EastGroup Properties' (EGP) CEO Marshall Loeb on Q4 2016 Results - Earnings Call Transcript

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EastGroup Properties Inc. (NYSE:EGP) Q4 2016 Earnings Conference Call February 2, 2017 11:00 AM ET

Executives

Marshall Loeb - President and CEO

Keith McKey - CFO

Brent Wood - SVP

Keena Frazier - IR

Analysts

Manny Korchman - Citi

Craig Mailman - KeyBanc Capital Markets

John Guinee - Stifel

Alexander Goldfarb - Sandler O’Neill

Jamie Feldman - Bank of America Merrill Lynch

Blaine Heck - Wells Fargo

Brad Burke - Goldman Sachs

Sumit Sharma - Morgan Stanley

Rich Anderson - Mizuho Securities

Eric Frankel - Green Street Advisors

Rob Simone - Evercore ISI

Operator

Good morning and welcome to the EastGroup Properties’ Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded. [Operator Instructions]

And it is now my pleasure to turn the conference over to Mr. Marshall Loeb, President and CEO. Please go ahead, sir.

Marshall Loeb

Thank you. Good morning and thanks for calling in for our fourth quarter 2016 conference call. As always, we appreciate your interest. Keith McKey, our CFO and Brent Wood, Senior Vice President are also participating on the call. Since we’ll make forward-looking statements, we ask that you listen to the following disclaimer.

Keena Frazier

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 is subject to the Safe Harbor Statement included in the news release, is accurate only as of the date of this call. The Company has disclosed reconciliations of GAAP to non-GAAP measures in its quarterly supplemental information, which can be found on the company’s website at www.eastgroup.net.

Marshall Loeb

Thanks, Keena. The fourth quarter saw a continuation of EastGroup’s positive trends. Funds from operations exceeded our guidance, achieving a 14.9% increase compared to fourth quarter last year. This marks 15 consecutive quarters of higher FFO per share as compared to the prior year’s quarter. Per share FFO was the highest in the company's history in 2016, breaking the records we set in 2015 and 2014. Furthermore, our 2017 guidance is projected to break this record. The strength of the industrial market is demonstrated through a number of our metrics such as another solid quarter of occupancy, leasing volumes, positive same store NOI results and continued positive re-leasing spreads. In summary, our increasing FFO and dividend proved the success we're seeing in all three prongs of our long term growth strategy.

At quarter end, we were 97.3% leased and 96.8% occupied. Occupancies exceeded 95% for 14 consecutive quarters as market commentary, we've never achieved this level of occupancy for this long. Drilling into specific markets at December 31, a number of our major markets including Orlando, Tampa, Charlotte, San Francisco and Los Angeles were each 98% leased or better. Houston, our largest market with over 5.9 million square feet down from over 6.8 million square feet in January 2016 was 93% leased. Supply and specifically shallow bay industrial supply remains in check in our markets. In this cycle, supply is predominantly institutionally controlled. As a result, deliveries remain disciplined and also as a byproduct of the institutional control, it's largely focused on big box construction being over 300,000 square feet. Rent spreads continued their positive trend for the 15th consecutive quarter on a GAAP basis. Overall, with 95% occupancy, strengthening markets and disciplined new supply, we continue seeing outward pressure on rents.

Fourth quarter same property NOI rose on a cash and GAAP basis, average quarterly occupancy was 96%, up 30 basis points from 2015. We expect same property results to remain positive going forward though increases will continue to reflect rent growth as at 95% to 96% occupied, we view ourselves as fully occupied. The price of oil and its impact on Houston's industrial real estate market remains a topic of discussion.

We thought it appropriate for Brent to again join today's call. Brent is one of our three regional Senior Vice Presidents and is based in Houston with responsibility for EastGroup's Texas operations. Brent?

Brent Wood

Good morning. Our Texas markets finished the year at a combined 95.2% leased while our Houston portfolio finished the quarter at 93% leased, which was unchanged from the prior quarter. The Houston industrial market exhibited solid fundamentals at year end. The market vacancy rate decreased 20 basis points to 5.1%, which is near record low. There was 2.1 million square feet of positive net absorption in the fourth quarter, which marked the 23rd consecutive quarter of positive absorption and raised the year-to-date total to 6.7 million square feet. Meanwhile, developers continue to show restraint with the construction pipeline containing only 2.4 million square feet of speculative space, which is down to a level not seen since 2011.

Even though the overall Houston industrial market remains stable, there is an undercurrent of tenants downsizing upon their lease expiration, which is producing a lot of movement within the market. We have not been immune to this trend. For example, last year, we signed a total of 30 leases, 20 were new tenets and only 10 were renewals. A more typical year would be the inverse of those results. Two renewals to one new lease and our activity so far this year has continued in this same manner. In January, we signed four new leases, totaling 175,000 square feet, the two renewals totaling 63,000 square feet. The good news is that there continues to be prospects in the markets. Our early leasing efforts have already reduced our scheduled expirations for 2017 from its peak of 17.7% down to 12.8% as of January 31st.

With the number of known move-outs throughout the year, we will continue our focus on maintaining occupancy. As a result, we have been cautious with our Houston budget assumptions included in our guidance. Our leasing assumptions for 2017 reflect occupancy reaching a low of 88% in third quarter before gradually rising to end the year at 92%. Looking into 2018, only 7% of our Houston portfolio [Technical Difficulty] which is less than half of the square footage we faced in 2016 or 2017. The diversification of our development platform within Texas continues to produce results. Our 2017 potential development starts include additional phases to existing parks in Dallas and San Antonio, while the combined occupancy at year end for the Texas markets, excluding Houston, was 97.1%.

In summary, the fundamentals remain strong for the Texas markets outside of Houston. Marshall?

Marshall Loeb

Thanks, Brent. 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 because the majority of our developments are additional phases within an existing park, the average investment for our business distribution buildings is below 10 million. We develop in numerous states, cities and sub markets and finally we target 150 basis point minimum projected investment return of our market cap rates. At December 31, the projected return on our development pipeline was 7.6% or as we estimate, the market cap rate for completed properties to be in the low to mid-5.

During fourth quarter, we began construction on two 100% leased buildings totaling 441,000 square feet with a total investment of 34 million. These starts were in Orlando and Tucson. Meanwhile, we transferred ParkView, a Dallas development, totaling 276,000 square feet into the portfolio also at 100% leased. As of December 31st, our development pipeline consisted of 17 projects, totaling 2.9 million square feet with our projected cost of 235 million, which is 55% leased. This is a large development pipeline for EastGroup compared to recent history. And while large in size, it includes three 100% lease developments as well as three construction complete projects we acquired. Removing the leasing risk on a portion of our pipeline and the construction risk on others should allow us to more quickly stabilize the properties, create incremental NOI and ultimately move them into the portfolio.

