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Eastgroup Properties Inc
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Good morning, and welcome to the EastGroup Properties Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions]. Please note, today’s conference may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead sir.
Thank you. Good morning, and thanks for calling in for our fourth quarter 2017 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also participating on the call. And since we'll be making forward looking statements, we ask that you listen to the following disclaimer.
The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected.
Also, the content of this conference call contains time-sensitive information that, subject to the Safe Harbor statement included in the news release, is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which may be found on the company's website at www.eastgroup.net.
Thanks, Tina. The fourth quarter saw a continuation of EastGroup's positive trends. Funds from operations came in above guidance, achieving a 5.6% increase compared to fourth quarter last year and this marks 19 consecutive quarters of higher FFO per share as compared to prior year.
The strength of the industrial market is further demonstrated through a number of our metrics, such as another solid quarter of occupancy, positive same store NOI results and strong re-leasing spreads. In summary, our increasing FFO and dividend prove the success we're seeing in all 3 prongs of our long-term growth strategy.
At quarter-end, we were 97% leased and 96.4% occupied. And while we are pleased with these numbers They will each by 50 basis points higher but for a largely vacant value add mid-December acquisition.
Drilling into specific markets at year end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Phoenix, San Francisco and Los Angeles, were each 98% leased or better. And Houston, our largest market with 5.5 million square feet, down from over 6.8 million square feet in early 2016, was 95.7% leased.
Supply, and specifically, shallow bay industrial supply, remains in check in our markets. In this cycle, supply is predominantly institutionally controlled. And as a result, deliveries remained disciplined and as a byproduct of institutional control, it's largely focused on big box construction.
Rent spreads continued their positive trend for the 19th consecutive quarter on a GAAP basis, rising over 15%, further for the year our GAAP release and spreads were up almost 17%. Overall, with roughly 95% occupancy, strengthening markets, rise in construction pricing and disciplined new supply, we continue seeing upward pressure on rents.
Fourth quarter same-property NOI rose on a GAAP basis by 5.2%. And average quarterly occupancy was 96.4%, up 40 basis points from fourth quarter 2016. We expect same property results remain positive going forward though increases will reflect rent growth as with mid-90s occupancy we view ourselves as fully occupied.
Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe, we effectively manage development risk as the majority of our developments are additional phases within an existing park. The average investment for our business distribution buildings is below $10 million. In 2018, we plan to develop in a broader range of cities and we historically have. And finally, we target 150 basis point minimum projected investment return premium over market cap rates. At December 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.
Further, we're continuing to see cap rate compression in the majority of our markets. During fourth quarter we began construction on four buildings and three cities, totaling 352,000 square feet with total projected investment just under $32 million.
And as of December 31, our development pipeline consisted of 18 projects in 11 cities, containing 2.2 million square feet with a projected cost of $185 million, which is 48% leased.
For 2018, we project development starts of 120 million and 1.4 million square feet. And one of the things I’m excited about this year is a greater number of our development markets. This reduces our risk and also raises our chance of growing the development pipeline during the year. More specifically, you'll see us continue developing within our successful parks in markets like Charlotte, Dallas, Orlando and San Antonio.
In addition, we restarted Phoenix development mid 2017, and we're recently broken ground in Houston for the first time since 2014. The final and third leg of this stool is we'll have active developments in new markets such as Miami, Austin and Atlanta.
In mid-December we’ve acquired Gwinnett Progress Center, a newly completed project in Atlanta for $29.3 million. Gwinnett Progress Center consists of four buildings totaling 392,000 square feet of over 10.5 adjacent acres for future development which is presently 17% leased.
Then on January 26, we closed the sale of World Houston 18, which was a non-EastGroup developed, 33,000 square foot older building on the edge of our World Houston park for $2.5 million.
Brent will now review a variety of financial topics, including our initial 2018 guidance.
Good morning. We continue to see positive results due to the strong performance of our operating portfolio. FFO per share for the quarter exceeded the upper end of our guidance range at $1.14 compared to $1.08 the same quarter last year, an increase of 5.6%. FFO per share for the year ended December 31 was $4.26 per share as compared to $4.02 last year, an increase of 6%.
Operations have benefited from the continual conversion of well-leased development properties into the operating portfolio, an increase in the same-property net operating income and value add acquisitions.
Debt-to-total market capitalization was 26.6% at December 31 well below our long-term target. Floating rate bank debt amounted to only 2.8% of total market capitalization at year end.
From a capital perspective, in the fourth quarter, we issued $30.6 million of common stock under our continuous equity program at an average price of $91.95 per share. In December, we closed on $60 million of 7-year senior unsecured private placement notes at a fixed rate of 3.46%.Also in December, we closed on an amendment to an existing $75 million unsecured term loan that reduced the effective fixed rate by 30 basis points to 3.45%, and the maturity date was unchanged.
FFO guidance for the first quarter of 2018 is estimated to be in the range of $1.10 to $1.12 per share and $4.45 to $4.55 for the year. Those midpoints represent an increase of 12.1% and 5.6% compared to the prior year, respectively.
The first quarter estimated increase is influenced by our lower G&A cost in the first quarter 2018 as a result of the changed computing executive compensation on a bright line of test basis.
