Eastgroup Properties Inc (EGP) 2018 Q1 法說會逐字稿

Good morning, and welcome to the EastGroup Properties First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this call may be recorded. It is now my pleasure to introduce Marshall Loeb, President and CEO. Please go ahead.

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

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

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

Thanks, [Tina]. The first quarter saw a continuation of EastGroup's positive trends. Funds from operations per share came in above guidance, achieving an over 17% increase compared to first quarter last year. This marks 20 consecutive quarters of higher FFO per share as compared to the prior year quarter. The strength of the industrial market has further demonstrated through a number of our metrics, such as another solid quarter of occupancy, positive same-store NOI results and strong re-leasing spreads. And as these statistics bear out, the current operating environment is allowing us to steadily increase rents and create value through ground-up development, along with value-add acquisitions.

At quarter end, we were 97% leased and 96.4% occupied, and this marks 19 consecutive quarters or -- since second quarter 2013, where occupancy has been approximately 95% or better, truly a long-term trend. Drilling into our specific markets at quarter end, a number of our major markets, including Orlando, Tampa, Jacksonville, Charlotte, Dallas, San Francisco and Los Angeles, were each 98% leased or better.

In Houston, our largest market with 5.5 million square feet, down from over 6.8 million square feet in early 2016, was 94.5% leased.

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

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

First quarter same-property NOI rose 4.3% on a GAAP basis, and average quarterly occupancy was 96.3%, up 70 basis points from first quarter 2017. Given the intensely competitive and expensive acquisition market, we view our development 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 and we target 150 basis point minimum projected investment return premium over a market cap rates.

At March 31, the projected return on our development pipeline was 8% whereas we estimate the market cap rate for completed properties to be in the low 5s. And further, we're continuing to see cap rate compression in our markets.

During first quarter, we began construction on 2 buildings, totaling 170,000 square feet with a total investment -- projected investment of $12 million. And then coming out of the pipeline, we transferred 3 buildings totaling 347,000 square feet with an investment of approximately $30 million into the portfolio and 100% leased.

As of March 31, our development pipeline consisted of 17 projects in 10 cities containing 2 million square feet with a projected cost of $165 million, which was 51% leased.

For 2018, we project development start of $120 million and 1.4 million square feet. One of the things I'm excited about this year is a greater number of development markets. This diversity reduces risk, while also raising our odds to grow the development pipeline. More specifically, you'll see us continue development within our successful parks in places like Charlotte, Dallas, Orlando and San Antonio. Additionally, we restarted Phoenix development in mid-2017 and recently broke ground in Houston for the first time since early 2015.

The third and final leg of the stool is we have active developments in new markets for us, such as Miami, Austin and Atlanta. I'm also excited about where we stand in terms of our projected pipelines so early in the year. As a reminder, our leasing results are what drive our next start. So the $120 million in projected starts consist of 10 separate projects, and I'm pleased that we've either begun or have approval for 7 of those 10 starts now. And while we're not raising our projections, it's a positive sign that development leasing is progressing as hoped.

Our first quarter dispositions upgraded portfolio quality as we sold several nonstrategic assets. In March, we sold 56th Street Commerce Park, an older 7-building, 180,000 square-foot service center project in Tampa for $12.5 million. Earlier in the first quarter, we sold World Houston 18, a non-EastGroup developed 33,000 square-foot older building on the edge of our World Houston Park for $2.5 million. And finally, at the end of the quarter, we sold roughly half of our Lee Road land in Houston for $2.6 million. These sales allowed us to upgrade the quality of our portfolio, improve portfolio allocation by market and freed up capital to reinvest elsewhere.

Brent will now review a variety of financial topics, including our updated 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 $1.16 compared to $0.99 for the same quarter last year, an increase of 17.2%.

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

Floating rate bank debt amounted to only 3% of total market capitalization at quarter end.

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

In April, we closed on $60 million of 10-year senior unsecured private placement notes at a fixed rate of 3.93%. FFO guidance for the second quarter of 2018 is estimated to be in the range of $1.11 to $1.13 per share and $4.51 to $4.61 for the year.

