the second quarter of $0.04 per share is primarily attributable to $0.02 of non-recurring gains from first quarter along with the impact of converting 60 million of variable rate debt to higher interest fixed rate long-term debt.

Our first quarter results combined with the leasing assumptions that comprised guidance produced an average quarterly same-store growth of 4.0% for the year, an increase of 70 basis points from our initial guidance. This is the result of outperforming our bunch of expectations in the first quarter along with continued optimism for the remainder of the year.

Other notable guidance assumption revisions for 2018 include reducing both acquisitions and dispositions by 10 million to 40 million each.

In summary, our financial metrics and results continue to be some of the best we have experienced and we anticipate that momentum continuing throughout 2018.

Now Marshall will make some final comments.

[Marshall Loeb, CEO, President & Director]

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, upgrading and geographically diversifying our portfolio. And as we pursue these opportunities, we're also committed to maintaining a strong, healthy balance sheet with improving metrics. We view this combination of pursuing opportunities while continually improving our balance sheet is an effective strategy to manage risk while capitalizing on the current strong operating environment.

The mix of our operating strategy, our team and our markets has us optimistic about our future.

And we will now take any questions.

[Operator]

[Operator Instructions]. And our first question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

[Jamie Feldman, Bank of America Merrill Lynch]

So, I was hoping to focus on development starts guidance, correct me if I wrong. But I think you maintained it for the last quarter, from your initial guidance. I am just curious what it would take for you to bump a number up and in answering the question maybe just talk about supply risk and is that holding you back at all?

[Marshall Loeb, CEO, President & Director]

Yes. Thanks, Jamie, and good question. We maintained our guidance, it’s [indiscernible] really if you guys have to dig into the details 120 million in dollar volume and I guess big picture I am using an analogy, a lot of our development is almost like building out a subdivision, as one building leases, we start the next one. So, it's really driven by that a lot of it was driven by the two and leasing revenue by corporate. We have, we were a little bit light on our dollar volume and starts for the first quarter but of the 10 starts we’ve projected this year based on our leasing volumes, we either started or have approval and we are starting soon four more. So that will get us through seven of our 10 buildings, we feel pretty good, knock on wood about our 120 million kinds of anecdotally where they’re all early but we’re in the running for three different preleases on buildings which is a higher number for us. Usually we build multi-tenants state buildings, so we’re seeing more demand through pre-lease we’re also consistently hearing more and more where we just had our own internal leasing call of about expansions. So, a number of the spaces we’ve leased or a number of our developments like Chamberlin and Tucson and Oak Creek 7 in Tampa are really accommodating an existing tenant who has outgrown their space within an existing, our last building that we’re just starting in Orlando.

So cautiously optimistic that later in the year that we’ll be upfront of 120 million if the economy hangs in there and then in terms of supply we’ll typically say we like where we fit within the food chain and there is so much of what we see being built there is large numbers of starts that we see in terms of volume in places like Dallas and Atlanta where each of 19 million but absorptions has been in 19 in the 20 million in both of those markets and really I will stick with Atlanta in reading some of the statistics about the Atlanta market there is 19 million currently under construction which would -- the last year they absorbed 21 million but of the 19 million there is 8 buildings that are a million square feet or above and most of that is in -- an awful lot of that is in South Atlanta. the statistic I also read, the average building under construction in Atlanta was over 530,000 square feet. So, we just broke ground on an 80,000 building. So, it may as well be a hotel being built down the street and in a lot of cases we are in North Atlanta and the construction is in South Atlanta. So, we struggle to find land sites and thankfully feel pretty good about where supply is today with construction prices are going up, rents are hopefully keeping pacing but we aren’t alarm about supply and what we do see is so much of it is being boxed at point [ph].

[Jamie Feldman, Bank of America Merrill Lynch]

Okay. And I guess along those lines the big picture question is you know if you think about the East group business in portfolio and we keep hearing e-commerce is driving so much demand in this cycle. I mean do you think that the types of tenants you’ll have in the portfolio and do the most leasing with going forward are going to be different than past cycles, I mean is there kind of a structural shift going on here within your portfolio as well?