G&A guidance of $13.2 million for 2018 reflects a normalized year. Our G&A to revenue ratio was a sector leading low of 5.5% in 2017. The leasing assumptions that comprised guidance produced an average quarterly same store growth of 3.3% for the year. Other notable assumptions for 2018 guidance include, 50 million of both acquisitions and dispositions, 50 million in common stock issuances, 140 million of unsecured debt and 700,000 of bad debt net of termination fees.
In summary, our financial metrics and results continue to be some of the best we have experienced and we anticipate that momentum continuing throughout 2018. Now Marshall will make some final comments.
Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong, healthy balance sheet with improving metrics, as evidenced by the equity we raised during 2017.
I am proud of our teams result last year especially during the time we’ve transitioned. I’m also excited about the foundation we laid as we move into 2018. As we begin the year we are in a solid operating environment as last quarter’s results indicate.
We are also stronger as a team, have an even better portfolio of properties and stronger balance sheet. This combination has us optimistic about our future and we are now happy to take your questions.
[Operator Instructions]. And we’ll go first to the line of Jamie Feldman from Bank of America. Please go ahead.
Hey thank you and good morning. I’m hoping you guys can focus on the same store guidance. We are getting a lot of questions about the overall rate that you put in 2018 numbers. So can you talk about what’s driving – it sounds like you think full occupancy, but it’s driven by kind of leasing spreads and hopefully it’s a margin improvement, but can you talk about the moving pieces there and I know last year your 2017 full year number was a lot higher than your actual guidance when you started the year. So just maybe some thoughts about how you came to that number?
Yes, I’ll jump in first, Jamie then give it to Marshall. But I would point out a couple of things. One that is to our midpoint that the disclosures we give, the 2.3 and the 2.7. I would also point out that we disclosed now the average quarterly same store which is more of a four quarter trailing type concept. That’s 3.3%, that’s you know we are budgeting basically a similar occupancy year-over-year, so then it really becomes incumbent on pushing your rents. So as you mentioned Jamie, we proved to be conservative in 2017.
Our [Indiscernible] over 200 basis points better in 2017 than our original projection. We hope we have that opportunity again but when you are budgeting 95% 95.5% occupancy it’s just hard to push that to say 96.5%. And so along with that I would point to what we are really pleased with is that pushing is our growth is our developmental pipeline with 170 million converted last year at 7.7% and another 185 million in the pipeline currently under construction and the lease up at an 8% yield we are predominantly a developmental company and that pushes the bottom line and we are very pleased with the bottom line growth that we are projecting for next year.
And Jamie, I think a good question on why we kind of raised that topic because we get that question as well, I agree with what Brent said and again, I would say that annual same store NOI at least with us it leaves so much out with our developmental pipeline of what we delivered in 2016 or completed in 2016 what we worked on last year and this year dispositions and so – really an incomplete metric or is that kind of compared to here as I am thinking of player out on a team that it leaves so much out of our metric [Indiscernible].
Core FFO was a much better driver or a way to measure us and we hopefully -- or we have, we don’t have a non core and a core but our FFO growth really captures our development and annual same store leaves so much out. So I wish I number our projections were higher, they are what they are, we are projecting a little more bad debt, a little lower term fee, a little lower occupancy this year and that really won’t return to normalcy on the occupancy although we are still optimistic about the environment and so it’s a dial on the dash floor but it’s not the driver that seems to us that seems to get the attention it does.
I wanted to just add to that one thing, because I know that same store has been a topic, but an example of what Marshall is referring to, our Parc North project in Fort Worth converted there in first quarter of 2017, we brought that 40 million 33% leased, we’ve raised that almost 90% leased. That project won’t be in same store until 2019 because it wasn’t held in the year-to-date because it wasn’t held 1/1/2017 it was not eligible for the same [Indiscernible] for 2018. So yes we will have that 23 months before that even gets into a year-to-date same store pool. So as Marshall said we view that as just a metric that at times is incomplete once you are really looking at the trailing quarters.
Okay, that’s helpful. And then just my – I guess my second question and a final question. Just thinking about Houston and the pickup you’ve seen there. Can you just talk about rent growth, like what’s your expectation for rent growth in your markets and how shallow bay industrial is probably differing from big box?
Sure, good question. It’s hard for us. I hesitate to speak on big box just because we really aren’t in that field. We read about it probably like you and things on the shallow bay, supply does not particularly worry us. There are people that do what we do, but as we go and look at markets and sub markets so much of what’s being delivered is big box delivery. I was in reading in Atlanta the average size of the spec building is under construction. I don’t think Atlanta is that different than any number, it’s over half a million square feet. So it may as well be a multi family project and we’re building – right now we are building 180,000 foot, a 100,000 foot building that it’s so much larger. We like gap rent growth because you capture the free rent and the rent box that we negotiate on. Just for example, we were about a 12% increase in 2015 and 2016 and last year at 2017. And with industrial land prices rising and we’ve seen a jump in construction price in really in the last six or seven months especially that all that logically has led us, its stressed us -- on our developmental yields as we got our own committee. We are still well north of -- for seven but those are putting pressure with construction pricing, but we think all that’s got to lead to higher rents overtime logically that the markets are all forward rise in prices has to lead to further rent growth.
