Eastgroup Properties Inc (EGP) 2017 Q4 法說會逐字稿

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. Since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

The discussion today involves forward-looking statements. Please refer to the Safe Harbor language included in the company's news release announcing results for this quarter that describes certain risk factors and uncertainties that may impact the company's future results and may cause the actual results to differ materially from those projected.

Also, the content of this conference call contains time-sensitive information that subject to the safe harbor statement included in the news release is accurate only as of the date of this call. The company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which may be found on the company's website at www.eastgroup.net.

Thanks, 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 PNOI results and strong re-leasing spreads. In summary, our increasing FFO and dividend proves 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're pleased with these numbers, they would each be 50 basis points higher, but for a largely vacant value add mid-December acquisition.

Drilling into specific markets at year-end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Phoenix, San Francisco and Los Angeles, were each 98% leased or better. 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 by-product of the institutional control, it's largely focused on big-box construction. Rent spreads continued their positive trend for the 19th consecutive quarter on a GAAP basis, rising over 15%. Further for the year, our GAAP releasing spreads were up almost 17%. Overall, with roughly 95% occupancy, strengthening markets, rising construction pricing and disciplined new supply, we continue seeing upward pressure on rents.

Fourth quarter same-property NOI rose on a GAAP basis by 5.2%, and average quarterly occupancy was 96.4%, up 40 basis points from fourth quarter 2016. We expect same property results to remain positive going forward, though increases will reflect rent growth as with mid-90s occupancy, we view ourselves as fully occupied.

Given the intensely competitive and expensive acquisition market, we view our development program as an attractive risk-adjusted path to create value. We believe we effectively manage development risk as the majority of our developments are additional phases within existing park, the average investment for our business distribution buildings is below $10 million. In 2018, we plan to develop in a broader range of cities than we historically have. 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 4 buildings and 3 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 at $120 million and 1.4 million square feet. One of the things I'm excited about this year is the greater number of our development markets. This reduces our risk and also raises our chance of growing the development pipeline during the year. More specifically, you'll see us continue developing within our successful parks in markets like Charlotte, Dallas, Orlando and San Antonio. In addition, we restarted Phoenix development mid-2017, and we've recently broken ground in Houston for the first time since 2014. The final and third leg of the stool is we'll have active developments in new markets, such as Miami, Austin and Atlanta.

In mid-December, we acquired Gwinnett Progress Center, a newly completed project in Atlanta, for $29.3 million. Gwinnett Progress Center consists of 4 buildings totaling 392,000 square feet, and about 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 for the same quarter last year, an increase of 5.6%. FFO per share for the year ended December 31 was $4.26 per share as compared to $4.02 last year, an increase of 6%.

Operations have benefited from the continual conversion of well-leased development properties into the operating portfolio and 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 product placement notes at a fixed rate of 3.46%. Also in December, we closed an amendment to an existing $75 million unsecured term loan that reduced the effective fixed rate by 30 basis points to 3.45%. The maturity date was unchanged.

FFO guidance for the first quarter of 2018 is estimated to be in the range of $1.10 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 first quarter 2018 as a result of the changed computing executive compensation on a bright line test basis. G&A guidance of $13.2 million for 2018 reflects a normalized year.

Our G&A-to-revenue ratio was a sector-leading low of 5.5% in 2017. The leasing assumptions that comprise guidance 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've experienced, and we anticipate that momentum continuing throughout 2018.

And now, Marshall will make some final comments.

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Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong, healthy balance sheet with improving metrics, as evidenced by the equity we raised during 2017.

I'm proud of our team's results last year, especially during the time of transition. I'm also excited about the foundation we laid as we move into 2018. As we begin the year, we're in a solid operating environment as last quarter's results indicate. We're also stronger as a team, having even better portfolio of properties and a stronger balance sheet. This combination has us optimistic about our future, and we're now happy to take your questions.

(Operator Instructions) And we'll go first to the line of Jamie Feldman from Bank of America.