For 2017, we project development starts of approximately 95 million. What's gratifying about these starts is we can reach this level again in 2017 with no Houston starts, demonstrating the value of our diversified Sunbelt market strategy. During the year, we closed 15 sales, consisting of over 1,250,000 square feet of operating properties in 25 acres of land, generating over 81 million in proceeds. Four of the property sales were in Houston, representing 906,000 square feet and 52 million in sales. Our asset recycling is an ongoing process. We're pleased with the 2016 closings and continually evaluate our options, including additional Houston sales. As we recycle capital and diversify, the portion of our NOI coming from Houston has declined, while the quality of our Houston portfolio rose. Specifically, at the beginning of 2016, Houston represented over 20% of our NOI with three properties in our development pipeline.

Today, Houston represents roughly 15% of our 2017 projections with nothing under development. Meanwhile, the average age of our Houston portfolio is now eight years versus an average age of the dispositions of 38 years. While the first half of 2016 was spent on dispositions, later in the year, we found a number of promising acquisitions. In fourth quarter, we closed on the 416,000 square foot two building Jones Corporate Center in Las Vegas. Jones was completed in April of 2016 and is 50% leased. We've been seeking growth opportunities in South Florida for a number of years and closed two in November. First, we acquired the 134,000 square foot Weston Commerce Park in Broward County, Florida for 14 million Weston's presently 29% leased and is undergoing redevelopment. We also acquired 61 acres in North Dade County for 27 million. We're projecting 850,000 square feet of development on the site, which has frontage along the Florida Turnpike, adjacent to the Calder Casino and immediately north of Hard Rock stadium.

Finally, we're excited to announce our entry into the Atlanta market. Later this month, we plan to close the acquisition of a three building 238,000 square foot 100% leased property along Georgia 400 in North Central, Atlanta.

Keith will now review a variety of financial topics, including our updated 2017 guidance.

Keith McKey

Good morning. FFO per share for the quarter increased 14.9% as compared to the same quarter last year. Our growth in FFO is from development, acquisitions, same property results, debt refinancing and reduced G&A costs. FFO per share for the year increased 9.5% compared to 2015. One way we measure total return from operations is to add the FFO growth to the dividend yield to obtain a return to the shareholders. For 2016, that return was 13.9% and the last five years has averaged 10.5%.

Our outstanding bank debt was 192 million at year end and with bank lines of 335 million, we had 143 million of capacity at December 31. Debt to total market cap was 31% at 12/31 compared to 36.4% last year. For the year, our interest in fixed charge coverage ratios were 4.8 times, an improvement from 4.4 last year. Debt-to-EBITDA ratio was 6.6 for the year and adjusted debt to adjusted EBITDA was 6 times. And page thirteen in supplemental package shows the adjustments.

In December, we paid our 148 consecutive quarterly cash distribution to common stock holders. This quarterly dividend of $0.62 per share equates to an annualized dividend of $2.48 per share. This was the company's 24th consecutive year of increasing or maintaining cash distributions to its shareholders. Our dividend to FFO payout ratio was 61% for the year and rental income from properties amounts to almost all of our revenues.

Earnings per share for 2017 is estimated to be in the range of $1.78 to $1.88. FFO for 2017 is projected to be in the range of $4.21 to $4.31 per share. The midpoint of $4.26 per share represents an increase of 6% compared to 2016. A few of the assumptions we use for the midpoint are occupancy rates are projected to average 94.9%. Same property NOI increase of 0.6% for GAAP. We are adding a new disclosure for same store by showing same store change without Houston. Without Houston, same property PNOI growth is projected to be 3.2%. Total G&A of 12.3 million with 4.8 million projected for the first quarter. The first quarter is lumpy because of the accounting for stock grants, which is consistent with prior years.

G&A for the year is less than 2016, primarily due to transition costs in 2016 and capitalized development fees. Historically, the compensation committee preset performance metrics and total shareholder return targets and would evaluate the results and make awards in the first quarter of the following year. The accounting resulted in expense in the short term and long term incentives beginning in the first quarter of the following year and that's why it was lumpy that we had. These incentives are restricted stock grants and not cash. The compensation committee anticipates approving a new plan in March for 2017 and following years that will be forward-looking and include bright line tests, such as FFO per share as compared to target FFO per share.

The new plan is projected to provide compensation similar to past years. Therefore, we will start expensing estimated 2017 awards, beginning in 2017 and as a result, 2017 will include some double counting that 2018 and following years will not have. After the plans are approved by the compensation committee, we will compute the impact on compensation expense and disclose the effect. We estimate the double counting amount to be approximately $0.05 a share. But point out that the final plan has not been approved. The $0.05 is a one-time catch up number and will not be in a run rate for G&A. Guidance does not include the estimated $0.05 expense.

In summary, for 2017 guidance, we project strong results in FFO growth and same property growth, absent Houston, occupancy close to 95%, strong development starts, attractive debt financing and lower G&A costs on a run rate basis.

Now, Marshall will make some final comments.

Marshall Loeb

Thank you. Industrial property fundamentals are solid and continue improving in the vast majority of our markets. Based on this strength, we continue investing in and geographically diversifying our portfolio. We're also committed to maintaining a strong healthy balance sheet with improving metrics. Overall, we're excited about our 2017 opportunities. From a holistic standpoint, our expectations are for another solid year. Ironically, as Houston's economic prospects begin turning after a two plus year oil and gas downturn, our 2017 Houston NOI is projected to be lower than 2016. This may cause us to compare unfavorably in any given quarter or two on certain metrics. That said, focus on our bottom line were the sum of our parts and we expect to finish the year with higher FFO, a strong balance sheet and a higher quality portfolio.

We now like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question from Manny Korchman with Citi. Please go ahead. Your line is open.

Manny Korchman

Hey, good morning, guys. Marshall, just as you think about your acquisitions and entering new markets, how do you think about that opportunity of going into a market where you aren't right now and dealing with competition of people that are already on the ground there?