Okay, did you say 17% rent growth last year?
That was our gap number roughly, yes.
No, I mean market.
Our market mark, okay. So then our markets, I’m trying to get Atlanta mainly it was up about 6%, Atlanta is up 7%. I think in a charter we usually look at it lease to lease. So we were 17% releasing spread. It will probably be about that if not a touch high this year. Target for us to fit market by market but it sure feels like it will be 5% to 7% and most all of our market rent growth, because supply just simply isn’t there and we are also seeing many more expansions than we used to within our own portfolio and I would imagine our peers are as well.
Okay, great. Thanks guys.
Sure.
Thank you. [Operator Instructions] We’ll go next to the side of Alexander Goldfarb with Sandler O'Neill.
Hi, good morning
Good morning.
Hey just a few questions here. First, just given the commentary and -- reports out about compressing cap rates and clearly you can see the larger PE [Ph] shops buying in the market. I’m assuming that the bid for stabilized assets or stuff that’s near 80 plus percent occupied is probably significantly tighter than where you guys would bid. But you did buy the Atlanta deal which is a lease up, just curious if you are seeing growing competition for those sorts of assets and then why those assets which sort of exist at the pricing that you are getting it at, if the market is still good and under writers could figure they could lease it up in fairly quickly?
We’ve done really four of those in about a year and a half. As Brent mentioned Parc North, Atlanta, there’s Jones, and Las Vegas and then Weston in South Florida. So we view it as a nice really shadow pipeline. For development we brought about 120 million, but there is a few of those asset, but not a lot and typically – think about every one of those but one who’s been in all of market transactions. Typically it works where it’s a regional developer working with an institutional partner.
Our offer gets them kind of mathematically into their promote with their financial partner and they can move onto the next deal. But it’s always a development to say and tended to exit either upon stabilization or by offer is attractive and up to them and sometimes they are worried about the economy and interest rates and things like that. So those are – there’s not a lot of it that’s out there but it’s a niche we found that we’ve been able to buy or thankful are able to buy quality product at a yield somewhere usually kind in the midpoint between development yields and core yields that once they finish leasing up, say Atlanta working on the market cap rates are both stuffed up now in Atlanta and we think we’ll be in the low sixes on this project assuming some care and that we could at least stop. So we will like this opportunity because core acquisitions as you mentioned just about impossible to get right now.
And so Marshall do you think, I mean if you’ve done four of them in the past year it sounds pretty good that you’ve been able to dig up. Do you – so we should expect more of these or was it just that you were able to get four but what you are seeing in your markets right now doesn’t give you hope that you can do an equal number of those this year?
I’d like to think we could do more. I don't know that we'll get as many dollars out as we have, but we're looking -- we're always looking at a few things and you just hope and a lot of more don’t line up and do, but I’d be disappointed if we didn’t – if we couldn’t pull one or two up.
Okay, and then Brent in your guidance you have a $1 million place holder debt. But last year you only did, you only had 500,000. Is there a reason that you are doubling it versus last year?
There is not a specific reason, Alex. We don’t have anything identified that’s driving that effort. You know that number can, depending on the size of the tenant need particular year we had a million in 2016, we dropped to 500 last year. And so 250 a quarter is just a – frankly a rate that we are comfortable with, we certainly hope that it proves to be conservative but you get a 10,000 square foot guide versus a 150,000 square foot guide unless [Ph] that number move quite a bit. So it’s just a guidance budget number and that we hope that we beat.
Okay, thank you.
Thank you. And we’ll go next to the line of Emmanuel Korchman from Citi. Please go ahead.
Hi, good morning everyone. Brent, can you tell us more about your disposition plan and what assets and what markets you are thinking about selling?
Yes, the 50 million that we have in guidance we have a couple of projects earmarked say the 12 million for first quarter, that is specific project that we view kind of noncore holding in Florida that we hope if everything goes well would close in the next couple of months. And then throughout the rest of the year we announced we closed the one small project in Houston that I think around 3 million. Another potential small where Houston building later in the year and beyond that it’s to be identified. I think one thing we’ve seen Marshall do in the last couple of years is he had taken the ranges to be a little more forward looking and potential dispositions and that type of things. So we’ll play that through the years sometimes an opportunity just presents itself kind of unexpectedly and it’s something that we keep our ears open for. But it’s I would say 15 million and that’s specifically identified and then the rest is just like say to be determined throughout the year.
[Indiscernible] that its some service center type projects that we acquired in the mid 90s in Florida and then it’s really the bottom of that portfolio as you saw us kind of sell in Houston, it’s typically our oldest buildings. We’ve got an older building in Phoenix, specially have some brokers helping us, kind of opinion or values on and again when the market is anxious for industrial product we are trying to really come up with abiding order each quarter of what’s the best properties based on our leasing expense and where cap rates are what we can push out the door.
Great. And maybe could you give us an updated view on Mattress Firm. It’s one of your biggest tenants and all the news around that company.