Great. I'm hoping you guys can focus on the same-store guidance. We're getting a lot of questions about just the overall rates that you've put in the '18 number. So can you talk about what's driving -- well, it sounds like you think full occupancy, but it's driven by kind of leasing spreads and hopefully, some margin improvement. But can you talk about the moving pieces there? And I know last year, your '17 guidance -- your '17 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, the disclosure that we give, the 2.3% and the 2.7%. I'd also point out that we disclosed now the average quarterly same-store, which is more of a fourth quarter trailing-type concept, that's 3.3%. That's -- we're budgeting basically a similar occupancy year-over-year. So then it really becomes incumbent on pushing the rents. So as you mentioned, January proved to be conservative in 2017. We -- our previous 200 -- over 200 basis points better in '17 than our original projection. We hope we have that opportunity again, but when you're 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 our -- what we're really pleased with is this is pushing our growth in our development pipeline with $170 million converted last year at 7.7% and another $185 million in the pipeline currently, either under construction, under lease up and an 8% yield. We're predominantly a development company, and that pushes the bottom line. And we're very pleased with the bottom line growth that we're projecting for next year.

Jamie, a good question. I'm glad you 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 PNOI, at least with us, it leaves so much out with our development pipeline of what we delivered in '16 or completed in '16, what we've worked on last year and this year's dispositions, it's really an incomplete metric; or as I kind of compared to here, it's like picking a player out on a team that it leaves so much out of our metric, where we think poor FFO is a much better driver, or a way to measure us -- and I guess, when I say core -- we don't have a noncore and a core, but our FFO growth really captures our development, and the annual same-store leaves so much out. So our lease share number, our projections are higher. They are what they are. We're projecting a little bit more bad debt, a little lower turnkey, a little lower occupancy this year, and that, in a way, will return to normalcy on occupancy, although we're still optimistic about the environment. And so it's A dial on the dashboard, but it's not the driver that seems to us -- that seems to get the attention it does.

I would just add to that, one thing, because I know that same-store has been a topic. But as an example of what Marshall is referring to, our Parc North project in Fort Worth converted there in first quarter '17, we bought that $40 million, 33% leased. We've raised that to almost 90% leased. That project won't be in same-store until 2019 because it wasn't hit in the year-to-date because it wasn't held 1/1/17, so it's not eligible for the same [all-year] pool for '18. So you're -- 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're really looking at the trailing quarters.

Okay, that's helpful. And then just my -- I guess, my second question or final question. Just thinking about Houston and the pickup you've seen there --Oh, I'm sorry, let me -- I'll ask everyone. Can you just talk about the rent growth, like what's your expectation for rent growth in your markets and how shallow bay industrial is probably differing from big-box?

It's -- sure. Good question. It's hard for us -- I hesitate to speak on big-box just because we really aren't in that field. Now, we read about it probably like you and thinks 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 submarkets, so much of what's being delivered is big-box delivery. I was reading in Atlanta, the average size of the spec buildings under construction, I don't think Atlanta is that different than any normal -- it's over 0.5 million square feet. So it may as well be a multi-family project, and we're building -- right now, we're building 180,000 foot -- 100,000 foot building, and it's so much larger. Our -- we might GAAP rent growth because you capture the free rent and the rent box that we negotiated on. Just for example, we were about a 12% increase in 2015 and '16, and last year, it's 17%. And with land --industrial land prices pricing, and we've seen a jump in construction pricing really in the last 6 or 7 months, especially that all that logically has led us -- it's stressed us some on our development yields as we got our own committee. We're still well north of 7%, but those are putting pressure with construction pricing. But we think all that's got to lead to higher rents over time logically that the markets are all forward. Rising prices has to lead to further rent growth.

Okay. Did you say 17% rent growth last year?

That was our GAAP number roughly, yes.

No, I meant market.

Oh, market. Okay. So in our markets, I'm trying to get -- Atlanta -- or Miami was up about 6%. Atlanta was up 7%. I think market -- it's harder. We usually look at it lease-to-lease. So we were 17% re-leasing spread. It'll probably be about that, if not a touch higher this year. It's harder for us to pick market-by-market, but it sure feels like there'll be 5% to 7% in most all of our market rent growth because supply just simply isn't there, and we're also seeing many more expansions than we used to within our own portfolio. And I would imagine our peers are as well.

(Operator Instructions) We'll go next to the site of Alexander Goldfarb with Sandler O'Neill.