Marshall Loeb

Good morning. Good question. As we -- probably several ways we think about it. One, we really aren’t looking at entering that many new markets. Probably Atlanta obviously is an exception. What appealed to us about Atlanta is, it's a major US industrial market. It really fits within our map. It's a major sunbelt market and we thought given the size of the market, I won't say it’s easy, but with some patience and some optimism, we could reach critical mass there in time. I would compare it to, a lot to what you see us having done in Dallas the last handful of years or so. The other appeal of Atlanta to us, besides that we could get to critical mass, it's recovered a little bit later in the cycle compared to some other markets.

So we think Atlanta is maybe at a slightly earlier inning than some of, I’d say the California or some other markets. And then really with, so many of us because of its proximity, we're familiar with Atlanta. We'd all spent time in Atlanta in some form or fashion and it goes back a little bit, but John Coleman who runs the eastern region for us was in -- worked in industrial in Atlanta for about 14 years when it was weak. So he is part of Duke now. So John Coleman knows Atlanta and has a lot of relationships and so we really felt like it's a market we should have a good reasoning of either why we're not there, because it was so much within our map as to why we were there.

So he and I started spending time there, maybe a year and a half ago and John spent more time there than me and John is just kind of trying to figure out what submarkets would we be interested in and which ones wouldn't. We kind of like if it's on a map kind of that, call it 10 o'clock to 2 o'clock, what people locals would call the Golden Triangle and we're right at 12 o'clock is where this acquisition is. So we think it's a good market, we can get critical mass, get some attractive returns while diversifying our portfolio and never say never, but I would be surprised or maybe pleasantly surprised if you heard us announce another new market later this year or something that quickly, but we've spent some time looking at Atlanta and that's really our thinking on it.

Manny Korchman

Great. And then turning to Houston because we can avoid that, how much of your guidance is conservative with the decline next year and how much of it is known move-outs there happening and they'll get refilled, but probably won't be in ’17, probably more of an ’18 event?

Brent Wood

Hi, Manny. Yes, it is Groundhog’s Day after all. So the Houston question is very appropriate. Yeah, we have -- similar to last year, we have a number of known move-outs. It's heavily weighted to the first half of the year, 80% of our remaining rollover is in the first half of the year, 20% is in the second half. So with that, we just have to budget the assumptions. There's some guys that we know are going to move out, some we have to renew. Last year this time, we had tenants that totaled they were going to vacate. They eventually didn't vacate. So as I mentioned in my remarks, what we're seeing in Houston, there's activity in the market, but there are tenants downsizing, especially in the logistics arena. Those type businesses are downsizing for slower business. So it's just creating some movement and we're having to deal with that. ’16 was a pretty heavy rollover year for us. ’17, they're both in that, started with 17% range. And as I mentioned, looking out to ’18, we only have 7%. So we view this year continue to block and tackle and operate, perform and then hopefully things pick up and get stronger as we get into the second half of the year in to next year.

Operator

Thank you. And next, we'll move to Craig Mailman with KeyBanc Capital Markets. Please go ahead. Your line is open.

Craig Mailman

Hi, guys. Maybe just to stay on Houston real quick. Brent, it was helpful for you give us where occupancy troughs and then where you guys think it will rebound there, but could you just maybe give a little bit more color around maybe who are some of the bigger known move assets or anything chunkier, is that several smaller guys and what gives you guys the confidence to drop almost 500 basis points than end 4Q up another 400. It seems like a big swing.

Brent Wood

Yeah. Craig, I would point out that we had, when I say this year is going to be similar to last year, we had the same swing in ’16. We started the year at 97%, 98% in ‘16. We finished at 93. We had projected to get it lower and thankfully we’d beat our early year assumptions and we're basically forecasting the same thing this year. It’s a very similar swing. We're just starting from a lower threshold and so that really results in that number. There are a couple of the potential move-outs that would be six digit type move-outs, but we don't want to get in specific tenant names, like it’s fluid that we might keep a tenant that says they're going to vacate, might not vacate. So I will say, like I said, it's heavy weighted to the first half of the year with 80%, so that's why we show third quarter being the low point before we hopefully execute more leasing and rebound back in that low-90s at year end and then like I say, in ’18, we have a very low rollover year and there's optimism in the market that oil and gas related tenants are feeling better.

The new regime and changes is being viewed positively within those type businesses in Houston. All has held steady, the rig rate counts up. Oil and gas companies are hiring. Big producers are spending money again. So the signs are there, people are feeling better, home sales for 2016 broke a record, broke a sales record. Residential housing is down to 3.2 months of inventory. So like I say, we've just got our own internal work to do with rollover and then like I say, we hope things are picking up toward the latter half of the year.

Marshall Loeb

Just I would add, Craig I would add just to Brent’s comment, one of the things that makes me feel better about Houston, it's an interesting market of, some of the negative sentiment here, but when we've had vacancy, they’ve done a nice job of, there have been tenants that have been in line and moved back in. The rent may be a little bit lower than we were collecting before rents have come down, but it’s stayed active. As Brent said, usually, we’re call it 70% renewals, 30% new leasing type thing. And it's flipped in Houston. The ratios have, but it's, I've been pleasantly and perhaps surprised that whenever we have vacancy, it’s still an active market and people show up and want the space and I like, as we mentioned also too that our average age in Houston for almost 6 million square feet is only 8 years. So we like our portfolio where it sits today and we just will weather through this and thankfully the other markets are doing well.

Craig Mailman

What's the mark-to-market, you guys have embedded for Houston on the exploration schedule this year.

Marshall Loeb

We don't really disclose or even we’ve learned that, it gets very tricky to do. Obviously, if you do renewals, it’s going to be better numbers than if the space vacates and you have to go to the open market. The vacancy where it puts you subject to having to compete, you get more into the free rent incentives. So the obvious goal is try to renew everyone we can. I would say, so quarter to quarter, just like last quarter, we had double digits down for EastGroup and this quarter, we were very small down. I would say globally for the market, if you're having to compete with a vacancy, especially in the north submarket, you may be in that 10% to 15% down. Obviously, if you have a renewal, you won't be pushed that far. Other submarkets in the city are stronger than that and I would say are probably single digit to closer to flat. So, there is a little bit of diversification of that with them, the market as a whole, but I think our numbers could be a little choppy as it goes through the year internally for us, just depending on what space moves and what the prior history of that space was. But on the whole, I think you'd see somewhere around 10% for the market up north.

Craig Mailman

And then just one quick one for Keith, helpful on the breakdown of the extra $0.05, but just curious why not even just put an estimate in initial guidance, because it seems like you guys are going to have to bring numbers down when the accounts count figure out for that?