[Marshall Loeb, CEO, President & Director]

We see a trend towards a little bit towards some bigger tenants, especially within our development. I mean our average tenant size is still in the mid-20s but we certainly see demand from the larger tenants that will take a whole building to us. I don’t view it as a shift so much away. The customers uses we had 10 years ago or five years ago are still there, it's really thankfully been more supplemented and if we see e-commerce, people with that last mile usage, one of the leases we signed this quarter was Best Buy and it's really the last mile get into their stores in North Carolina.

So, a little bit e-commerce I guess you could say are physical stores there. So, it's more supplementing the uses that we’re seeing rather than replacing.

[Operator]

Your next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

[Alexander Goldfarb, Sandler O'Neill]

Morning Marshall, just a few quick questions here. First let's just go to guidance, you guys had a very healthy beat to the street and yet your guidance increase for the year pretty much matched up to what the guidance beat was or what the beat was in the first quarter, you increased your expectations for same store NOI, so is this just usual, conservatism, or why wouldn't either the guidance range be increased more or it would seem to just telegraph that you guys will have continued increases throughout the year. So, what would be offsets for why we shouldn't expect a bigger number.

[Marshall Loeb, CEO, President & Director]

We based on nickel as you said and we added a penny after that, so we did for balance of the year over the remaining three quarters did raise our guidance and I hope you’re right. I mean we feel like were average occupancy is 95.5%. So that's a pretty healthy number for the year for us. We feel like we built numbers that are reasonable and rational and I hope six months from now or better yet first quarter next year, you can say I told you so that we were being too conservative. Hoping the economy stays in there and the uncertainties there but we feel like it's our best guess and I hope you're right.

[Brent Wood, CFO & EVP]

Yeah, it was clear it was a well-balanced beat, we have the two sets we mentioned that was nonrecurring but of the other three sets it was same-store contribution. It was a development leasing little ahead of schedule, it was a lot of different bucket and also say for the rest of year when you’re in that 95.5% to 97% leased in occupied range it's just hard to make yourself when you're dealing with budgets to really get more aggressive than that. So, like Marshall said, we hope that that sets the stage for us to have upside through the rest of the year, as we've always said, our budget is not necessarily our goal, but we just point out these are the assumptions that are driving our midpoint and if we can continue to outperform then that that would be to the good side.

[Alexander Goldfarb, Sandler O'Neill]

Okay and then the second question is, in often in Santa Barbara I’m going to guess that you guys loss tenant, which is why same-store NOI was down so if you just can comment one on timing to backfill to what the expected red marks are going to be on the backfill and then finally Santa Barbara always seems like a standalone market. So just sort of curious your long-term view for holding that the assets there versus presumably those would go to really low cap rate and would provide you with some accretive capital to expand to reinvest in Southern California in California where you guys want to expand anyway. So, if you can just take that two-parter.

[Brent Wood, CFO & EVP]

You’re correct both of them and Austin we had a front running getting bankrupt by the airport submarket and good activities nicely. Thankfully we’re downsized the last year and even after during that they still did not just to tough business to be another. So, they didn’t survive the good activity to backfill that space, we still are happy in Austin like that market a lot. Santa Barbara had more history than you want to know, it came in the portfolio that for R&D two story R&D buildings in suburban Barbara, we had a tenant that been there for as long as I can remember when I was the asset manager in the ’90 for 20 plus years that [indiscernible] built their own building and moved out last year, had good leasing activity. We leased the 50,000 feet 12 of it during the first quarter we have a large prospect that we are hopeful. Leases I hope that comes back here in the next week to two, just address another balance of it. The tricky part with Santa Barbara is, it is semi-office building, so that the leasing cost is I have said you are an asset manager makes me appreciate industrial getting a leasing cost you are looking at, turning a single tenant R&D building and there is multitenant building. And then you may remember at the end of the year of the four buildings we bought our long-term partner out who had a 20% interest out of two of the four buildings and really long-term you are right, we would look to probably go to more industrial buildings. I don't know that the cap rates given where they are in Southern California today and that we are selling a semi-office building R&D building that we can trade down and yields from some R&D in to office. But long-term by having it in the three separate parcels today really 1031 in our way out of Santa Barbara long-term is on our long-term horizon. You are correct.