Just a few questions here. First, just given the commentary and the -- [Berger] reports out about compressing cap rates, and clearly, you can see the larger [P] 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're seeing growing competition for those sorts of assets and then why those assets would sort of exist at the pricing that you're getting it at if the market is so good and underwriters could figure they could lease it up in -- fairly quickly.

We've done really 4 of those in about 1.5 years. As Brent mentioned, Parc North, Atlanta, the Jones in Las Vegas and then Weston in South Florida. So we view it as a nice really shadow pipeline for development. We bought about $120 million. There's a few of those out there, but not a lot. And typically, think about it, every one of those but one has been an off-market transaction. Typically, it works where it's a regional developer working with an institutional partner. Our offer gets them, kind of mathematically, ended their promote with their financial partner, and they can move on to the next deal. But it's always a development that they intended to exit, either upon stabilization or if our offer is attractive enough to them. And sometimes they're worried about the economy and interest rates and things like that. So those are -- there's not a lot of those out there, but it's a niche we found that we've been able to bought. We're thankful, we're able to buy quality products and yield somewhere usually kind of in the midpoint, between development yields and core yields that once they finish leasing up, say, Atlanta, we're seeing in the market cap rates are both sub 5 now in Atlanta, and we think it will be in the low 6s on this project, assuming some carry, and then if we get it leased up. So we would like this opportunity because core acquisitions are, as you mentioned, just about impossible to get right now.

And so Marshall, do you think -- I mean, if you've done 4 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 4 but what you're seeing in your markets right now doesn't give you hope that you can do an equal number of those this year?

I think -- 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 it -- more don't line up than do, but I'd be disappointed if we didn't -- if we couldn't pull 1 or 2 off.

Okay. And then, Brent, in your guidance, you have $1 million place setter -- placeholder for bad debt. But last year, you only did -- you only had $500,000. Is there a reason that you're doubling it versus last year?

There's not a specific reason, Alex. We don't have anything identified that's driving that asset. That number can -- depending on the size of the tenant in any particular year, we had $1 million in '16. We dropped to $500,000 last year. And so $250,000 a quarter is just, frankly, a raise that we're 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 that number will move quite a bit. So it's just a guidance budget number that we hope that we beat.

And we'll go next to the line of Manny Korchman from Citi.

Brent, while I've got you, can you tell us more about your disposition plan and what assets and what market you're thinking about selling?

Yes. The $50 million that we have in guidance, we have a couple of projects earmarked. You see the $12 million for the first quarter. That's a specific project that we view kind of noncore holding in Florida that we hoped, if everything goes well, we'd 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 smaller Houston building later in the year. And beyond that, it could be identified. Yes, I think one thing we've seen Marshall do over the last couple of year as he had taken the reigns, it could be a little more forward-looking at potential dispositions, that type of thing. So we'll play that through the year. Sometimes an opportunity just presents itself kind of unexpectedly. It's something that we keep our ears open for. But it's, I would say, $15 million of that is specifically identified. And then the rest is just, I'd say, could be determined throughout the year.

[you’re saying that typically] as Brent said, it's some service center-type projects that we acquired in the mid-90s in Florida, and then it's really the bottom of our portfolio. As you saw -- kind of saw in Houston, it's typically our oldest buildings. We've got an older building in Phoenix, which we have some brokers offering us kind of opinion of values on. And again, when the market is this anxious for industrial product, we're trying to really come up with that batting order each quarter of what the best properties based on our leasing stance and where cap rates are, what we've been 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, we were frankly, surprised as anyone else, I guess, when the news came out about the parents and the troubles they're having. But they're in 4 locations with us, they're current in every location. No feedback at all from them in terms of any difficulty. From what I've read and seen, it's no more than what you guys have, but I think there will be some consolidation at some of the retail stores as they aggressively bought as a company and had duplicative retail stores. But in our locations, as long as they're still selling mattresses and have a need to distribute them, we're optimistic that they're -- that they'll continue to remain current, continue to push mattresses out of our warehouse. So we're aware of some of their parent difficulties but that has not drooped 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 either, we have a nice term on loans.

We'll go next to the line of Eric Frankel with Green Street Advisors.

Just to go over guidance again. Brent, can you specifically go over the difference between your GAAP annual NOI growth outlook and your average quarterly NOI growth outlook? My understanding with the new methodology is that the same property pool doesn't change starting at the beginning of the year.