Yes I mean frankly surprised as anyone else I guess when the news came about the parents, some of the troubles they are having, but they are in four locations with us. They are currently in every location, no feedback at all from them in terms of any difficulty. From what I’ve read and seen it’s no more than what you guys have, but then I think there will be some consolidation of some of the retail stores that they aggressively bother the companies and had duplicative retail stores. But in our locations as long as they are still selling mattressesd and have a need to distribute them we are optimistic that they will continue to remain current, continue to push mattresses out of our warehouse. So we are aware of some of their parent difficulties, but that has not dripped down to them with us. So we’ll keep an eye on it, but so far so good.
And none of those releases rolled this year [Indiscernible]
Thanks Brent.
Sure.
Thank you. We’ll go next to the line of Eric Frankel with Green Street Advisors.
Thank you. Just to go over guidance again, Brent can you specifically go over the difference between you GAAP to annual NOI growth outlook and your average quarterly NOI growth outlook by understanding what the new methodology that the same property pool doesn’t change starting at the beginning of the year.
It does. And I’ll try to give you quick overview and then if that doesn’t cover it for you, we can talk offline so as not to bore everyone with the details. But basically in our guidance for 2.3 on the straightline that is true year-to-date call. And one I would say very pleased to work with our peer group and coming with some common definitions that we’ll all be implementing in 2018 I will say that none of that impacted our definition of same store as the consensus wind up being the way that we completed the metric. So the 2.3% is simply property that we have – for that to be eligible for that pool we had to owned and operated that property January 1 of 2017 through basically December 31 of 2018, meaning it was held all of 2017 and all of 2018.
As a stabilized asset.
As a stabilized asset. What the average quarterly same NOI growth does with each quarter we compute same store based on for example second quarter this year we will compute properties that were held stabilized in our operating portfolio, April 1st to June 30th 2018 compared to April 1st of 2017 through June 30, 2017. The example I gave earlier of Parc North is not in the year-to-date beginning in the second quarter though of this year and for the following two quarters for the year it will be in the quarterly same store because it was held quarter-to-quarter, year-over-year comparison, but obviously it won’t be in the year to date because it was in the 1/1/2017 [Ph] property. So again, I hope that covers, the 3.3 is the average then of each individual quarter that we are projecting this year. It’s a simple average of those four and that’s more of a trailing metric and we think more of a relevant metric. Again the example of Parc North not being eligible for the year-to-date pool until 2019 – we would have owned it 23 months at that point.
Okay, it does sound like the pool...Yes I understand it does sound like pool changes obviously based on the way you describe it which is understandable. Just going through your guidance assumption in a more detailed fashion, can you – are there any plan trying to move out that are guiding your lower occupancy number versus today?
No. I would say no. There's no specific tenant. I think Marshall prior alluded to the Atlanta acquisition for example that had low occupancy rolled in. You know part of the value add you had that nice upside that true higher yield that comes along with that, typically a little shaky to your occupancy, but we view it in the 95.2% 95.5% occupancy range were fully occupied and that inherently means our lease percentage is 96%, 97% if we’re that occupied.
And typically when we do our budget we tell our guys even though they may not know of a specific vacancy was that – don’t paint yourself in a corner and assume 9, 10 is that a 10 – is that a 10 renew that a pick here and there and assume some of those don’t renew just margin for error and so as we I hope we are wrong again. The last few years that turned out this way that we kind of budget occupancy almost over return to normalcy and then the industrial markets stayed strong and we finished the year closer to 96 when we budget you know 95 and down into the 94 at different points.
Okay. I’ll jump back in queue just quickly. I had just one quick question on Houston. Obviously release and spreads were quite positive this quarter, is that a reflection of rents growing quite rapidly or is that just some older vintage leases that are rolling through?
Yes, good question. You know a little bit of it is the pool of leases that happened to roll through. So we did have some older leases and some – but I would also say that Houston, the market was improving and then Harvey came through and it was not a – maybe the fantasy what we were hoping for but it did improve the market. So the Houston market is getting better, we saw a tightening and then we had a nice fourth quarter, so it always like our year-to-date or our annual numbers on releasing spreads that are little – it is a better sample for than any one quarter you can get some odd results.
Okay. Thanks. I’ll jump in.
Sure. You’re welcome.
Thank you. And we’ll go next to the line of Ki Bin Kim from SunTrust.
Thanks. Good morning everyone. So going back to the lease expiration question you have about 4.1 million square feet expiring and slightly under 6 million next year, but for this year how much of that 4.1 million is already kind of addressed at this point, I guess, by this point?
We probably won't go through with our team. It really depends on when those -- I guess I’m back – when those leases rolled. A lot of times tenants will be, depending on the size of them, six to nine months out. So we’re pretty far into negotiations with an awful lot of those tenants. And typically I don’t – we’ll end up renewing a year-in and year-out about 70% of those. So I don’t know that we really address those. We’re probably trading paper with the lot of them and fairly close to leases even with a number of them and I would expect us to renew about 70%, and right now the good news too and some we won’t renew simply because I mentioned expansion earlier, kind of a number that surprised us and Charlotte or surprised me. And just in the last year we’ve had 11 tenant expansions.
So a lot of those tenants that won’t renew is our Vice President where Charlotte said his life has become a Rubik's Cube of just trying to accommodate one tenant growth and moving people around to accommodate them all. So we’re probably, 70% of those will renew, the lot of them ones we won't renew will be trying to accommodate a tenant expansion. I hope we see the economy getting better really in 2018 than we saw in 2017.