[Operator]

And our next question comes from Emmanuel Korchman with Citi. Please go ahead.

[Emmanuel Korchman, Citi]

Good morning, everyone. Maybe to follow-up on Alex's question. Are those same vacancies, what sort of driving the pace of an occupancy decline in your guidance from 1Q to 2Q?

[Marshall Loeb, CEO, President & Director]

Yes, it’s a little bit -- there is a -- some of moving parts if you remember at the end of the year -- good question you have asked, four vacant buildings when that progress center in Atlanta and they roll in the portfolio 12 months after the developer got the certificate of occupancy. So, some of that rolls into our portfolio. In second quarter in Tucson we are finishing up wrapping up construction for an existing 150,000-foot tenant. So, they're going to relocate. So, we will get that. The building has been released, again another expansion great story about existing tenants can take about 80% of it, but we will get that 150,000 square feet back, kind of thinking just some moving parts. We are losing a tenant in Jacksonville a little over 100,000 feet. We know we have a good prospect to backfill it, so it's some moving parts and one in Las Vegas. I think the tricky part as Brent mentioned earlier little bit of some of our guys in the field at 95%, 96% occupied as we move tenants around and backfill space that fills a little bit like Rubik's cube and each time we do it we are putting any ESFR sprinkler system in one of the warehouses. You lose tenants, you lose the occupancy for two to three months as you paint and carpet and get the space ready for the next tenant. So, we will bounce back during the year. We actually raised our annual occupancy by 30 basis points, but second quarter, a little bit of acquired vacancy and then a little bit of just moving parts as we move tenants around within the portfolio.

[Emmanuel Korchman, Citi]

And then on just the Houston disclosure, it looks like you guys have finally pulled that out of the package and I understand that given sort of less focus on the one market, but still could you discuss how trends are going and maybe considerations for giving us, maybe not as much detail as you have in the past but more detail than you're now giving us.

[Brent Wood, CFO & EVP]

Sure.

[Marshall Loeb, CEO, President & Director]

Sure. Maybe I will -- good question, I will explain our logic, I’ll go in reverse order. With Houston, with oil prices rising in the high 60s and really now we are several years into the downturn started in the late ‘14 and Houston also going from low 20s in our portfolio to the low teens, we felt like okay we don’t do that for every market, although Houston is still our largest market and people talk about it when they think of EastGroup that we would drop that disclosure play. It’s much smaller in our portfolio and much more stable thankfully within our portfolio. So that was some of the logic at year end is where we typically like to take a look at our supplement and make changes so it’s like a natural time the drop the Houston page as we discussed it internally. And then in terms of the market it has stopped falling and is really more of a recovery phase now. The word I’ve heard a couple of times from brokers or different people we’ve talked there for [indiscernible] the tenants are struggling to expand the economy is moving, Houston a couple of stats to throw at you is 5.2% vacant which is actually a lower vacancy rate than Dallas and Atlanta and any number of our major markets. Over half of the new construction in Houston is in the Southeast Valley where a submarket where we were being not, they added almost 100,000 people, 94,000 people in 2017 which was the number two, the second highest growth rate in the country, second to Dallas. So, we feel comfortable about Houston, and optimistic it’s great to see development restart in Houston. It was so much of our development pipeline several years ago and we shut that off but we have good activity on what we are building there.

So, keep throwing numbers at you. Overall, we feel good about Houston and feel like it’s recovering market mix and stop falling and flat for the moment. But we think they are going to start accelerating here probably in the next quarter or two.

[Operator]

And our next question comes from Eric Frankel with Green Street Advisors. Please go ahead.

[Eric Frankel, Green Street Advisors]

Can you just walk through how your same-store guidance was increased by nearly 100 basis points after just one quarter? I am just trying to understand how you guys are forecasting our business?

