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Executives

David Hoster - President and CEO

Keith McKey - Chief Financial Officer

Analysts

Craig Mailman - KeyBanc

Kevin Varin - Citi

Vance Edelson - Morgan Stanley

Alex Goldfarb - Sandler O'Neill

Brendan Maiorana - Wells Fargo

John Guinee - Stifel, Nicolaus & Co.

John Stewart - Green Street Advisors

Erin Aslakson - Stifel

Jamie Feldman - Bank of America Merrill Lynch

Eastgroup Properties Inc (EGP) Q2 2013 Results - Earnings Call Transcript July 19, 2013 11:00 AM ET

Operator

Good morning and welcome to the EastGroup Properties second quarter 2013 earnings conference call. At this time all participant are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions). Please note today's call is being recorded.

Now, it's my pleasure to introduce David Hoster, President and CEO. Please go ahead.

David Hoster

Good morning and thanks for calling in for our second quarter 2013 conference call. We appreciate your interest in EastGroup. As usual Keith McKey, our CFO will be participating in the call. Since we will be making forward-looking statements today, we ask that you listen to the following disclaimer covering these statements.

Operator

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 described 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.

David Hoster

Thank you. The past quarter was productive for EastGroup. Funds from operations of $0.80 per share exceeded the upper end of our guidance range and represented an increase of 3.9%, as compared to the same period last year. We have achieved FFO per share growth as compared to the previous year's quarter in eight of the last nine quarters. Strong leasing and a 95% renewal rate increased occupancy to 94.2%. Same property cash net operating results were positive for the ninth consecutive quarter. We continue to expand our development program and we acquired eight building complex in Dallas.

As of June 30, we were 94.2% occupied and 95.5% leased. Both figures represented increases over the end of the first quarter and we were well ahead of our internal projections. These results reflect both the improving industrial leasing fundamentals in every one of our markets and the quality of our assets. Activity continues to be good but still lack significant depth.

Prospects were becoming even more decisive and moving to lease more quickly. We have moved past the stage of just a flight to quality and are now experiencing a real increase in both expansions and new users to the marketplace.

As might be expected, our Texas markets were the best at 98.4% leased, followed by our California markets and 97.3% leased. Houston, our largest market was 5.4 million square feet, was 99.2% leased and 98.4% occupied. Jacksonville, which experienced several large move-outs, was our only larger core market below 90% leased, but it is expected to be above that level by the end of the third quarter.

In all of our major markets, rents for the higher quality assets are increasing and should continue to improve as market vacancies continue to decline. It is too early to say that we are in a landlords market or that we have real pricing power, but we are certainly heading in that direction. Looking forward we expect occupancies to remain in the 94% range for the balance of the year.

In the second quarter, we renewed 85% of the 1.4 million square feet that expired in the quarter, which is a major accomplishment and signed new leases on another 2% of the expiring space for a total of 87%. We also leased 707,000 square feet that had either terminated early during the quarter or was vacant at the beginning of the quarter. In addition, we have leased and renewed 377,000 square feet since June 30.

For the quarter, GAAP rent spreads on renewal leases were up 3.8% and up 5.5% on new leases. Cash rent spreads were negative 3.7% on renewals and up 1.1% on new leases. Average lease length was 4.7 years, which was well above our averages for the past several years and probably reflects prospects growing confidence in the economy. Tenant improvements were $2.06 per square foot for the life of the lease or $0.44 per square foot per year of the lease, which is significantly above our recent average. The average amount of free rent concessions continues to decline.

As a result of our strong leasing, second quarter same property operating results increased 3.2% on cash basis and 1.8% which declined rent adjustments. As previously reported in May, we acquired Northfield Distribution Center in Dallas for approximately $70 million. Northfield which we developed from 1999 to 2008 contained 788,000 square feet and eight business distribution buildings. Located immediately north to the DFW International Airport it is 100% leased to 31 customers and increases our ownership in the Dallas metro market to over 2.9 million square feet.

In early July, we purchased Interchange Park II in Charlotte for $2.4 million. This business distribution building which was constructed in 2000 contains 49,000 square feet and is 100% occupied by a single user. It is located adjacent to our Interchange Park I in the city's north submarket. Also this month we sold 2.2 acre partial in our new Horizon Commerce Park development for $1.4 million and we recorded a small gain in the third quarter. We currently do not have any properties under contract to purchase. We do have a small building is Tampa under contract to sell and trying to dispose approximately $10 million of buildings before the end of the year.

In the beginning of the second quarter, we acquired 43.3 acres of developed land in southwest Charlotte for $5.8 million, with the plans for the development of 467,000 square feet in six business distribution buildings to be named Steele Creek Commerce Park.

In June we began construction of the first two buildings of 71,000 square feet each with the projected combined total investment of $10.2 million. One is 100% pre-leased and the other will offer multi-tenant space.