And Ki Bin, I’ll just add to that. [Indiscernible] here who does a great job of keeping these numbers for us. We’ve release 400,000 square feet of that, so that's down to 3.7 and occupancy stayed the same, so that hasn’t made its way into vacancy. So 400,000 of that has been dealt with in January.
Okay. And when you at reasons why tenants don’t renew, I know your tenant [ph] ratios already high, but anything to but anything going from there, reasons why they're leaving? leaving?
Sometimes they need space and we can’t accommodate. No there’s real pattern. I mean, everyone’s know tenant maybe just the financial trouble and I’m trying to think about couple of examples out where also we chose to not renew tenants, there’s one in Denver where they simply just left the state. I can’t really point to a great pattern. Sometimes they’ve credit issues and we’ve chosen not to renew and sometimes they leave the state and in every one we like about building in our park, so we just can’t accommodate their growth.
So, it doesn’t sound like a lot of just because the rents too high living?
No. We haven’t seen that. I mean, a lot of times people have good out of it could be a little bit in shock and then they do you look at the market. And if I rates your market which is where we try to be or maybe a higher above, especially on a renewal you can get away with it. Then they stay and probably I had one of our brokers tell us, if a tenant isn’t -- doesn’t have a tenant rep broker it’s like a warning sign, it’s something must be wrong. They must have financial issues are not really be serious, so when all of our customers have a tenant rep broker they’re educating them on the market pretty well too, which we appreciate, makes it easier for us to move that tenant to market and then lastly go to a BRC product is probably the only way they would find less expensive space.
And one last quick one, how much land you guys have develop developable square feet, and your balance sheet right now?
Page nine on our supplement, I’ll give you a pretty good idea of let’s say, we’re projecting 5. – not that we would do that all, maybe only the 5.9 million square feet of developable land.
Okay. Thank you.
Sure. You’re welcome.
Thank you. And our next question will come from Craig Mailman from KeyBanc Capital.
Hi, guys. Just kind of follow-up on Kevin’s question on your ability to push rents, it doesn’t seem like you guys have gotten significant pushback. I mean, are you getting more aggressive on the ground to try to see where the pressure point is with tenant this cycle? Or I just kind of curious there and also if you could update on what your average annual escalator is in place and versus what you guys are kind of getting today?
We’re probably similarly, I mean, lot of time that usually said by the market too, again, that tenant rep broker, we’re probably 2.5% to 3% as an annual escalator, we’re probably slightly below that in the portfolio, but most new deals will have that in it. And I think our guide --usually our best guys know what we're proposing to a tenant and what their best – what their other options are and how our buildings compare pros and cons. So we’ll push rents as hard as we can, although given the choice we'd rather keep the tenant and keep the FFO coming in and make the best deal we can and keep the tenant rather the other side as you lose the tenant and you may get a better rent, but if you have to wait six months, you’ve lost that income.
So net effective or over a present value period you don’t make that value up, so we won’t negotiate to the point to just purposefully lose the tenant but we don’t push – that’s kind of our guidance, we gave people, push as hard as you can without torching a relationship, because a number of these customers we have in multiple locations too and push as hard as you can without losing it and hoping the markets better and we get a little bit better rent six months from now. If we were a merchant builder and trying to fill the building that’s not a bad strategy, but as a REIT we think it’s probably not the best alternative.
It’s helpful. Then just secondly on the decision I guess to sell the building and where Houston that’s sound like you may have another one behind that. Can you just give us some thoughts here on where the cap rates and what you’re selling are relative to the product that each group has build over the years and then also the decision there to give us a little bit of control in that park?
Sure. Good question and how we look at it and this is going to be the down side of a phone call, if you looked at an aerial of World Houston, it was a building on the northeast corner. So not in call it the center of the doughnut, but the edge of the doughnut. It was mid-90s construction, older building, a little more office in it then typical aggregate finish versus concrete tilt wall. So it was -- we sold it as we would underwrite it. There was an original route. So as we would underwrite it, it was a sub six kind of mid-5s to high 5s cap rate, and nice hazard to guess, the latest cap rate in Houston where I want to say first that here from CBRE were around five in Houston. So I would think we would trade as low as anything traded with Brett and I were just in Texas last week with several of the national brokers and we’re still hearing that the wall of capital for quality industrial is even greater this year, so I would think our world Houston would trade as low, but we could either settle a low watermark or be right there at five or sub-five on our developed product that’s six years old.
Yes. I want to just add in that. The building we just sold and other one we say we might sell over the summer, purchase option with the tenant, those were both buildings that we originally purchased early on in our process of growing the park and then, that’s over 10 years ago 10, 12, 15 years ago, then since then obviously we’ve developed a lot of Class A premium buildings and these two if you were look at as Marsh said just make sense to kind of prove now and we’re not going any really controlling the park t combined still in total less than 100,000 square feet and we still can totally control and manage that association and architectural control committee of that park. So just low hanging assets that would get a good gain and this make sense to upgrade the core quality there are in the park.