[Marshall Loeb, CEO, President & Director]

Yes, I will jump in there. I mean obviously we had the first quarter that build into it that increased for the year and then the good news there it was really as I am looking at it, I am looking at about eight or 10 of our markets [indiscernible] achieved here that have at least six digits increase in NOIs in terms of just our [biased] numbers. So, it was a combination of actuals first quarter and as I mentioned just our continued optimism as we tweak going through the year as we revisited budgets this past quarter. The good news is that the changes made in the field resulted in a wide based increase. It wasn’t A lease, it wasn’t A market, again I think it speaks to the depth that it was the combination of a lot of different markets that just up ticked and all that add together it resulted in a nice raise.

[Eric Frankel, Green Street Advisors]

Okay. And just really quickly. The $0.02 of non-recurring gains, can you just clarify what those were?

[Marshall Loeb, CEO, President & Director]

It was clearly non-recurring we had a land sale which was an older parcel southeast of outside of our [indiscernible] that we sold for a small gain. I think that was $85,000, $86,000 and a larger portion of that was we sold a personal interest we've had for over 10 years now in a king airplane. And so, the accounting for that we had expense to above the line is we sold other income above the line so that's just one-time thing there. We ask that the partnership in that plane that just wasn't working for us anymore and we saw better ways to get around the country to see our properties.

[Eric Frankel, Green Street Advisors]

I guess that did the job pretty well. And then finally, your company seems to be selling call it noncore assets and so may be can you clarify how much your portfolio might consider non-core or probably you probably would desire to sell the next few years.

[Marshall Loeb, CEO, President & Director]

Sure, it's harder to quantify, I think probably viewed as part of our job that we should always be thinking of our portfolio and as properties get older and maybe have don’t get to produce the metrics that are about portfolio average in terms of occupancy, rental increases that we should always above [indiscernible] and in that portfolio what we've been selling has been, high lease just not our future. So, we should always be pruning the portfolio, we’ve done a lot of that in -- for us a lot of that in 2016, 2017 in Tampa it was a 30-year-old seven building service center, kind of the same thing in Houston. It was one of the first properties we acquired in Houston it was over 20 years old where we’re listing just listed a building in Southwest Phoenix again we like the east side of Phoenix better than the west side, its more land constrained, but that's probably 30 to 40-year-old building that's just coming to market now. So, I would like to think you're never really done and as they kind position like in this asset in Phoenix new paint, new carpet we presented it fairly recently got stability. It's a great time to take it to market when there's so much demand out there for core industrial or stable industrial side. We have 40 million this year in our projections, and that's probably a pretty reasonable run rate and I cannot do it again as our job, to kind always be thinking of what two or three assets do you not want to own in the next downturn and how do we go ahead and move those to market.

[Operator]

Our next question comes from John Guinee with Stifel. Please go ahead.

[John Guinee, Stifel]

Thank you, three quick questions. First, are you using Southwest Air or did you get a new plane. Second, is it important to keep the Santa Barbara asset because you need to do three or four different site visits in the summer and then a serious question is if you look at all your development how much of the tenants are coming from your existing tenant relationships and how much of them are new tenants.

[Marshall Loeb, CEO, President & Director]

We do not own an airplane. If you want to make us a deal, personal loan we will look into it. Yes, Santa Barbara we have our chairman and spending part of the year already there. So we have good asset manager in place in Santa Barbara that goes above the asset regularly for us and then your last question, a good one, it’s a fair amount of our tenants, it's not the majority but probably right now, 25 to 30% as I kind of run through my list of these existing tenants like Houston where were you picking up additional business from them or expansions in Tampa and in Tucson, that’s why one of the reasons we liked about the part development program, one I think it lowers our risk. It prefers five buildings and in Charlotte where there are greater odds that the 6 one will work versus a big building on the edge of town. And in many cases a tenant will come to us and they still have a few years left on their lease which was the case in Tucson and they need more space and we can work through and basically have the ability to tear up their existing lease and build them up on a typically a larger building on the longer-term lease. So, we are seeing many more expansions over the last 12 months than we did the prior probably 48 and that’s a great time, like that’s the best of us drives the demand because we're not pulling the tenant out of one of our peers and at the zero-sum game that really shows the health of the economy in market.