It does, I'll try to give a 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 of 2.3% on the straight line, that is a true year-to-date pool and one, I would say, we're very pleased to work with our peer group in coming with some common definitions that we'll all be implementing in '18. I will say that none of that impacted our defined -- definition of same-store, as the consensus wind up being away that we compute as a metric. So the 2.3% is simply property that we held -- for that to be eligible for that pool, we had to own and operate at that property January 1, 2017 through basically December 31, 2018, meaning it was held all of '17 and all of '18.

As a stabilized asset.

As a stabilized asset. What the average quarterly same PNOI growth does is each quarter, we compute same-store based on -- for example, second quarter of this year, we will compute properties that were held, stabilized in our operating portfolio April 1 to June 30, 2018 compared to April 1, 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 2 quarters for the year, it will be in the quarterly same-store because it was held quarter-to-quarter, year-over-year comparison. But I don't think it won't be in the year-to-date because it wasn't a 1/1/17 property. So again, I hope that covers it. The 3.3% is the average then of each individual quarter that we're projecting this year. It's a simple average of those 4. And we -- that's more of a trailing metric, and we think more of a relevant metric. Again, example of Parc North not being eligible for the year-to-date pool until 2019, and we will have owned it 23 months at that point. And half of it...

Okay. It does sound like the pool -- understood. It does sound like the pool changes, obviously, based on the way you described it, which is understandable. Just going to your guidance assumptions in more detailed fashion, can you -- are there any planned tenant move-outs that are guiding your lower occupancy number versus today?

No. I would say no. There's no specific tenant. I think Marshall probably alluded to the Atlanta acquisition, for example, that had low occupancy rolled in. Part of the value add, you have that nice upside, that true higher yield that comes along with that, typically a little picky to your occupancy, but we view 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'll tell our guys, even though they may not know of a specific vacancy, also -- don't paint yourself in a corner and assume 9/10, it's out of 10, 10/10, it's out of 10 renew that a pick here and there and assume some of those don't renew just margin for error. And so it's -- we -- I hope we're wrong again. The last few years have turned out this way that we can budget occupancy and almost returning to normalcy, and then the industrial market stayed strong and we finished the year closer to 96%, and we budget 95% and down in the 94s at different points.

Okay. I'll jump back in the queue. Just quickly, just one quick question on Houston. Obviously, releasing spreads were quite positive this quarter. Is that a reflection of rents growing quite rapidly? Or is that just some older vintage leases that are rolling through?

Yes. Good question. A little bit of it, it's 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 that we were hoping for, but it did improve the market. So as Houston market is getting better, we saw tightening, and then we had a nice fourth quarter. So, it's always like our year-to-date or our annual numbers on releasing spreads are a little -- there's better example for -- than really one quarter, you can get some odd results.

And we'll go next to the line of Ki Bin Kim from SunTrust.

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 -- by this point?

We're -- probably, we'll go through with our team. It really depends on when those -- I guess, I'm back -- depends on when those leases roll. A lot of those tenants would be, depending on the size of them, 6 to 9 months out. So we're pretty far in the negotiations with an awful lot of those tenants. And typically, I don't -- we'll end up renewing, year in and year out, about 70% of those. So I don't know that we really addressed those. We're probably trading paper with a 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'm used -- I mentioned expansions earlier, kind of a number that surprised us in Charlotte, or surprised me. And just in the last year, we've had 11 tenant expansions. So a lot of those tenants that won't renew, as our Vice President over at Charlotte said, his life has become a Rubik's Cube of just trying to accommodate one tenant's growth and moving people around to accommodate them all. So we're probably -- 70% of those will renew, the latter ones we won't renew. We'll be trying to accommodate a tenant expansion. I hope we see the economy getting better, really, in '18 than we saw in '17.

And Ki BIn, I will just add to that, Tina who does a great job of keeping these numbers for us. We believe 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. It's -- so 400,000 of that has been dealt with in January.

Okay. And when you look at the reasons why tenants don't renew, I know you're tenancy ratio is already high, but anything to going from there, reasons why people are leaving?