This year Houston will be for example about 14% of NOI, so we’re at a time we’ve also said earlier when were 21%, we used more of a meat cleaver to kind of reduce our portfolio allocations to Houston and this year it will more [Indiscernible] more of scalpel, we’re not opposed to strategically exiting a building here or there based on where it is within our park, where it fits within our Houston portfolio, but we would like that the market is for improving but just in terms of an allocation we like that low teens kind of lower double digits at 14, we’d like to rather out grow problem than shrink to it, but we like – we build a building now in Houston that will finish up our West Road project. We sell one and maybe two or three later this year.
Great. Thanks Guys.
Thank you. And we’ll take our next question from the line of Blaine Heck from Wells Fargo Securities. Please go ahead.
Hey, good morning. I appreciate your comments on looking at the big picture and your point is well taken, but I did want to follow up on the topic of same-store. It looks like Houston performed better than expected in the fourth quarter at 9.8%. Are you guys expecting Houston to be above your average same-store NOI throughout 2018. And if so are there any regions that you think may do the opposite and drags the overall same-store number down in 2018?
I’ll take the first half of that, maybe let Marshall talk bigger picture. The Houston was obviously strong fourth quarter, about half of that was the success of a property tax appeal and we got to keep a portion of that, because some of the space was vacant. So it was north of 4% just on operating metric positive as we took that out. And then for 2018 we’re looking at about a 4% to 4.1% budgeted same-store positive from Houston, so it’s actually above the average for the year. So we’re not seeing it as being a laggard.
In terms of any other market, I’ll hand it to Marshall, but when you’re – lot of markets are 100% leased and you get one vacancy there in the year and then your 98, but that's a down 2018 compared to [Indiscernible], it just becomes very challenging, this becomes very challenging to take the Houston benefit and then have it be just a total positive because again it gets nerve-racking when you get into 96, 96.5% occupied projections that’s a tough spot to put yourself at the beginning of the year.
And I’ll agree with Brent, I think if you said, we went through market by market and thankfully most of our markets are strong or improving, so there no specific market that really is it’s not a market its – I’m just kind of looking down our list, those they go backwards as we’ve assumed to move out of a large tenant and it may or may not happen. We just didn't want to assume we renew every tenant in that market and things like that. And some of those larger leases or when we keep or lose tenants or one of them that’s negative this year. It’s not a made a huge market for us, but Tucson where we have a building under construction for our largest tenant, they’re going to move out, we've released about 80% of their space, but that'll leave us with a vacancy there and we were 100% leased for all of 2017. So it's a negative number in Tucson, but it's really a good opportunity to build pre-lease building for a tenant. So there’s some moving parts and again I hope we’re being conservative on all of our assumptions, and maybe other than bad debt, I hope we can.
Okay. That’s fair. Maybe just focus on one other market, there's a pretty high level of expirations coming in Tampa, in 2018 can you just talk about that market a little bit and what your expectations might be for rent spread. I think they lacked the overall portfolio a little bit this year but do you see any improvement in that market as you look forward?
We like the Tampa market, I mean, a couple of soundbites, but I was surprised our barge on our eastern region team and we finished the year in Florida, 99% leased, which has to be a record, if it’s not on almost 11,000,000 square feet. Our GAAP releasing spread last year, because that again we’ve talked about Tampa and looked at it, a little north of a 20% GAAP releasing spread. It’s a strong market and doing well. It’s not a strong within the state of Florida, it’s probably in Orlando or Miami, but is a solid third within the market. And really, I think is good, I guess when in all of the Tampa expirations, our 14 tenants make up that, because I had same thing, it jumped out at me and I was talking to our team of what’s going on with all of our expirations there and our like that its – there’s no one major tenant really driving, its 14 fairly evenly sized tenants that drive that 740,000. So I think we renew and looking our projections we’ve renewed about portfolio average of those.
One of tenants again in our Oak Creek building, one of the large expirations that we relocated them into our new Oak Creek development, so we’ll get that space back, but that’s one of our expiration. So one of the big spaces we’ll get back this year. So like the market and thankfully glad we’re diversified and it does have a lot rolling, but given 20% increases last year if we can do that again It’s an opportunity not a liability.
All right. Great. Thanks you.
Thank you.
Thank you. And we’ll go next to the line of John Guinee from Stifel. Please go ahead.
John Guinee here. Thank you. I was just looking into land portfolio, Marshall, and basically over about 60% of this Miami, Houston or Fort Myers looks like Miami haven’t started yet. It looks like your basis is a little over 500,000 an acre and about 36 square foot of buildable. Can you talk about what you can build out there? And then talk about Fort Lauderdale which looks like your basis is over 300 square foot – I’m sorry, 300,000 an acre and how we should – what you’re going to build there and how we should think about the basis, your land basis throughout your portfolio?
Okay. Sure. We will try to move it and of today everything we buy we’ll try to put in development as quickly as we can. One, if there’s a good time in the cycle and we try – and you’re not -- at this point of a cycle you’re not stealing land from anybody too. And so in Miami we bought the 60 acres and that’s about a quarter – roughly quarter of our land holdings in terms of value today. On the site and where -- really where the intersection of county line road where we’re in Dade County where the other side of the road being Broward County and the Florida Turnpike. Right there at that corner – so the front seven acres is what we’ve designated is really higher value than industrial.