[Operator]

And our next question comes from Craig Mailman with KeyBanc. Please go ahead.

[Unidentified Analyst]

This is [indiscernible] here with Craig. I just want to follow up on an earlier question regarding the cash same store NOI growth guidance. I noticed that bad debt expense came down in guidance was that a factor?

[Marshall Loeb, CEO, President & Director]

We don’t have our bad debt reserve baked into our same store, so that was not actually a factor. We had 90,000 of bad debt first quarter. We had close to 250. We kept the 250 at reserves which is not anymore for specific tenant but we still have the 250 reserve for the remaining three quarters. Likely we had 500,000, before that we were closer to the million. So, we like to look back and say we are conservative but when you got 1500 to 1600 customers it's hard to not reject something. And then you don’t know someone does go back and [indiscernible] 100,000 square feet tenant and given our size that could have a swing quarter to quarter. So, it wasn’t in the same-store, to answer your question it was not in the same-store upward guidance.

[Unidentified Analyst]

And then you had some meaningful rent spreads in several markets, including San Francisco, L.A. Fort Myers, Dallas. Are those representatives of the markets? Or was those like individual leases?

[Marshall Loeb, CEO, President & Director]

Good question Laura, it's always -- I know we are just quarter in. I typically always like to look at things which we can't now the year-to-date number just because given our size I always thought we could get a more meaningful sample size. And the West Coast markets we are seeing high rent growth and actually negative supply and the Bay Area and even like Orange County was really where there was negative industrial supply in Orange County where buildings were being repurposed. Dallas and Fort Myers are also growing down them. With things this tight, and construction prices rising, that's one of the challenges we are working our way through with our new developments. So just every project we put out to bid the construction pricing comes down and surprises us a little bit. So, I think that has to with a tight market, and a rising land and rising construction prices will continue to put upward pressure on the rents because everybody else is in the same dilemma as we are in terms of adding new supply. So, we are, I think, good catch. Same those at Fort Myers that's some of the highest population growth at least in terms of percentage smaller base but within the state of Florida over the last year as well.

[Operator]

And our next question comes from Blaine Heck with Wells Fargo.

[Blaine Heck, Wells Fargo]

Hey, guys. Good morning. Just to follow up on Houston, obviously the portfolio has bounced back dramatically. Are you guys at the point where you think development could tick back up there? I know you guys are doing the one project but what are the prospects for more just given the amount of land you still have there ready to be monetized?

[Marshall Loeb, CEO, President & Director]

We’ll ease our way, again the market's better and stabilize and we did feel that northwest sub-market 60,000 building. We thought comfortable better that really no one was, knock on wood, building what we were building later. We have had some pre-lease opportunities out near World Houston and really more towards that if we had even a fully leased building or significantly leased building. So, we will work our way back towards that. But right now, it feels like maybe a quarter or two or hopefully ahead and hopefully that we may speed it up if the market comes back, especially at north there was oversupply but vacancy rates come down pretty nicely. It’s just over 7% in the north sub market where a World Houston land is at 7.2%.

So, if that keeps coming down and tenants are expanding and the other thing we heard this quarter for the first time which was nice to see where contracts with oil and gas companies that people out looking for space. So that was an -- always seen growth in tenant demand in Houston, the oil and gas industry has been quite and we started hearing that a couple of our prospects for out chasing really 3PL contracts with oil and gas companies. So that’s the other side that can really fix things up. And the logistics companies when they need space, the good news, bad news is when they shrank they went away quickly because they lost contracts but if they give these contracts, I thought, our belief is those will be the first guys back in the market and they will need space in 60 days or in a few months, they’ll need it quickly.

[Blaine Heck, Wells Fargo]

Okay, that’s helpful. And then can you give us any cap rate assumptions for your expected acquisitions and dispositions for the year and whether you guys are targeting any specific markets on either side?