Sometimes, they need space and we can't accommodate. No, there's no real pattern. I mean, every one smaller tenant may just be financial trouble and I'm trying to give a couple of examples out West, where we chose to not renew tenants. There's one in Denver where they simply just left the state. I don't -- I can't really point to a great pattern. Sometimes, they've had credit issues and we've chosen not to renew them. Sometimes, they leave the state. And then if everyone talks to us what we've liked about building in our parks, a lot of times, we just can't accommodate big growth.

So those sound like a lot of, just because the rent is too high, leaving.

Yes. I haven't seen that. I mean, a lot of times, people will -- yes, a good problem to have, we'll be a little bit in shock and then they go look at the market. And if I rent to market, which is where we try to be or maybe I hear about, especially on a renewal, you can get away with it, then they stay. And probably, I had one of our broker sellers, if a tenant isn't -- doesn't have a tenant rep broker, that is like a warning sign that something must be wrong. They must have financial issues or 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. It makes easier for us to move that tenant to market. And then -- and 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, developable square feet, on your balance sheet right now?

Let's see. Page 9 on our supplement will give you a pretty good idea. Let's see, we're projecting 5 point -- not that we would do that all immediately, but 5.9 million square feet of developable land.

And our next question will come from Craig Mailman from KeyBanc Capital.

Just a kind of follow-up on Ki Bin'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 tenants this cycle? Or -- I was just kind of curious there. And also if you could update us on what your average annual escalator is in place and versus what you guys are kind of getting today.

We're probably similar in a long time. That's usually set by the market, too. Again, almost with that tenant rep broker, we're probably 2.5% or 3% in an annual escalator. We're probably slightly below that in the portfolio, but most new deals will have guide in. And I think our guide in our -- 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, pro and con. So we will push rents as hard as we can, although given the choice, we'd rather keep the tenant and then keep the FFO coming in and make the best deal we can and keep the tenant rather than the other side as you lose the tenant and you may get a better rent, but if you have to wait 6 months, you've lost that income. So like most 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 a tenant, but we will push -- That's kind of our guidance we give people. Push as hard as you can without torching a relationship because a number of these customers we have in multiple locations, too. And push as hard as you can without losing it and hoping the market is better and we get a little bit better rent 6 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.

That's helpful. Then just secondly, on the decision, I guess, to sell the building in World Houston, it sound like you may have another one behind that. Can you just give us some thoughts here on where the cap rates and what your selling are relative to the product that EastGroup has built over the years and then also the decision there to give up a little bit of control in that park?

Sure. And a good question on how we looked at it and this is going to the downside of a phone call. If you looked at an aerial of World Houston, it was a building on the Northeast corner, so not in the center of the doughnut, but the edge of the doughnut. It was a mid-90s construction, older building, a little more office in it than typical aggregate finish versus concrete tilt wall. 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-6, kind of mid-5s to high 5s cap rate. And I -- it's hard to guess. I'm trying to think of the latest cap rates in Houston where, I want to say, first, that on CBRE, we're around the 5% in Houston. So I would think we would trade as low as anything that's traded with kind of we were -- Brent and I were just in Texas last week with several of the national brokers and we're still hearing that the roll-out capital for quality industrial is even greater this year. So I would think our World Houston would trade as low -- could either set a low watermark or be right there at a 5% or sub-5% on our developed product that's 6 years old.

Yes. I will just add to that, Craig. Those -- the building we just sold and the other one we've said we might sell over the summer or purchase option with a tenant, those were both buildings that we originally purchased early on in our process of growing in the park and then -- over 10 years ago, 10, 12, 15 years ago. And then since then, obviously, we've developed a lot of Class A premium buildings. And these 2, if you look at them, as Marshall said, just makes sense to kind of prune out. And we're not foregoing any rental control on the park combined with those 2 in total less than 100,000 square feet. And we still can totally control and manage that association and our protection control committee of that park. So just low-hanging assets that we've got a good gain and just makes sense to upgrade the core quality there in the park.

Yes. This year, Houston will be, for example, about 14% of our NOI. So we're [accounted to] we've also said earlier, when we were 21%, we use more of a meat cleaver to kind of reduce our portfolio allocation to Houston. And this year, it'll be more -- let's cut more with the use of a scalpel. We're not opposed strategically exiting a building here or there based on where it is within our park, or where it fits within our Houston portfolio, but we like that the market is improving. But just in terms of an allocation, we like that low teens, kind of lower double digits at 14%, we -- we'd rather outgrow the problem than shrink to it. But we like -- we'll build a building now in Houston that will finish up our West Road project. We'd sell 1 and maybe 2 or 3 later this year, still.