Those midpoints represent an increase of 6.7% and 7.0% compared to the prior year, respectively, and an increase of $0.06 per share in the midpoint of our guidance for the year.

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

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

Other notable guidance assumption revisions for 2018 include reducing both acquisitions and dispositions by $10 million to $40 million each. In summary, our financial metrics and results continue to be some of the best we have experienced, and we anticipate that momentum continuing throughout 2018.

Now, Marshall will make some final comments.

Thanks, Brent. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in, upgrading and geographically diversifying our portfolio. And as we pursue these opportunities, we are also committed to maintaining a strong healthy balance sheet with improving metrics.

We view this combination of pursuing opportunities, while continually improving our balance sheet as an effective strategy to manage risk while capitalizing on the current strong operating environment.

The mix of our operating strategy, our team and our markets has us optimistic about our future. And we'll now take any questions.

(Operator Instructions) And our first question comes from Jamie Feldman with Bank of America Merrill Lynch.

So I was hoping to focus on development starts guidance. Correct me if I'm wrong, but I think you maintained it from last quarter or from your initial guidance. I'm just curious what it would take for you to bump that number up. And in answering the question, maybe just talk about supply risk. Is that holding you back at all?

Yes. Thanks, Jamie, and good question. We maintained our guidance at about -- it's 10 projects really, if you guys will dig into the details, and $120 million in dollar volume. I guess big picture, I don't use the analogy. A lot of our development is almost like sub -- building out of subdivision. As 1 building leases, we start the next one. So it's really driven by the -- a lot of that was driven by the field and leasing rather than by corporate. We have -- we were a little bit light on our dollar volume and starts for first quarter. But of the 10 starts we projected this year based on our leasing volumes, we've either started or have approval and will be starting soon 4 more. So that will get us through 7 of our 10 buildings. We feel pretty good, knock on wood, about our $120 million kind of anecdotally. We're -- they're all early, but we're in the running for 3 different pre-leases on buildings, which is a higher number for us. Usually, we build multi-tenant spec buildings, so we're seeing more demand to pre-lease. We're also consistently hearing more and more. We just had our own internal leasing call about expansions. So a number of the spaces we've leased or a number of our developments like Chamberlain in Tucson and Oak Creek VII in Tampa are really us accommodating an existing tenant who's outgrown their space. It was an existing tenant. Our last building that we're just starting in Orlando, too. So cautiously optimistic, but later in the year, we'll be up from the $120 million if the economy hangs in there. And then in terms of supply, we'll typically say we like where we fit within the food chain. And that so much of what we see being built, there's large numbers of starts we see in terms of volume in places like Dallas and Atlanta each about $19 million, but absorption has been $19 million to -- in the $20 million in both of those markets. And really, I'll stick with Atlanta. And reading some of the statistics about the Atlanta market, there's $19 million currently under construction, which would -- the last year, they absorbed $21 million. But of the $19 million, there's 8 buildings that are 1 million square feet or above and most of that is in South -- an awful lot of that is in South Atlanta. The statistic I also read the average building under construction in Atlanta is over 530,000 square feet. So we're -- we just broke ground on an 80,000-foot building. So it may as well be a hotel being built down The Street. Or in a lot of cases, it's -- we're in North Atlanta and their construction is in South Atlanta. So we struggle to find land sites and thankfully feel pretty good about where supply is today with -- construction prices are going up. Rents are hopefully keeping pace, but we don't -- aren't alarmed about supply and what we do see is so much of it is big-box supply.

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

We see a trend towards -- a little bit towards some bigger tenants, especially within our development. I mean, our average tenant size is still in the mid-20s, but we certainly see demand from the larger tenants that will take a full building from us. I don't know that -- I don't view it as a shift so much away. Our -- the customer uses we had 10 years ago or 5 years ago are still there. It's really thankfully being more supplemented and that we see e-commerce or people with that last mile usage. One of the leases we signed this quarter was Best Buy, and it's really the last mile getting to their stores in North Carolina. So a little bit e-commerce, I guess, you could say are physical stores there. So it's more supplementing the uses that we're seeing rather than replacing.