At quarter end, our development program included 13 buildings with the total of 1 million square feet and the combined projected investment of $72 million. These buildings are currently 51% leased.

During the quarter we transferred five buildings with 253,000 square feet into the portfolio; World Houston 31B, Ten West Crossing 1, Thousand Oaks 1 & 2, and Beltway Crossing X, they are collectively 91% leased. Since the end of the quarter, we have started two additional developments for [Horizon One] with 109,000 square feet and a projected cost of $7.7 million. It's the first building in our new Horizon Commerce Park in Orlando. With Southridge Commerce Park now fully build-out, Horizon in the continuation of our Orlando development activity.

The second is Ten West Crossing 4 in Houston which will contain 68,000 square feet and has a projected investment of $4.8 million. Year-to-date, we have started nine developments, 696,000 square feet and an expected investment of $51 million. Our 2013 guidance assumes additional development starts of approximately $40 million for a total of over $90 million for the full year.

Keith will now review a number of financial highlights.

Keith McKey

Good morning. FFO per share for the quarter was $0.80 per share compared to $0.77 per share for the same quarter last year, an increase of 3.9%. Operations had benefited from lower interest rates on refinancing mortgage debt and an increase in property and net operating income related to developments, acquisitions and higher occupancy.

Acquisition costs reduced FFO by $138,000 for the quarter. Bad debt expense, net of lease termination fee income was $49,000 for the quarter compared to $74,000 for the second quarter of 2012. FFO per share for the six months was $1.56 per share as compared to $1.53 per share last year, an increase of 2%.

Lease termination fee income exceeded bad debt expense by $331,000 for the six months in 2013 and bad debt expenses exceeded lease termination fee income by $127,000 in the same period last year. Debt to total market capitalization was 34.6% at June 30, 2013.

For the quarter, the interest and fixed charge coverage ratio was 3.75 times and debt-to-EBITDA was 6.85 times. We have included a new schedule in the supplemental information, adjusted debt-to-adjusted EBITDA. The debt-to-EBITDA ratio sometimes does not match. The net operating income associated with debt that is borrowed.

In our case, we made two adjustments. One is for acquisitions during the period where you may have only a partial period of income recorded but the full amount of debt is barred and the other developments with a little or no income recorded because properties are under construction or at [lease] but the debt is included in the ratio.

The adjusted debt-to-adjusted EBITDA ratio was 6.39 for the quarter. Our floating rate bank debt amounted to 6.8% of total market capitalization at quarter end. Our bank debt was $177 million at June 30 and with bank lines of 250 million, we have $73 million of capacity at quarter end.

During the first quarter, we entered into an agreement in principle with an insurance company under which we planned to issue a $100 million of senior unsecured notes at a fixed interest rate of 3.8%. The notes were required semi-annual interest payments with principal payments of $30 million at August 30, 2020; $50 million on August 30 of 2023 and $20 million on August 30, 2025. These maturity dates complement our existing debt maturity schedule.

The transaction is expected to close on August 30, 2013, and the issuance of the notes in this private placement is subject to due diligence and completion of final documentation. We plan to pay out two mortgages in the remaining months of 2013 and $34 million in mortgage due in September 5, 2013 with an interest rate of 4.75% can be prepaid on August 5 with no penalty and a $51 million mortgage due in January 5, 2014 with an interest rate of 5.75% can be prepaid on December 5, 2013 with no penalty.

We also plan to close an unsecured fixed rate debt financing of approximately $60 million in December. We continue to convert to unsecured debt as we fund the development program and acquisitions with unsecured debt. And also pay out mortgage debt with unsecured debt.

In the second quarter, we sold $2.1 million of common stock, and so forth in July, we sold another $7.9 million through our ATM program. We plan to sell an additional $27 million for the remainder of 2013. In June, we paid our 134 consecutive quarterly cash distribution to common stockholders.

This dividend of $0.53 per share equates to an annualized dividend of $2.12 per share. Our FFO payout ratio was 66% for the quarter. Rental income from properties amassed almost all of our revenues so our dividend is 100% covered by property and net operating income. We believe this revenue stream gives stability to the dividend.

FFO guidance for 2013 has been there to a range $3.17 and $3.23 per share, and the midpoint was increased from $3.15 to $3.20 per share. The increase is due to the $0.03 per share increase in the second quarter as we discussed and another $0.02 per share in the second half of the year due to acquisitions, developments and continued momentum in leasing..

Now David will make some final comments.

David Hoster

We had a strong second quarter, good leasing ahead of expectations, continued momentum in our development program and an attractive acquisition in a core market where we want to grow. Our balance sheet is the strongest as ever been and we believe it's well structured to take advantage of future opportunities.

Keith and I will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to the side of Craig Mailman with KeyBanc. Go ahead your line is open.