And we'll take our next question from the line of Blaine Heck from Wells Fargo.

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 and maybe let Marshall talk the bigger picture. Yes, Houston was up. Obviously, strong fourth quarter. About half of that was the success of a property tax appeal. And we got to keep a portion of that because some of the space was vacant. So it was north of 4% just on the operating metric positive if you took that out. And then for '18, 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 lagger.

In terms of any other markets, I'll hand it to Marshall, but when you're -- a lot of markets are 100% leased and you get one vacancy during the year and then you're 98%, but that's a down '18 compared to '17. It just becomes very challenging to take the Houston benefit and then have it be just the 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 in at the beginning of the year.

Yes. And I'll agree with Brent. I mean, I think if you said kind of we've went through market by market, frankly, most of our markets are strong or improving. So there's no specific market that really is -- it's not a market. It's -- I'm kind of looking down our list. Those that go backwards 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, I'm lucky that's not very huge market for us, but Tucson where we have a building under construction for our largest tenant, they're going to move out. We've re-leased about 80% of their space, but that will 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 a building for the tenant. So there's some moving parts. And again, I hope we're being conservative on all of our assumptions. Maybe other than bad debt, I hope we can we're conservative on all of these things.

Okay, that's fair. Maybe to just focus on one other market. There's a pretty high level of expirations coming in Tampa in 2018. Can you just talk about that market a little bit and what your expectations might be for rent spread? So I think they lagged the overall portfolio a little bit this year, but do you see any improvement in that market as you look forward?

We like the Tampa market. I mean, a couple of soundbites, but I was surprised, our brag on our Eastern region team where we finished the year in Florida at 99% leased, which has to be a record, if it's not, on almost 11 million square feet. Our GAAP releasing spreads last year, because, again, we've talked about Tampa and worked at it, a little north of a 20% GAAP releasing spread. It's a strong market and doing well. It's not as strong within the state of Florida, it's probably in Orlando or in Miami, but it's a solid third within the market. And really, I think it's good, I guess, within the Tampa expirations, it's a -- our 14 tenants make up that because I had the same thing. It jumped out of me. I was talking to our team of what's going on with all of our expirations there and I like that it's -- there's no one major tenant really driving it. It's 14 fairly, evenly sized tenants that drive that 740,000. So I think we've renewed and I have looked in our projections. We've renewed about the -- about portfolio average of those. One of our tenants, again, in our Oak Creek building, one of the large expirations that as we relocate them into our new Oak Creek development. So we'll get that space back, but that's not in our explorations in one of the big spaces we'll get back this year. So we like the market and thankfully glad we're diversified. 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.

And we'll go next to the line of John Guinee from Stifel.

John Guinee here. I was just looking at your land portfolio, Marshall. And basically, over about 60% of this Miami, Houston or Fort Myers, looks like Miami is -- 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're going to build out there? And then talk about Fort Lauderdale, which looks like your basis is over 300 a 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, you land basis throughout your portfolio.