And our next question comes from Alexander Goldfarb with Sandler O'Neill.

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

We did -- I guess, in either way, we beat it by a $0.05, as you said, and then we did add $0.01 to that. So we did, for the balance of the year with the remaining 3 quarters, did raise our guidance. And I hope you're right. We feel like we're -- our average occupancy is 95.5%. So that's a pretty healthy number for the year for us. We feel like we've built numbers that are reasonable and rational. And I hope 6 months from now or better yet, first quarter next year, you can say I told you so that we were being too conservative. We -- a little bit [obviously] you're hoping the economy stays in there and the uncertainty is there, but we feel like it's our best guess and I hope you're right. Brent, any...

Yes. It was -- obviously, it was a well-balanced beat. We had the $0.02. We mentioned that was nonrecurring, but of the other $0.03, it was same-store contribution. It was development leasing a little ahead of schedule. It was a lot of different buckets. I'd also say for the rest of the year, when you're in that 95.5% to 97% leased and occupied range, it's just hard to make yourself when you're dealing with budgets to really get more aggressive than that. So like Marshall said, we hope that it sets the stage for us to have upside through the rest of the year. But as we've always said, our budget is not necessarily our goal. But we just point out, these are the assumptions that are driving our midpoint. And if we can continue to outperform them, then that would be to the good side.

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

Okay. Sure. I'll -- you're correct. Both of them in Austin, we had a [tenant] that went bankrupt. It's a project by the airport submarket and good activity. Thankfully, we had downsized the tenant last year. And even after doing that, they still did not -- just a tough business to be in evidently. So they didn't survive, but good activity to backfill that space. We still are happy in Austin and like that market a lot. Santa Barbara, probably more history than you wanted, but it came in a portfolio. It's 4 R&D -- two-story R&D buildings that we own in suburban Santa Barbara. We had a tenant that had been there for as long as I can remember when I was the asset manager in the '90s for 20-plus years. They had outgrew the building, built their own building and moved out last year. Had good leasing activity. We leased 50,000 feet, 12 of it during the first quarter. We have a large prospect that we're hopeful leases out. Hopefully, that comes back here in the next week to two to address another balance of it. The tricky part with Santa Barbara, it is semi-office building, so the leasing cost is -- I've said to our asset manager, makes me appreciate industrial given the leasing cost you're looking at. Turning a single-tenant R&D building into a multi-tenant building. And then you may remember at the end of the year, of the 4 buildings we bought our long-term partner out who had a 20% interest out of 2 of the 4 buildings. And really, long term, you're right. We would look to probably go to more industrial buildings. I don't know that the cap rates, given where they are in Southern California today, and we're selling a semi-office building R&D building that we can trade down and yields from some R&D into office. But long term, by having it into 3 separate parcels today, really [1030] our way out of Santa Barbara long term is on our long-term horizon. You're correct.

And our next question comes from Manny Korchman with Citi.

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

Yes. It's a little bit -- there's a -- some of the moving parts -- if you remember, at the end of the year -- good question. We bought 4 vacant buildings, Gwinnett Progress Center in Atlanta and they roll in the portfolio 12 months after the developer got their certificate of occupancy. So some of that rolls into our portfolio in second quarter. In Tucson, we're finishing up -- wrapping up construction for an existing 150,000-foot tenant. So they're going to relocate. So we'll get that. The building has been re-leased. Again, another expansion. Great story of existing tenants going to take about 80% of it, but we'll get that 150,000 square feet back. Kind of same thing, just some moving parts. We're losing a tenant in Jacksonville. A little over 100,000 feet. We know we have a good prospect to backfill that. So it's some moving parts and 1 in Las Vegas. I think the tricky part, as Brent mentioned earlier, a little bit in talking to some of our kind of guys in the field at 95%, 96% occupied as we move tenants around and backfill space, it feels a little bit like Rubik's Cube. And each time we do it, we're putting an ESFR sprinkler system in one of the warehouses. You lose tenants for -- you lose the occupancy for 2 to 3 months as you paint and carpet and get the space ready for the next tenant. So we will bounce back during the year. We actually raised our annual occupancy by 30 basis points. But second quarter, a little bit of acquired vacancy and then a little bit of just moving parts as we move tenants around within the portfolio.