Keith McKey

We really don't know all the numbers yet, so hopefully the $0.05 will be close to the number. And we were hesitant to put it out initially but we ought to put something out to give some kind of range. Hopefully, in a month, our goal would be to give you another roughly a press release that can confirm the numbers, we want to avoid surprising everybody. So that’s what he said, we debated in, put the footnote in and realized it may cause some confusion, but we didn't want to surprise you. And hopefully, here in a month, it's a one-time event. We’ll put out a new press release that will have the impact and again, I would emphasize our officers’ salaries won’t on an annual basis, won't really change. The targets are pretty similar. It's just a different methodology, which leads to a different accounting and you may recall one of our proxy reviewers did not -- wasn't protesting the amount of the payment, but our methodology a year ago. And so that's what precipitated this change.

Marshall Loeb

And just to add, we were for ’16, 5.2% of G&A cost to revenue, one of the lowest in the, all of REITs. So our G&A costs have always been low and that's what we will continue to try to do.

Operator

Thank you. Next, we'll move to John Guinee with Stifel. Please go ahead. Your line is open.

John Guinee

Great. Okay. Just to make sure that we understand the math. It looks to us as if you've got essentially mid 3s on same store NOI, excluding Houston, but 0.6 with Houston. If you do that math and you assume that Houston is about 17% of your portfolio, entire company, you're assuming about a 15% decrease in same store NOI for Houston only?

Marshall Loeb

That’s a good question. Houston is about, more like 15%. So again it keeps this year, if you looked at our NOI and you said, on an annual basis, so again that's what we were pleased to see from, in the low-20s and rising to now this year, it's down to about 15% and we expect it to be less than that probably in ’18, although we're also optimistic the market turns and we'll start developing there, but say 15%, probably answering your question down is more like a 10% down roughly than 15.

John Guinee

Okay. And then what you're going to do is you're going to lose about 300,000 square feet of occupancy on a 6 million square foot portfolio and then hopefully lease back about 240,000 square feet to go full cycle for 93%, 88% to 92%. Those are the basic numbers on Houston, is that fair to say?

Marshall Loeb

John I think so yes.

John Guinee

Then, if we just want to bake in a nickel of G&A into the guidance, we should probably say the guidance, the G&A will be roughly 14 million for 2017. If we just want to save ourselves from time, is that fair?

Marshall Loeb

That's correct.

John Guinee

Okay. And then if I look at the, say that $4.02 in FFO for 2016 and if we assume the high end of G&A, we're at $4.21 G&A for ’17 with zero same store NOI. It looks to us like about half of your FFO growth could be attributable to debt cost reduction and half of your FFO growth attributable to accretive development. Is that a rough way to look at it if you've done that math, Keith?

Keith McKey

Not to those percentages, but also we've got acquisitions that came in also that'll above our cost of capital that will add to it. We did have some good G&A, some debt refinancing that helped us out on interest expense.

John Guinee

Our quick calculation was you saved about 10 or you generated about $0.10 in FFO from your debt cost reduction. Does that sound right?

Keith McKey

I have not computed that number, but we had a good year in ’16 reducing.

Operator

Thank you. And next, we'll move to Alexander Goldfarb with Sandler O’Neill. Please go ahead. Your line is open.

Alexander Goldfarb

Thank you. Good morning, gentlemen. Just a few questions. Keith, just wrapping up on the comp, is the $0.05, is that ratable through the year or are you guys taking a catch up hit, let's say, in the first quarter or something like that?

Keith McKey

It'll be in the what, second, third and fourth quarter. Maybe first quarter, little bit in the first quarter maybe, and but it'll be over the year.

Alexander Goldfarb

Okay. And then just so we understand, so before the old system was expensing in hindsight, the new one is expensing prospectively, so basically the overlap in ’17 is the normal expensing of whatever was paid over the past year plus payment on the go forward over the next year, is that right?

Keith McKey

Yes.

Alexander Goldfarb

Okay. Then on the recycling activity, it looks like your dispositions are lower for ’17 than they were for ‘16. But last year, you guys spoke about getting religion and the need to be more active on the recycling front. So just curious why the drop-off in dispositions versus last year?

Marshall Loeb

Sure. So last year was an abnormally big year for us and as you pointed out, looking back historically, we're targeting, we’re going to pick the number 40 million and part of that is driven, the Houston market for dispositions was pretty strong until about summer and then we saw it slow down and buyers were much more selective that the private market matched the public market mood mid-year. So we’ll still try to sell some Houston assets and I'm curious how much optimism may seep into the Houston market towards the real estate market by the end of the year based on what we're saying in oil and gas today. So we may sell some older assets in Houston and Dallas and then the other markets we've kind of earmarked we've got some service center properties down in Florida and things like that that we're working through pricing and getting an idea. So I'd say I don't know if it's getting the religion or not getting the religion, well, we've always been faithful, but we would like to have a recycling program and maybe 80 plus million, I mean Brent and his team and they all did a good job selling a lot last year that maybe a more normal run rate, maybe about what we forecasted 40 million, 50 million on a given year this year.

Alexander Goldfarb

Okay. And then just final question, Atlanta, for years, it seemed like a market that you guys were hesitant on and it seemed like just the amount of supply and the inability to get pricing power kept you away from there. So what has changed as the market is just so built up that now, you're seeing pricing power or is that the type of product that you think will actually sustain pricing powers now, there's a big enough opportunity for you guys to acquire there?

Marshall Loeb

A little of both. We were looking back and Atlanta has had nice rent growth over the last 10 years. I mean, it went down like every market during the downturn, but Atlanta rents are higher today than they were 10 years ago. What we also like about Atlanta we will admit, it's a competitive market, but if you ask the guys in the field, I don't know any markets we’re in that aren't that don't feel extremely competitive. So it's another competitive market we’re in. The other things we like it, you’re right when we probably way back when looked at Atlanta, it was about 2.5 million people. Now, it’s 6 million people. So I was shocked when we sat in some of the brokers’ offices and said, what's for sale and we like to develop where can we find good infill sites and there's simply very few and that's what we're seeing, rents rose 7% last year in Atlanta as the market.

So we see it being much more of an infill market than it was probably when, maybe when you first started covering us for example or earlier. And then we also like our other markets. Our peers are typically on the edge of town, building big box. That's where you can place a lot of dollars and that's where demand has been a lot with e-commerce and Fortune 1000 type companies. So there's not as many people building shallow bay industrial, which is what we're acquiring, what we've said to our investment committee, the buildings we’re buying look just like any other EastGroup building. They just -- buildings, they happen to be in Atlanta. So that's why we’re excited. I think it's going to be a good path of future growth for us. We’ll be patient there, but a market that size, there's always activity and we've figured, we think we've figured out exactly where we more or less want to be over time there.