So we have that listed where the broker and actually engaged in a dialogue of purchase and sell where the group that would buy a portion of that acreage. It will probably a mix of office or hotel or retail and should – it’s probably worth twice what our industrial land is. So we kind of viewed it as a way to buy the land from Churchill Downs and then chip away at a basis on the balance. So the 54 acres we’re excited about the Miami market, its 3.5% vacant which really [Indiscernible] out, that was 13 consecutive quarters with under 4% vacancy. And we should be with our first building coming out of the ground in Miami really late first quarter, early part of the second quarter there and that's one we talk to ourselves and do it that we can move quickly through that land.
So if we sell the seven acres you take a good bit of that basis away and then once we start developing that is a place where we hopeful you could potential get a prelease on some of those. We build five buildings, a little over 800,000 square feet and really build as fast -- faster or slow as the market allows us. Fort Myers is the other one where we got a good piece of land there. It’s actually two tracks, some of I-75 and another track just off of I-75.
We’re really under leased up, built the building at Suncoast and looking at another building. So we probably won't build as quickly as Miami will. But we’ll work – we are active on development of Fort Myers and that’s one of the 120 million in starts this year as we think our next building in Fort Myers with the economy doing well and tourism doing well there, the economy feels pretty good when you’re in Fort Myers, another – there are other biggest landholdings in Houston, a lot of that's at World Houston and we just started development again for the first since 14 West Road. and we chased a few prereleases at world Houston and came in second on a large not too long ago, but I’m confident even though we got that in active today that hopefully we’ll get the order from somebody and we’ll start working our way through that land in Houston and I'll give Brent and the team [Indiscernible] that we sold last quarter.
We really made an effort to chip our way at our landholdinags where we didn’t have immediate plans to develop to start selling that land here there. We have sold about 44 acres for a little over $9 million over the last couple years of land that we didn’t foresee a near-term need, so we’re trying to chip away here there and then one of our challenges is like a Tampa and Orlando, I actually concerned about running out of land. That's one of my biggest fears is having enough land because we think that's where we really create our values as if we can build to roughly an eight kind of sticking with page nine of our where land schedule is and GAAP are five and to a 100 and 120 [ph] and we love that 300 basis point spread that the markets allowing right now.
Okay. Now problem. Thank you very much. Talk you in a month.
Thanks John.
Thank you. And we’ll go next to the line of Rich Anderson with Mizuho Securities. Please go ahead.
Thanks. And good morning and thanks for taking questions. So, Brent, I’m sorry, I’m going to back to this new disclosure on the quarterly average, and I appreciate it because it helps sort of explain things, but I just want to make sure understand. It does imply putting aside the changing pool that you described, same-store pool. It would imply something like 1% same-store NOI growth in the fourth quarter. So my question is the changing pool a powerful component such that that math is not accurate in terms of how -- like the back half of the year could look based on your guidance as it exists today?
I'm not quite sure, probably how you get 1% for fourth quarter, assuming meeting of 2018. I would point on page seven of the supplemental, we broke that same number out this time. You see it for five quarters they are listed and you can see how it’s not exact science. Our same-store last year ranged on a straight line basis from 2.5 and as high as 5.2 in the fourth quarter. And again the 3.3 would just be the simple average for the year of each individual quarterly pool, so we haven't given any guidance or disclose quarter by quarter computation to that. It looks similar to what you see there where it moves in a very similar range.
Okay. All right. So I guess what I was doing like putting aside the changing pool. If you’re starting is 3.7 and your ending point would be something below the 2.3 average, that's the way I was thinking about it, but your point taken?
I was right, where you were Rich, at one point we event went into one of our accountant's office, in fact, taking us, comparing that to grades in school you’ve made. Two 90s on a test then a 95 and you’re making 75, that’s your grade just like, no, they don't tie, each pool is almost standalone pool, so we can give you some odd metrics, but it makes me feel better that you have same thought I have.
Okay. Well, I’m happy to be less uninformed I guess. So thank for the explanation. And then the other side, the other question I have is on the G&A ramping down relative to 2017. Is there any specific color, I know it's a positive component to the story in terms of how you run your G&A, but what's happening there to see a trend down as much as it is 2018?
Yes. This was a bigger topping first two quarters of last year, we change from more they look back way of compensating executive officers to the ISS preferred, forward-looking bright line test metrics and what that differs early last year as we basically had – and that’s a little different accounting, it gets more bright line test, metrics where they more measurable, see more evenly recognized it over the year which we did in 2017, but we also had to wrap up the old compensation probably for 2016 in early 2017 which was still a heavy number. So that got lumpy early first half of next year, the 13.2 like we said is a good run rate and it’s actually a pretty comparable number to 16. So 17 is a little bit anomaly with that change in the way we were setting our goals and the way those were accounted for.
Okay. So not quite apples to apples I guess to the point for relative to the 17 number because I recall that now, so yes?
Yes.
Okay. And then last question just connecting the dots to unadjusted funds from operation number, you know you mentioned retaining 70% [ph] of your tenants and you know the role in all that sort of stuff, but items like straight-line ran and non-cash stock comp, do you have any color on those line items that help or assist in the AFFO calc?