Okay. Sure. We'll try to move it. And today, everything we buy, we'll try to put in development as quickly as we can. When we feel it's a good time in the cycle and we try -- and you're not -- at this point in the cycle, you're not stealing land from anybody, too. And so in Miami, we bought the 60 acres and you're right, that's about a quarter, roughly a quarter of our landholdings in terms of value today. On the site and we're really where the intersection of County Line Road where we're in Dade County, with the other side of road being Broward County and the Florida Turnpike. That corner. The -- so the front 7 acres is what we've designated is really higher value than industrial. So we have that listed with a broker and are -- and actually engaged in a dialogue of purchase and sale with a group that would buy a portion of that acreage. It will probably be a mix of office or hotel or retail and should -- it's probably worth twice with our industrial land is, so we kind of view it as a way to buy the land from Churchill Downs and then chip away at our basis on the balance of the 54 acres. We're excited about the Miami market. It's 3.5% vacant, which really [in their stats] 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 second quarter there, and that's one we've talked ourselves into it but we can move quickly through that land. So if we sell the 7 acres, you take a good bit of that basis away. And then once we start developing, that is a place where -- or you could potentially get a pre-lease on some of those. We'll build 5 buildings, a little over 800,000 square feet and really build as fast -- faster or slower as the market allows us. Fort Myers is the other land where we've got a good piece of land there. It's actually 2 tracks, some of it all along I-75 and another track just off of I-75. We're really under lease up. Built a building at SunCoast and looking at another building. So you they'll probably won't go as quickly as Miami will, but we'll work out. We're active on development in 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. It's -- the economy feels pretty good when you're in Fort Myers. Another -- our other biggest landholding is Houston. A lot of that is at World Houston and we just started development for the first time since '14 at West Road. And we've chased a few pre-leases at World Houston and came in second on a large one not too long ago. But I'm confident, even though we've got that inactive today, that, hopefully, we'll get the order from somebody and will start working our way through that land in Houston. And I'll give Brent and the team up with El Paso that we sold last quarter. We've really made an effort to chip away at our landholdings where we didn't have immediate plans to develop to start selling that land here or there. We have sold about 44 acres for a little over $9 million over the last couple of years of land that we didn't foresee a near-term need. So we're trying to chip away here or there. And then one of our challenges at -- like, in Tampa and Orlando, I actually concerned about running out of land. That's one of our biggest fears, is having enough land because we think that's where we really create our value, as if we can build to roughly an 8, kind of sticking with Page 9 of our -- where our land schedule is and a cap rates at 5% and do $100 million, $120 million and we love that 300 basis point spread that the market is allowing right now.

And we'll go next to the line of Rich Anderson with Mizuho Securities.

So Brent, I'm sorry, I'm going to go back to this new disclosure on the quarterly average and I appreciate it because it helps sort of explain things, but I just want to make sure I understand. It does imply -- putting aside the changing pool that you described, same-store pool, it would imply something like 1% same-store NOI growth in the fourth quarter. So my question is, is the changing pool a powerful component such that, that mass 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 I follow how you get 1% for fourth quarter, assuming meeting of '18, I would point out Page 7 of the supplemental. We broke that same number out this time. You see it for 5 quarters they are listed. And you can see how it's not exact size. 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% will just be the simple average for the year of each individual quarterly pool. So we haven't given any guidance or disclosed a quarter-by-quarter computation of that. It looks similar to what you see there, where it moves in a very similar range.

Okay. All right. So I guess, what I will do is, like, putting aside the changing pool. If your starting point is 3.7% and your ending point would be something below that 2.3% average, that's the way I was thinking about it, but your point is taken. Good.

And I was right where you were -- Rich, at one point, where I even went into one of our accountant's office, in fact, taking us, comparing that to grades in school, you've made 2 90s on the test and a 95 and you're making a 75 as your final grade. It's like now, they don't tie. it is -- and 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 had.

Okay. Well, I'm happy to be less uninformed, I guess. So thanks for the explanation. And then the other side -- the other question I have is on the G&A ramping down relative to the 2017. Is there any specific color? I know it's a positive component to the store in terms of how you run your G&A, but what's happening there to see a trend down as much as it is in '18?

Yes, it wasn't -- yes, this was a bigger topic the first 2 quarters of last year. We changed from more of a look-back way of compensating executive officers to the IFF-preferred forward-looking bright-line test metrics. And what that did for us early last year is we basically had -- and that's a little different accounting. It's more -- the bright-line test metrics are were there more measurable, so you more evenly recognize it over the year, which we did in '17. But we also had the -- had to wrap up the old compensation of the prior year for '16 and early '17, 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 2016. So '17 is a little bit of an anomaly with that -- this 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, as a point for relative to the '17 number because -- I recall that now, so, yes.

Okay.

Okay. And then last question. Just connecting the dots to an adjusted funds from operation number. You mentioned retaining 70% of your tenants. And we know the role and all that sort of stuff, but items like straight-line rent and noncash stock comp. Do you have any color on those line items that helped assist in the AFFO calc?