Operator

Thank you. And next, we'll move to Jamie Feldman with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Jamie Feldman

Great. Thank you. Good morning. So I guess just to understand in terms of your guidance, how do you guys approach expirations, like if there is an expiration and if not lease at this point, are you assuming vacancy across the board, not just Houston. I’m just trying to figure out how much conservatism is baked in?

Brent Wood

I mean we would, it’s really space by space, really kind of bubbles up from the field. So what they're feeling as to odds of renewals are not, probably the only time I would say we assumed probably some vacancy, we also will, you get the leases back or the budgets back and some of the guys will have budgeted 100% occupancy of give yourself a little bit or room and we'll, one of our phrases is, we have budgets and we have goals. So our budget, you hate the budget. Last year, we, high 95%, 96% occupancy the last couple of years. That's hard to sustain. So I hope we, in January, we’re 30 basis ahead of our budget. We’re a little over 96% occupied. So that's a little bit space by space in the field and then we try to blend them a mix of conservatism with that.

There's another element of our occupancy just to point out to people, this is helpful. When we bought these newly developed projects being the Jones in Las Vegas and Parc North and Fort Worth, they’re bigger projects than we typically would have built, where we build a building or two at a time, Fort Worth was four buildings, but the accounting of it is it rolls into our portfolio upon a year of when the original developer got their CEO. So we don't have those in our development pipeline for our budget for the full year. So those will actually -- we need to get them leased and that's a key part of hitting our numbers, but we expect them to roll into our portfolio at some lower numbers, because they'll, Parc North and Fort Worth, Dallas Fort Worth anniversary is in I guess this month. Now, we're into February and Jones will be April, even though we acquired both of them in the back half of last year. So some of our pressure on occupancy comes in that we bought other people's vacancy and it rolls into our portfolio reasonably quickly.

Jamie Feldman

Okay. Are you saying into the same store portfolio or just the portfolio?

Brent Wood

In to our portfolio occupancy. It will roll out of our development pipeline maybe a better way to say it.

Jamie Feldman

Okay. But still not in same store?

Brent Wood

Not same store. Even on the same store, taking you off topic, one way when just reading some of the pieces this morning where people have pushed on Houston same store NOI being low and it is. Houston is challenging, we think it's turning, but it's challenging. I would also add if you think back a year ago we sold over 900,000 square feet of older buildings and we picked those because they were well least with lease terms. So everything we sold was 100% leased. If we hadn't sold anything that was not done that hypothetical calculation but our same store Houston NOI would be higher. I think materially higher this year, so we think we did the right thing for shareholders by exiting those, they were older buildings, the cap rates were attractive and we sold them. But we also went by part that shot ourselves in the foot on same-store NOI this year a little bit.

Jamie Feldman

And then just taking a step back, since the election and all the trade talk, just across your markets maybe talking to your leasing team, any interesting activity from tenants in terms of preparing for changes or thoughts on how they may change or things may change or changes in leasing activity, if any anecdotes you guys could pass along to see how things look from here in your world?

Marshall Loeb

Maybe on the - two parts and I’ll let Brent who is the field [indiscernible] two impacts we saw that were positive, where one, we were more active in December then we typically were usually. The brokers are gearing down for the holidays or the tenants or the attorneys, but our leasing activity was abnormally high in December, we just had a leasing call with our team and we actually had more expansion talk than I’ve heard in the now quite two years I've been here, as we're going through space by space, we had more tenants which is a - to me that's the most positive sign that people's businesses are doing well.

Keeping on that was one of our bank line participants recently and they were talking about their cost coming down with less regulations, it doesn’t mean interest rates are coming down but at least people seem to be a little bit optimistic about less regulation and we're hopeful with a average tenant size of 25,000 square feet, a lot of our local and regional tenants haven't had the access to credit coming out of this downturn they typically have. So we're you know we want to be optimistic. Those are some positive things we could see. I'd also say one of our build-to-suit was with our manufacturer in Northern Mexico there on the border that stores in Tucson and I don't know how they would view it today. I'm glad we got that lease signed when we did, but that was signed after the election actually too. Brent, what all did I…

Brent Wood

Yeah, I would say that’s spot on. I mean it's hard to say if the activity that we did see uptick fourth quarter into this year, did it have anything to do with post-election results who knows. But I think ultimately decisions are still based on the tenants bottom line, how is their business doing, if it is doing better they want to grow, if it's not. I think there's a general optimism as I mentioned particularly in Houston, you've got Tillerson the former Exxon Mobil who's in the cabinet, you got Rick Perry the former Texas governor that's in the cabinet heading department of energy. So there's a general optimism amongst that sector that it's going to be less bureaucratic, a little more free to move about and do business. These companies have been spending a lot of money. There's been $27 billion of land acquired by these oil producers out in the West Texas in the Permian Basin. And they're not going to spend that sort of money and just sit idle on it for a long period of time. The biggest news lately was Exxon Mobil purchasing the 275,000 acres for 6.6 billion. So as all that eventually ratchets up a notch or two, again that's going to produce activity within Houston again all that's viewed very favorably.

Jamie Feldman

And would you say, there are certain markets, I know you mentioned Houston obviously, but across your other markets that expansion talk has been more focused on? Or is it across the board?

Marshall Loeb

It’s really been a little bit across - thankfully across the board. I know we've got one in process in the Bay Area and then we had a few in Florida. So it's been a nice mix. I think John Coleman would say the eastern region. We kidded we said it's a goldilocks environment and it hasn't been too hot but certainly not cold and if you could push a button and keep this environment absent maybe where you said where Houston is today we would push this button for the next how many years you want to add.

Operator

Thank you. And next we’ll move to Blaine Heck with Wells Fargo. Please go ahead. Your line is open.

Blaine Heck

Marshall, on the property and acquisitions during the quarter, they seemed fully priced at a hundred bucks a square foot and a little over especially given that they're not yet leased. So I guess can you talk about the opportunity you see there and whether we should expect more of this type of deal where there is a little bit more work to do after acquisition versus purchasing kind of stabilized properties.