We don’t do as you see, we put information where you can do your own AFFO calculation, but don’t necessarily computed, because there are some moving parts specially when you get into capital side of it, when you get into routes and other unexpected expenditures. I would just say that we don’t see – we’re talking about G&A there are some variance between years, but we don’t see that much variance 2017 to 2018 that we don't see it being an odd year with capital projects or anything like that, the straight-line rents you know we don't again – it will probably go down to some extent as we have not as much free rent and other thing so that the variances isn’t as much, but I don’t see anything or foresee anything that that would be a big variance from one year over the other.
Okay. That’s great. Appreciate it. Thanks very much.
Thank you. And we’ll go next to the line of Rob Simone from Evercore ISI.
Hey, guys. Thanks a lot for taking the question. Just question from my end to round up the discussion on same-store, I may have missed it earlier, but is there any way or any possibility that you guys can provide the range around that 2.7 on a cash basis?
Yes. We’ve talked about that a lot, the sort of the feedback this time. You know, the 2.7 is the midpoint, so we haven’t put a pencil to it, but obviously if you felt like we were going to come in to the higher end of the range say 455 obviously that would be higher than that, so I don’t want to put a specific number to it. And I think you will see us next time change to – we’re actually guiding to a tenth of a percentage here in a very un-exact type metric.
So, I think next time it's pretty safe to say you'll see us put more of a range concept similar to what our peer group does versus showing it this way, but I hesitate to put that out there currently since we just presented this information, so I would simply say that is to the midpoint.
Okay. Sure. Thanks Brent. Understood. And then one of the housekeeping question from me. Can you guys and you touched on this earlier, obviously the same of – it’s becoming harder and harder to acquire attractively or adequately priced land. In your $50 million of acquisition guidance, can you guys talk about what you have budgeted in that number or break it down between operating properties and lands, and I ask that because if its 100% land for example, it could be call it $0.07 or so dilutive given your disposition guidance. So just trying to like break those two numbers down and understand what’s embedded in your assumptions?
Yes. We really typically – for those we would look towards operating properties are maybe value add within that 50 million and not the land acquisition. So again, unless its – especially let’s say, California or another Miami type opportunity, typically our land is coming in smaller value, smaller parcels.
So it’s mostly – probably we’ll end up being value add given the state in the market, but everyone – we may find the core acquisitions here there. We bought more last year. We bought Shiloh the year before, so we’ve done two in two years and we may find a third or fourth one this year, but that’s where to fall [ph].
Okay, great. Thanks guys.
Thank you. And we’ll take our final question from Eric Frankel from Green Street Advisors.
Thanks. Just a couple of quick follow-ups here, one, so it looks like your tenant improvement budget or your spent has increased pretty significantly versus prior in 2017. Can you explain that and whether that’s something we should expect going forward in terms of that level we call it $354 per square foot?
That can vary quite a bit depending on specific leases and not to be too general, but if we still have maintained, and I’m looking to chart here, we actually track it for many, many years. And RTI I think we’re still only like $0.70 total leasing cost with commission and TI combined per year of the lease, which is still very low. We can have some quarters us giving our leasing volume from quarter to quarter, you can have a higher bump in any given quarter for us, because the large single lease in a quarter would move that. But don’t average, we’ve been in that $0.70 to $0.80 range of total TI plus commission per year of lease which is pretty comfortable level for us.
I think construction prices are raising a little bit, so there’ll be some awkward pressure on that, but pre-year of lease it’s been a remarkably consistent number over on any long period of quarters.
Okay. And then, we notice obviously your acquisition of your partners ownership share of your Santa Barbara portfolio, do you have any long-term plans for that park, it’s obviously, it’s a little bit of different in terms of its functionality versus a rest of your portfolio?
Good observation. I think its four buildings that are two storey R&D buildings and Santa Barbara that we acquired in our portfolio in the 90s and that really a REIT acquisition. So long term our partner was kind of managing some of his own personal life, we brought him out of two of the four buildings separated and that allowed us to really separate it into three separate parcels basically, and again probably not issue but a long long term I could see it’s 1030 to 1031 our way out as one or two of those because as you said, they're not that high industrial buildings they want to grow up in California, but these are older two storeys R&D buildings, so it’s typically not what we do.
But they function well and so they will take our time in them.
Okay, thanks. So Brent, just a final follow up. That tax rebate that you got in Houston portfolio this year, can you just articulate the actual dollar amount of that rebate?
It was a tax appeal and so the net worth, it was in the $200,000 range. I don’t have the exact number in front of me. $300,000 and again that would have taken that 9 point something percent down the four point something percent. But we are very pleased that we won the appeal that Texas in general and Houston particularly you know their taxes have pushed, they brag about being a non income for individuals, no income tax but where they do get their money in Texas is via property tax and so the markets are strong in Texas, they have been pushing the price values very hard and we worked hard to repeat some of that and it took the course of the year to get that. But it was in that 300K range.
Okay, thank you.
Thank you.
Thank you. And this does conclude the Q&A portion. I would like to turn it back over to our speakers for any closing remarks.
Thank you everyone for your time. Thank you for your interest in Eastgroup . We are certainly available if anyone has followup question this afternoon and look forward to seeing you soon. Thank you.
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