[Marshall Loeb, CEO, President & Director]

It’s hard, cap rates will be a blend. I mean I think what we’ve earmarked going out and this is really based on broker guidance, we’re thinking will be 5.5 to 6. It’s been nice, we were meeting [indiscernible] every single last handful of deals based sold have all been above what they had target as their stretch pricing. Acquisitions are a little bit tougher. And then I could see us being in the -- really the value I had modeled we like better than a core acquisition right now just because once something gets fully leased and is out there, as the broker said, everything seems to exceed stretch pricing. So, we are -- hopefully we can find a building or two. We have got a small project now that is a fully leased project but it’s not a big portion of the 40 million and we’ll hopefully close it here in the next few weeks, and that’s around the 6% range. And if we buy something in Southern California where we’ve been pursuing things that will be at best sub 5.

[Brent Wood, CFO & EVP]

And at this point out from a budget perspective on the 40 million we did have about 75 basis point higher spread on our same-sales versus where we are putting the money and that’s just a reflection of selling from the bottom and then buying at a higher quality. But we do have a spread there. We are not -- it's not built into some that we would go even. We would assume there would for budget purposes we’ve assumed a 75-basis point trade out in that 40 million.

[Operator]

And our next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

[Rich Anderson, Mizuho Securities]

Thanks. Good morning folks. So just one kind of question for me. You had a lot of moving parts and continued a lot of moving parts that as you mentioned the release kind of a lot of it is moving in your favor, but still activity. I'm curious if you're seeing tenants generally moving up or down in terms of the amount of space they're using and I guess that part one if you could respond to that first.

[Marshall Loeb, CEO, President & Director]

Generally moving up in space, I mean that’s really where we -- good question backfill some of our developments is in Tampa and in Arizona where they double space and if I can walk you through the details. Even in this is in Tucson we need to move the 150-foot 20-year tenant relationship that we had into a new 300,000-foot building. We had a public company and auto parts supplier expanded and 120 of their 150 feet and it just shows you’re outside of the markets are and then we have third tenant that was a food services that expanded into the auto parts supplier. So really broker I’ve never seen the trifecta with tree tenants all expanded their square footage. Charlotte, we had a little bit later a one year had 11 tenant expansions. And that's what the airport commerce center made us feel better about building there and we have two buildings that are fully leased there that are best prospects for coming from whether our existing buildings that are adjacent.

[Rich Anderson, Mizuho Securities]

So, the basis of the question is rising rents are causing users to become more productive in their utilization process and you mentioned the 20,000 square feet average tenant size. I imagine you're also thinking then in that number trickles up over time as well.

[Marshall Loeb, CEO, President & Director]

We are kind of mid 20s and I think as we sold some of our older like the Tampa building had a lot of small tenants that we just sold to 30,000-foot building in Houston all about the average. I do think our average tenants size will grow, it won't be big as some of our peers that are more logistics centers on the edge of town, but I do think our average tenant size will evolve and grow overtime.

[Operator]

And our next question comes from Rob Simone with Evercore ISI. Please go ahead.

[Rob Simone]

Lot of the questions I had have been answered. I guess just one quick follow-up for me on the guidance. I know you guys have the $0.02 one timer, in the revised range or there any other kind of one-time items included in the 451 to 461. Just trying to size up what the raise was attributable just to core real estate.

[Marshall Loeb, CEO, President & Director]

There is not, that generally is just something that arises. If we were, we have a few parcels of the landfill and throughout the portfolio that we would say our market for selling that were to occur again, there would register in but we don't have anything that I would describe as other income valid into our midpoint guidance other than the actual we had in the first quarter.

[Operator]

And it appears there are no more questions over the phone at this time, I would like to go ahead and hand it back over to the speakers for any closing remarks.

[Marshall Loeb, CEO, President & Director]

Thank you everyone for your time. Again, we appreciate your interest in EastGroup. If we have any follow up questions we are certainly available and look forward to seeing many of you at NAREIT, I guess, in the next event. Thanks, everyone.

[Marshall Loeb, CEO, President & Director]

Thank you.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.