Marshall Loeb

Kind of answered in order, probably more and the reason being - I won’t view it so much a change in strategy is that when it's a fully leased building and fully marketed we do compete on those and we usually compete pretty badly. And I'll give Brent credit one was two years and then the one in Las Vegas were both off market and to me it felt more like you're trying to source acquisitions and a key on a key ring that finally works. So it were both - each case they were developers who would intentions to build them, lease them up and sell and we were able to go to them and say, you can make some of the money, you’re a little bit in the money with your financial partner but you're taking some risk off the table and we’ll acquire it. And in each case I’m trying to remember the specific numbers but say in Broward County and both are pricey on a per square foot but that's really more of a reflection I would say of rents.

In Broward County, it was on the market, it’s faced, the building to be reworked there's no front doors or sidewalks literally out in front of where the vacancy is but we're putting in and painting the building and a number of things. But we think we can earn a low fixed yield and once it's redeveloped and fully least probably mid-four type cap rate for South Florida. And in Las Vegas about the same yield, it’s a brand new building it's more of a leasing in TI project, but when that’s completed it would have been. We’ll earn a little north of a [indiscernible] and it would probably trade on the market at about [indiscernible] cap right. So you're right a higher price for square foot but it's not as higher yield say our development pipeline but then again we're not taking the risk of carrying the land and zoning and all the things so it's above core yield but below a true development yield and I don't know how many of those are out there but we’ll see. But if we could find another opportunity or things like that we like that model and really the task is on us now, we got to go lease as vacant so we don’t.

Blaine Heck

So on a couple of those situations just as a follow up, Park North and Jones Corporate Park, Marshall you were talking about how those will come into the operating portfolio early this year. So can you just give a little bit of an update on the leasing on those properties and whether you think you can get that leased up by the time they come into the portfolio or if those are going to be a little bit of a drag on occupancy?

Marshall Loeb

Brent, I’ll let you - you want to talk on…

Brent Wood

We kind of touched up on the others but yeah, we - despite the cost for a moment we bought those four buildings for 32 million that we saw a projected all-in lease with commissions in TI at 35 million. For Park North it’s just $78, $79 a foot so that you know today that's really not I think that's pretty reflective of replacement cost actually. We’re at 42% leased, we have a couple leases out for review in the 30,000 to 35,000 square foot range. And so meeting up review means they're not signed but obviously headed and turning in the right direction. It's another sub-market where we've seen activity pick up in the last 90 days or so. That submarket is not as deep as saying you are right around DFW Airport or those type things. So the activity may very well be a little more choppy, I think we’ll have a high success rate with the group that low. We just may have fewer groups that do low. But when we bought it even though we knew that would roll in not fully leased but we just looked at it that from our ownership period if we could lease it up within a 12-month period within that time frame. I think Park North is a mid-six yield if we hit our pro forma. So again it’s - we feel like it's good value and kind of a jump start. We want to develop in that submarket, couldn’t find attractive land piece. So we view it as we were able to fast forward 12 months and jump right into a nice few more buildings that we might would have done, but a very nice project.

Marshall Loeb

And I’ll add my view. They will both and Park North will role in this month and Jones in April. So there will be a drag on our portfolio occupancy. So again that's maybe why we are sort of 95% project or one of the reasons we're sort of 95% projected this year. And on Jones, it's two buildings, the back building is thankfully the one that’s fully leased, it leaves us the front building, our 208,000 feet, probably will be if we get lucky one tenant, but one to three tenants ultimately take it and we've got prospects and people we're talking to but we closed just this right before the holidays, closed in November. You probably do again, it was busier this year but it's still not our normal month in December. So it will be a little bit of a drag but we're optimistic and we've got people we're talking to but whether those get signed and end by April it would probably take a lot today now that we're in February, but will we feel good about both assets long term.

Blaine Heck

And then lastly quick, Keith, can you talk about the balance sheet strategy, you guys are now at 5.8 times net to EBITDA. How should we expect that to trend during the year given that it looks like you'll be a net investor during the year between acquisitions and development spend versus disposition and equity, but do you think the NOI coming on line from development is going to be enough to keep that ratio steady or should we expect it to creep up a little bit?

Keith McKey

35% is just kind of our goal to be and then when the stock markets good we like to drift down around 30. So I would think somewhere between the 30 and 35 range on our debt to total market cap.

Marshall Loeb

Our debt to EBITDA projected into the year is pretty consistent with where we are today. I mean we did, you’re right at that, we kind of looked at that to the net investments and the spend is always tricky on development, but our metrics are pretty consistent this year and we got our fixed charge actually frozen, our other metrics were pretty consistent for what we were showing at year and.

Operator

And thank you. We'll take our next question from Brad Burke with Goldman Sachs. Please go ahead.

Brad Burke

Just a question on the other 3.2% same store growth ex-Houston. You're currently sitting with occupancy that's pushing 98% ex-Houston, so just wanted to know if you can give us the approximate occupancy and rent growth of building blocks that you used to get to that over 3% growth number excluding Houston.

Marshall Loeb

That’s excluding Houston on the 3.2%.

Brad Burke

That’s right.

Marshall Loeb

Houston is, we're projecting to be down about 10% on same store and so if you take that out. Most of our other except for Santa Barbara doing real well and we've got a little dip in same store there but the rest of the markets are doing really good.

Brad Burke

Just trying to understand for the excluding Houston with the 3.2%, is there any assumption for occupancy growth in that number or is it entirely just rent growth on lease role?

Marshall Loeb

I see what you’re talking about. It’s pretty much rent growth because our occupancy backs a little bit this year, so it's pretty much rent growth and then two, we you know another factor, we do - we move our same store pool each quarter. I know some of our peers do it on an annual basis so that mix changes. But with occupancy trending down it's rent growth.

Brad Burke

And then on the 100 acres of land that you bought for development in the quarter just hoping you could talk about the attractiveness of buying new land versus just activating the 500 or so areas of undeveloped land currently on the balance sheet?

Marshall Loeb

Good question. What we bought this quarter, I'm excited is, as I mentioned we've been looking for years on South Florida and have had a hard time finding it and love to see it sometime when you're there but we grew right on the Florida Turnpike County Line Road is our northern boundary Churchill Downs was the seller. We're just north of the [indiscernible] that 61 of 100 acres and we'll spend this year really getting our infrastructure in place and it was horse stable so that's what it is today. So we've got to put the roads in, rework the retention, do some things we're not projecting a start and gate way as we've named it in Miami this year. But with a little bit of luck we can - we’ve projecting to start first quarter ’18, with some luck we could start fourth quarter ’17. And we're excited about where that could lead us. The other Creekview Brent bought, it’s a project we've got in North-East Dallas [indiscernible] which is a fast growing area land constrained and the sellers had some additional land, it was earmarked for retail it's got frontage along 121 the toll way and so we were able to acquire that really as the next to Creekview. And then the 22 acres in Tucson is really the 100% it's an existing tenant, our first tenant in Tucson outgrew their space came to us we signed a new 15-year lease with them and as part of that we acquired the land when they signed the lease so that was the last piece of the land we acquired.