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

Sure. Maybe I'll -- good question. I'll explain our logic on kind of reverse order. With Houston, with oil prices rising in the high 60s and really now we're several years into when the downturn started in late '14 and Houston also going from low 20s in our portfolio to the low teens, we felt like okay, we don't do that for every market. Although Houston is still our largest market and people talk about when they think of EastGroup that we would drop that disclosure play. It's much smaller in our portfolio and much more stable, thankfully, within our portfolio. So that was some of the logic at year-end is where we typically like to take a look at our supplement and make changes. So it seemed like a natural time to drop the Houston pages. We discussed it internally. And then in terms of the market, it has -- I've described it as stock falling and it's really more of a recovery phase now. The word I've heard a couple of times from brokers or different people we've talked there are green shoots. The tenants are starting to expand, the economy's moving. Houston, a couple of stats to throw at you. It's 5.2% vacant, which is actually a lower vacancy rate than Dallas and Atlanta and any number of our major markets. Over half of the new construction in Houston is in the Southeast valley where a submarket where we're not. They added almost 100,000 people, 94,000 people in 2017, which was the #2, the second highest growth rate in the country, second to Dallas. So we -- and we feel comfortable about Houston. We're optimistic. It was -- it's great to see development restart in Houston. It was so much of our development pipeline several years ago, and we shut that off. But we have good activity on what we're building there. So I can keep throwing numbers at you, but overall, we feel good about Houston and feel like it's a recovering market. Rents have stopped falling and are flat for the moment, but we think they're going to start accelerating here probably in the next quarter or 2.

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

Can you just walk through how your same-store guidance was increased by nearly 100 basis points after just 1 quarter? I'm just trying to understand how you guys are forecasting your business.

Yes. I'll jump in there. I mean, obviously, we had the first quarter that dialed into it that increased for the year. And then the good news there is it was really -- as I'm looking at it, I'm looking at about 8 or 10 of our markets that I have highlighted and I see here that had at least 6-digit increase in NOIs in terms of just revised numbers. So it was a combination of actual results first quarter. And as I mentioned, to start continued optimism as we tweak going through to the year as we revisited budgets this past quarter. The good news is that the changes made in the field resulted in a wide-based increase. It wasn't A leased, it wasn't A market. Again, I think it speaks to the depth that it was the culmination of a lot of different markets that just upticked and all that added together resulted in a nice raise.

Okay. And just really quickly, the $0.02 of nonrecurring gains, can you just clarify what those were? I had a hard time...

It was really nonrecurring. We had a land sale, which was an older parcel southeast outside of our North Houston property that we sold for a small gain. I think that was $85,000, $86,000. And then, the larger portion of that was we sold a partial interest we've had for over 10 years now in a King Air airplane. And so the accounting for that, we had expensed it above the line. So as we sold it, it was just other income above the line. So that's just a onetime thing there where we exited that partnership. And that plane, it just wasn't working for us anymore, and we sought better ways to get around the country to see our properties.

I guess Southwest does the job pretty well. And then finally, can you -- you seem to be -- your company seems to be selling more, call it, noncore assets. And so maybe can you clarify how much your portfolio you might consider noncore or property you probably will desire to sell in the next few years?

Sure. It's harder to quantify other than that -- I guess, I always view it as part of our job that we should always be thinking of our portfolio. And as properties get older and maybe have -- don't -- can't produce the metrics that are at our portfolio average in terms of occupancy, rental increases that we should always be -- although they're well leased in our portfolio. What we've been selling has been high leased. It's just not our future. So we should always be kind of pruning the portfolio. We've done a lot of that in 20 -- for us, a lot of that in 2016, 2017. In Tampa, it was a 30-year-old, 7-building service center. Kind of the same thing in Houston. It was one of the first properties we acquired. In World Houston, it's over 20 years old we're listing. Just listed a building in Southwest Phoenix. Again, we like the East side of Phoenix better than the West side. It's a little more land constrained, but that's probably a 30- to 40-year-old building that's just coming to market now. And so I'd like to think you're never really done. And when they -- if they kind of position like in this asset in Phoenix, we've -- new paint, new carpet, new tenant it fairly recently got stability. It's a great time to take it to market when there's so much demand out there for core industrial or stable industrial. So I -- we have $40 million this year in our projections, and that's probably a pretty reasonable run rate. And I kind of view it again as our job to kind of already be thinking of what 2 or 3 assets do you not want to own in the next downturn and how do we go ahead and move those to market.