We don't do -- as you say, we put information where you can do your own AFFO calculation, but don't necessarily compute it because there are some moving parts, especially when you get into capital side of it, when you get into routes and other unexpected expenditures. I will just say that we don't see -- we're talking about the G&A, there's some variance between years, but we don't see that much variance '17 to '18. We don't see it being an odd year with capital projects or anything like that. The straight-line rents, we don't -- again, it will probably go down to some extent as we have not as much free rent. Other things so that the variance isn't as much, but we don't see anything or foresee anything that would be a big variance from when you're over the other...

And we'll go next to the line of Rob Simone from Evercore ISI.

Just a question from my end to round out the discussion on same store. I may have missed it earlier, but is there any way or any possibility you guys could provide the range around that 2.7% on a cash basis?

Yes. We've talked about that a lot since the sort of the feedback this time. 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 $4.55, yes, obviously, that would be higher than that. So I don't want to put a specific number to it. I think you will see us next time change to -- we're actually guiding to 0.10 of 1% here in a very unexact-type metric. So I think, next time, it's pretty safe to say you will 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. Understood. And then one other housekeeping question for me. Can you guys -- and you touched on this earlier. Obviously, the theme of -- it's becoming harder and harder to acquire attractively or adequately priced land. In your $50 million of acquisition guidance, can you guys talk about what you have budgeted in that number or break it down between operating properties and land? And I asked that because if it's 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 2 numbers down to understand what's embedded in your assumptions.

Yes, we really typically -- so that was -- we would look towards operating properties or maybe value add within that $50 million and not the land acquisitions. So again, unless it's -- and especially right now, if it's California or another Miami-type opportunity, typically, our land is coming in smaller value, smaller parcels. So it's mostly probably will end up being value add given the state of the market. But every -- we may find a core acquisition here or there. We bought more last year and we bought Shiloh the last before, so we've done 2 in 2 years. And we may find a third or fourth one this year, but that's where they fall.

And we'll take our final question from Eric Frankel from Green Street Advisors.

Just a couple of quick follow-ups here. One, so it looks like your tenant improvement budget -- or your spend has increased pretty significantly versus prior in 2017. Can you explain that, whether that's something we should expect going forward in terms of that level of, call it $3.54 per square foot?

That can vary quite a bit depending on specific leases enough to be too general, but we feel it maintain in -- I'm looking at the chart here. We actually track it for many, many years. In RTI, I think we're still only at, 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 a large single lease in a quarter would move that, But on average, we've been in that $0.70 to $0.80 range of total TI plus commission per year of lease, which is a pretty comfortable level for us.

And I think, construction prices are rising a little bit, so there'll be some upward pressure on that. But per year of lease, it's been a remarkably consistent number over in -- any long period of quarters.

Okay. And then we know that's obviously your apposition of your partners' ownership share of your Santa Barbara portfolio. Do you have any long-term plans for that part? It's obviously -- it's a little bit different in terms of its functionality versus the rest of your portfolio.

Good observation. I think it's 4 buildings that are 2-story R&D buildings in Santa -- I really believe in Santa Barbara that we acquired in a portfolio in the '90s and really a REIT acquisition. So long term, our partner was kind of managing some of his own personal life. We bought him out of 2 of the 4 buildings separated, then not allowed us to really separate it into 3 several parcels, basically. And again, probably not this year, but long, long term, I could see it's 1031 [our way out] of 1 or 2 of those because as you said, they're not that high industrial buildings. We have lots in California, but these are older 2-story R&D buildings, so it's typically not what we do. But they function well. And so we'll take our time in their system.

Sorry, one, Brent, just a final follow-up. That tax rebate that you got on your Houston portfolio this year, can you just -- can you articulate the actual dollar amount of that rebate?

It was a tax appeal. And so the net to us was -- 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 to 4-point something percent. But we're very pleased that we won the appeal. The -- Texas, in general, Houston, in particular, their taxes have pushed. They brag about being a nonincome -- for individuals, no income tax, but where they do get their money in Texas is via real property tax. And so the markets are strong in Texas. They've been pushing appraised values very hard and we work hard to recoup some of that. And it took the course of the year to get that, but it was in that $300,000 range.

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're certainly available if anyone has follow-up questions this afternoon and look forward to seeing you soon. Thank you.

We'd like to thank everybody for their participation. Please feel free to disconnect at any time.