Operator

Thank you. Next we’ll move to Sumit Sharma with Morgan Stanley. Please go ahead. Your line is open.

Sumit Sharma

Keith, I think Keith or Marshall anyone, regarding the acquisition, we find it kind of interesting, I know that you've long-stand have been very disciplined with regard to acquisitions and you have a very stringent criteria. You focus on near term value add opportunities. Just trying to reconcile that against the raise in acquisition volume year-over-year while the rest of your peers are actually seeing acquisitions are still muted. So just want to get a sense of whether you see a lot more specific to your pipeline or is there opportunities opening up in the market that are greater.

Marshall Loeb

I don't know if it changed so much and keep chime in as well as more just maybe it was finding the opportunities really in terms of true operating property acquisitions we had one last year which was south side of Jacksonville, a submarket we've been in for 20 plus years. So we like that and are excited about flyover. And then Atlanta will be a really a core it’s 100% leased, core acquisitions. The other ones were value add and it was a little bit of a mix of probably starting midyear we thought we were able to with the stock price they got closer to our NAV and we found two of the three were all market opportunities that we were able to really reach an agreement on pricing. So if we miss our - really we've got 60 million in acquisitions this year, 40 million that's kind of blind, if we miss it, I would be fine with that. We’re out looking for acquisitions so I don't know that it's a - I don't - which to me it doesn't sense - doesn't have the sense of a change of strategy so much as finding an opportunity or finding developers where we could get quality assets where we could add a little bit of value and they were willing to make that trade. So I don't know - now that we changed strategy so much is we're able to get two or three hits in a row.

Sumit Sharma

Shifting to the compensation strategy question, I really appreciate everything you've said about $0.05, how they amortize across the year. I guess what I'm struggling with and where you could really help us out is understanding what the effective change in measurement was, I mean you hinted on saying that you're moving from a shareholder base return methodology to an FFO or a bright line FFO target. So two questions related to that, what’s the change essentially from a you know what are your performance measures now if you can sort of walk us through that. And secondly why?

Keith McKey

Performance measures are basically stand the same and what the compensation committee did was set - preset calculations you may target FFO of this number. You're at target, if you go high at this and then they looked at other debt metrics on balance sheet and various metrics and then the compensation committee made the decision of how much we should get based on all these metrics. One of the I guess the flavor of the day is that you should have the bright line test. And so if FFO meets your target for 21 [ph] or whatever it is you get target. If you go X above that you get high, if you go X below that. And so they're bright line tests and the accounting literature says if you've got subjective, measurements which the compensation committee it was subjective but it was taken into account all these metrics. Then you do not record that expense in until till you decide how much it is. But on bright line tests you do that you estimate what it is all during the year and guess at it on your accrual.

Marshall Loeb

I was really driven by one of the proxy review groups that recommended a vote against us based on the way we were doing it and so thanks to Keith, Keith and I spent two weeks on the phone calling institutional shareholders explaining the same thing asking we did get a passing vote but we said we can't put people in that box again in 2017. So it precipitated a change on our comp committee they're working through now and we expect to get resolved in March and then we'll give an update. So sorry for the confusion, it's not really a change in our pay, but as Keith said a change in our methodology and it was really probably more of a reaction to external environment than something we really initiated not that we were opposed to it, it just makes it complicated this year.

Keith McKey

If you call me back, I’ll really tell you what I think about it.

Sumit Sharma

One last question, from a supply fan perspective how does Atlanta compare to other kind of supply chain nodes like Juliet or Dallas which is one of your markets. I guess what drives growth in light industrial in Atlanta versus any of your other kind of core markets today.

Marshall Loeb

In Atlanta what we're seeing is again most of our peers of Clay County South most of our peers are building big boxes south of town. There's a few groups that they're more local regional groups building small box and it's really driven by strength of the local economy and jobs creation. One interesting thing and kind of I-85, kind of North East side of town is probably the traditional distribution market we've looked at it I-75 North West is a little more R&D, a little more office and both of these are kind of that. I'm kind of thinking ten o'clock as I-75, I-85, two o'clock where the residential growth is, up Georgia 400 where this acquisition is kind of with fiber optics there's a lot of financially driven companies and check processing and back of house. That's been one of the big drivers there but our tenants are - since we haven't closed, I hate to get into too much detail, but their tenant is serving that local economy traditionally and local area of town. Convention driven and it's probably not a lot different, we see most of our buildings serve their local economy. So where Brent is and it feels like Lewisville Texas where Creeview is, where the Toyota headquarters is going and the new Cowboys facility and IKEA with Nebraska furniture mart, it's kind of feels that we are in the path of growth of a major city in the US. So you get a lot of tenants that just need to distribute around that area. HVAC contractors things like that, plumbing supply.

Brent Wood

And plus just one last thought to that, this is Brent. At the end of the day, there is want to reduce their commute as much as possible. So if you get in that high path of growth, part of what factors into it is the quality of life of trying to be closer to home.

Operator

Thank you. We'll take our next question from Rich Anderson with Mizuho Securities. Please go ahead, your line is open.

Rich Anderson

But just a newsflash groundhog saw a shadow so it will be six more months of downside in Houston. I think that's what that means. But I do have a question about your same store for Houston in ’16 was down just modestly 0.4% and that was - it included a decline in occupancy from 98 to 93 I think you said. I'm curious as to what drives you down to down 10% in ’17 with a similar level of occupancy decline assumed in your numbers.

Keith McKey

Occupancy decline last year, Rich, happened over the course of the year and it happened more toward the back end of the year. But this year as I mentioned we've got 80% rolling right out of the gate and when you budget some assumptions in vacancy. We're very quickly measuring against the occupancy is taking a more quick drop in comparison. So the first two quarters of last year were slow to decrease and then it declined at a little greater rate toward the end of the year. Whereas this year it's accelerated from the get go.

Rich Anderson

And just a quick follow up. What do you have dialed into the spread, cap rate spread between dispositions and acquisition for ‘17?