And our next question comes from John Guinee with Stifel.

3 quick questions. First, are you using Southwest Air? Or did you get a new plane? Second, do you -- is it important to keep the Santa Barbara asset because you need to do 3 or 4 different site visits in the summer? And then a serious question is if you look at all your development, how much of the tenants are coming from your existing tenant relationships and how much of them are new tenants?

Okay. Let's see, I'll try to run through. We do not own an airplane. If you want to make us a deal, personal loan, we'll look into it. Yes. Santa Barbara, we have our chairman spending part of the year already there, so we have a good asset manager in place out in Santa Barbara who goes by the asset regularly for us. And then your last question, yes. A good one. And it's a fair amount of our tenants. It's not the majority, but probably right now, 25% to 30% as I kind of run through my list. It's either existing tenants like Houston where we're picking up additional business from them or expansions in Tampa and in Tucson. That's why one of the reasons we like about the park development program. One, I think it lowers our risk. If the first 5 buildings in Charlotte work, there's greater odds that the 6th one will work versus a big building on the edge of town. And in many cases, a tenant will come to us and they still have a few years left on their lease, which was the case in Tucson. And they need more space, and we can work through and basically have the ability to tear up their existing lease and build on typically a larger building on a longer-term lease. So we're seeing many more expansions over the last 12 months than we did the prior probably 48. And we -- that's a great sign. Always thought that's the best type of demand because we're not pulling the tenant out of one of our peers and it's a zero-sum game, but really shows the health of the economy in the market.

And our next question comes from Craig Mailman with KeyBanc.

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

We don't have our bad debt reserve baked into our same-store, so that was not actually a factor. We had $90,000 of bad debt first quarter. We had budgeted $250 million. We've kept the $250 million reserve, which is not earmarked for a specific tenant. But we still have the $250 million reserve for the remaining 3 quarters. Last year, we had $500,000. The year before that, we were closer to the $1 million. So we'd like to look back and say that we're conservative. But when you've got 1,500 to 1,600 customers, it's hard to not project something. And then you don't know if someone does go bad, is it a 5,000 square-foot tenant or is it 100,000 square-foot tenant. Given our size, that could have a swing quarter-to-quarter. So it wasn't in the same-store to answer your question. It was not in the same-store upward guidance.

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

Good question, Laura. It's always in any -- I know we're just 1 quarter in. I typically always like to look at the, which we can't now, the year-to-date number. Just because given our size, I always thought we'd get a more meaningful sample size. In the West Coast markets, we are seeing high-rent growth and actually negative supply in the Bay Area. And even like Orange County was rating where there was a negative industrial supply in Orange County where buildings were being repurposed. Dallas and Fort Myers are also growing. I mean, with things this tight, one of the -- and construction prices rising. That's one of the challenges we've kind of working our way through with our new development. So just every project we put out for bid, the construction pricing comes in and surprises us a little bit. So I think that has to do with that tight market and rising land and rising construction prices will continue to put upward pressure on rents because everybody else is in the same dilemma as we are in terms of adding new supply. So we are, I think, good catch. Seeing those -- Fort Myers had some of the highest population growth, at least in terms of a percentage smaller base, but within the State of Florida over the last year as well.

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

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

Easier way. Again, the market is better and stabilized. And we did so that Northwest submarket, that's a 60,000-foot building. We felt comfortable there that really no one was, knock on wood, building what we were building there. We have had some pre-lease opportunities out near World Houston and are leaning more towards that. If we had either a fully leased building or significantly leased building, and so we'll work our way back towards that. But right now, it feels like you're maybe a quarter or 2 or hopefully, ahead and hopefully we may speed it up if the market comes back. But especially up north, there was oversupply. But now, the vacancy rate's come down pretty nicely. It's just over 7% in the North submarket where our World Houston land is at 7.2%. So if that keeps coming down and tenants are expanding and -- the other thing we heard this quarter for the first time, which was nice to see, were contracts with oil and gas companies, people out looking for space. So that was a -- seeing growth in tenant demand in Houston. The oil and gas industry has been quiet, and we started hearing that a couple of our prospects were out chasing really 3PL contracts with oil and gas companies. So that's the other sign that could really pick things up. And the logistics companies, when they need space, the good news/bad news is when they shrank, they went away quickly because they lost contracts. But as they get these contracts, our thought or belief has been those would be the first guys back in the market, and they'll need space in 60 days or in a few months. They'll need it quickly.

Okay. That's helpful. Then can you give us any cap rate assumptions for your expected acquisitions and dispositions for the year and whether you guys are targeting any specific markets on either side?

It's hard. Cap rates will be a blend. I mean, I think what we've earmarked going out, and this is really based on broker guidance, we're thinking we'll be 5.5 to 6. So it's been nice. We were meeting with one of the national [businesses], every single last handful of deals they've sold have all been above what they had target as their stretch pricing. Acquisitions are a little bit tougher and then I could see us being in the -- really, the value-add model we like better than a core acquisition right now. Just because once something gets fully leased and it's out there, as the broker said, everything seems to exceed stretch pricing. So we're -- hopefully, we can find a building or 2. We've got a small project now that is -- would be a -- it's a fully leased project, but it's not a big portion of the $40 million. And we'll hopefully close it here in the next few weeks, and that's around the 6% range. And -- but if we buy something in Southern California where we've been pursuing things, that will be, at best, sub-5%.

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

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

So just one kind of question for me. You have a lot of moving parts and continue to have a lot of moving parts. As you mentioned in the release, kind of a lot of it is moving in your favor, but still activity. I'm curious if you're seeing tenants generally moving up or down in terms of the amount of space they're using and -- well, I guess, that's part one, if you can respond to that first.

Generally moving up in space. I mean, that's really where we've -- good question. Backfilled some of our developments in Tampa and in Arizona where -- in Arizona, they doubled space and then it's actually -- I'll walk, if I can, walk you through the details. Even in -- and this was in Tucson, we moved 150,000-foot, 20-year tenant relationship that we've had into a new 300,000-foot building. We had a public company, an auto parts supplier expanded and took 120 of their 150,000 feet. And it just shows you how tight the markets are. And then we had a third tenant that was food services that expanded into the auto parts supplier. So really, kidding our broker, I've never seen -- we're calling it the trifecta with 3 tenants all expanded their square footage. Charlotte, we've had, until a little bit dated, but over a 1-year period had 11 tenant expansions and that's what's the -- Airport Commerce Center made us feel better about building there. We have 2 buildings that are fully leased there that are our best prospects for it are coming from within our existing buildings that are adjacent.

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

Yes. I would -- yes. We're kind of mid-20s and I think, especially as we sell some of our older assets like the Tampa building had a lot of small tenants that we just sold, the 30-something-thousand foot building in Houston, although that's a little above our average. I do think our average tenant size will grow. It won't be as big as some of our peers that are more in a logistics centers on the edge of town, but I do think our average tenant size will evolve and grow over time.

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

A lot of the questions I had, had been answered. I guess, just one quick follow-up from me on guidance. I know you guys had the $0.02 one-timer. In the revised range, are there any other kind of onetime items included in the $4.51 to $4.61? Just trying to size up what the raise was attributable just to core real estate.

There's not. That generally is just something that arises. If we were, we have a few parcels of land still throughout the portfolio that we would sell or market for sale. I mean, if that were to occur, then a gain there would register in. But we don't have anything that I would describe as other income dialed into our midpoint guidance other than the actual we had in the first quarter.

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

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

Thank you.

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