Keith McKey

These are assumptions, but our acquisitions were around 5.75 and disposition 6.5.

Operator

Thank you. Next we'll move to Eric Frankel with Green Street Advisors. Please go ahead.

Eric Frankel

I'll try not to take too much of your time. Obviously there might be some optimism on some businesses post-election. But the President has been a little bit bearish on his relationship with Mexico and I want to understand how some of your markets are impacted by Mexican trade. And what would happen if there were some significant master revisions on trade and warehouse demand.

Keith McKey

It's one of those things where it makes for good talking points on the news talk shows at night, but again back to what I said earlier the tenants at the end of the day are just looking at their bottom line their business, if their business is doing well they're growing and that's what they're trying to do. If it's not, they’re decline, but I don't think that we're not heavily automotive driven or anything like that, so within our finite base that's metro area based there is no major reaction to it. I think the general view is whatever things like that will have more of a trickle effect. I think if we owned assets in Mexico there would be a much greater concern I think you know from what we're hearing people in war as in other parts deeper into Mexico there is much more worrying concern, we've heard stories of groups putting decision making on things in Mexico on hold, but in terms of how it impacts any of our other markets it's not [indiscernible] point to.

Eric Frankel

And then final question on, any changes any - have you seen any e-commerce related demand start to - start to manifest itself throughout latter half of the year and into this year.

Marshall Loeb

I guess we said e-commerce and really just changing retail formats, we continue to sign, we signed a lease with CVS which is really more not e-commerce, I guess it is, it's Internet delivery of prescription, so we see CVS Caremark we've signed leases with them. We've pursued them in other markets so they've been a prospect. This is Houston, just signed a lease with someone that will deliver online orders from Costco. So that's probably that last mile and things like that. So we - again the good news is we're full but we continue to see new - another new tenant really it's a tenant and they only sell online. So we're continuing to see e-commerce growth and what I guess what we viewed as the retail format seems to be coming more and more our way where you have fewer store smaller stores and spaces within our nearby warehouse that's coming our way. And then the other when people would ask us about the impact of the election, a new source of demand we saw it in Colorado when they legalized marijuana. It was 300 basis points of the total stock in Colorado really the sea assets all got absorbed by the growers. So we're you know reading about that more in the Bay Area than Southern California. But we think there's a new source of demand and what was an already tight market in California so that will just push rents. And again none of the institutions including us are leasing to the growers in Colorado and we don't expect to in California, it's still federally illegal, but it is kind of like e-commerce these new sources of demand keep pumping up.

Operator

Thank you. Next we’ll move to Rob Simone with Evercore ISI. Please go ahead, your line is open.

Rob Simone

I just wanted to try to drill down a little bit more on the occupancy guidance for this year. If I kind of weight you know plus or minus 200 basis points decline on average in Houston and you know weight - development pipeline and weight the occupancy by square footage that's kind of rolling in ’17 and assume that there's no lease up. That kind of combines to about 175 basis points of the 200 decline. And I know it's a back of the envelope calculation but I just wanted to see if, A, that's the right way to think about it and, B, are there any other markets that you know you're kind of looking at potential occupancy declines this year.

Keith McKey

Maybe I can answer it, I’m happy to talk, I think I follow you on the calculations maybe if we could look to follow up later to make sure I follow it. In terms of specific markets it's really two, Houston will be challenged this year as we've talked and then in Santa Barbara where we have got R&D buildings, we've got a large tenant out there's little over 60,000 feet, outgrew their space and built their own building. We've re-leased about 9,000 of their 61,000 and we get 50,000 of it back in April. The tricky part and backfilling it so that will hit our occupancy. The tricky part of it is it's more of a small tenant market than a large tenant market and so it will be gobbling up 50,000 feet, 5,000 feet at a time and that’s why the other part right it's on again on our same store NOI, it's R&D, its Santa Barbara, those are pretty high rents compared to our average portfolio rent. So our biggest probably three occupancy challenges will be Houston, Santa Barbara and then rolling in two 400,000 foot project that really when the original developers hit their COD. So those will be our three occupancies and then maybe I followed some of your math but not all of it, if we could circle back to that maybe post call that's fair.

Rob Simone

And just one follow up question on Houston, I noticed that Mattress Firm is one of your top tenants in Houston and they obviously left about a week and half ago, announced a pretty substantial contract terminations with one of their biggest wholesalers. And I just wanted to enquire as to, A, if any portion of that 200,000 square feet of role, sorry of their 200,000 square feet included in the plus or minus 900,000 square feet of roll in Houston. And also have you reflected any of that potential impact in your outlook for this year. Thanks.

Keith McKey

The 200,000 feet they have with us, the expiration is further out and that 200,000 feet serves as the sole distribution center for all of their retail stores in the Houston metro area which are many I don't know the count of the retail stores but they’re around every corner. So, we don't foresee, they haven't talked to us, we don't foresee a change in their need for that specific building in Houston for what they do. They're headquartered in Houston. Their offices are right around the corner from this building. I don't think it will impact Houston, we don't anticipate that impact, not at all.

Operator

Thank you. And our final question will come from [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst

Is Houston smaller tenant market or mix and then assuming you have smaller spaces, does this help you as maybe tenants look to downsize and [indiscernible].

Marshall Loeb

Houston is a smaller average size than say like a Dallas. The neighbor to the north is a much larger regional distribution hub. Houston smaller, I do hope that if we have spaces turn, I mention there's a lot of musical chairs within the market, obviously when you have a vacancy your hope is to grab someone else's shrinking tenants. So I think the smaller and more flexible your spaces are the more that works to your favor. Things like when we've had trouble moving a building or two has been the less difficult for us but those buildings that just aren't as visible. And that's where you can get more into a box of needing one particular size user, but it's a smaller tenant market more along our main business.

Keith McKey

With downsizes we think and probably a feeling that you know there will be some that downsize out of our buildings but there's a much larger buildings. And again, we've been pleasant - pleasantly surprised to see how many tenants we call, we get a vacancy with that sale. So I think still our buildings we design them on purpose to be as flexible as possible. So we've been able to catch those tenants as they move around the market. And we’ve got such a new portfolio at eight years old. So it's mostly all state of the art now.

Operator

Thank you. That was our final question. I’ll turn the call back over for any closing comments or remarks.

Marshall Loeb

Thank you everyone for your time and your interest in EastGroup, we're certainly available post call for any questions we didn't get to and happy Groundhog Day.

Operator

Thank you. That does conclude today's conference call. You may disconnect at any time and have a great day.

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