Craig Mailman - KeyBanc

Just curious, Florida looks like you guys saw some good improvement there and I was just wondering outside of Black & Decker move out in August. Is the move there is sustainable or you guys think that demand [really] come back?

David Hoster

Yes. We had projected much lower leasing in both Jacksonville and Tampa and we've been prudently surprised with the activity in both markets, Jacksonville I mentioned previously. In Tampa, we have the Black & Decker move out in a month or so but we've already released over 50% of that space and prospect, the user will be moving in the third quarter. So we are pleased with the activity.

Craig Mailman - KeyBanc

Is it pretty broad based demand, I know in your earlier comments you were saying the activity lacked depth is that projected towards any one market or?

David Hoster

No, to me the definition of debt is when you have either a prospect for every vacancy that you have and then the next step is two prospects competing, either three prospects competing in each vacancy and that's where you really start to develop your pricing power with rents other than general move up in the market.

So we are not at the stage yet where we can say we have a good prospect for every vacancy in the portfolio, but from the standpoint of users, I would say it's a bit more broad based over the last three months, four months than it has been in the past and housing certainly has been contributor to some of that and that range is everywhere from construction equipment to accustomed towards windows, flooring and HVAC and one that's somewhat new that we haven't talked about before is furniture.

So I guess when we think characterize it under housing, 3PLs who have been increasing their space usage electronics companies, medicals especially in Florida, in Florida we're seeing increased interest from convention center and entertainment and in Texas it's a variety of all those but Houston obviously, energy seems to be leading the way. So it just seems to be a broader number of prospects and maybe we had a lot earlier in the year.

Craig Mailman - KeyBanc

That's helpful. And then just lastly on the acquisition front, how does the pipeline look there, could there be any bigger deals similar to Dallas in '13?

David Hoster

We'd love that to happen but that's, we're such a disciplined, picky buyer that you just never know. We don't have any additional acquisitions in our guidance but hopefully we will find some attractive properties between now and the end of the year. But as I mentioned before we don't have anything under contract and don't have anything with offers outstanding, it's just but that changes every week. Hopefully we will find something more.

Operator

We will go next to the site of Michael Bilerman with Citi. Go ahead your line is open.

Kevin Varin - Citi

This is Kevin Varin with Michael. You mentioned in your opening comments that there's an additional $40 million upstart expected for the remainder of the year. Could you walk us through what markets do you expect us to use as new projects coming on line and then also what are the expected yields on the incremental projects versus the existing pipeline?

David Hoster

We see additional construction starts in, a building in Denver, but I think we've mentioned previously that we are not starting quite as quickly as we would have liked but it's now, it'd probably be a third or early fourth quarter start. San Antonio and some more in Houston because the demand we're experiencing there. Our yields, which we defined as 100% occupancy was fully loaded, nearly cost in the investment are still running from a low to mid eight. We have been able to maintain that so far.

Kevin Varin - Citi

Okay. Thanks and then just one more general question. Just with the ramp in development activity in the industrial markets across the U.S., are there any markets for the new suppliers a concern or maybe it could be a concern over the next 12 months?

David Hoster

The only market we're seeing a significant and some as any new supply that compete with us in Houston. Other industrial REITs are building there and some private developers now have institutional money backing them as partners and are building. Some of that will be competitive with us but a lot of it is in different sub-markets and in many cases, larger buildings where we're not going to compete for the same users. So in our portfolio in Houston is one that we're watching most closely from that standpoint.

Operator

We will go next to the side of Vance Edelson with Morgan Stanley.

Vance Edelson - Morgan Stanley

Could you provide an update on the percentage of the higher rate leases from the last cycle that you burned through? When we will be able to say that's all behind us and I guess related to that, could you just provide some color on the cadence of rents spread improvement over the next six to 12 months, when you think will be in a positive territory?

David Hoster

I wish I can give you the exact answer on when we're going to be 100% positive and really have some pricing power, but that's still a little bit of gray area. When we look at leases that were signed before 2008, we've got about 10% of our square footage that still fits that category and that is going to be a terminating and maturing over the next four or five years so it's not happening at all at one point.

So from that standpoint, we're going to see improvements and I think, I've said many times in the past, we really want to look at the renewal rates in the renewal results, because that's much more apples-to-apples because I'd like to remind people if we've had a space vacant for the two or three years and then tenant moves in today we compare today's rent with what the quite the previous tenant, no matter how long ago was it was paid so I think we sometimes over shake it, roll down in rents, because when we rented spaces went vacant for over a year, that rent plus the [CAM] charge augured at the bottom line and were obviously a big plus to FFO.

Vance Edelson - Morgan Stanley

Okay that's helpful. And then related to that the rents that you're commanding versus the competition based on the location, quality of your space, do you feel like you're getting a significant premium now and would you expect that premium to typically grow more pronounced as the cycle improves in vacancy is declined further.

David Hoster

Well, it sometimes is really hard to compare rents, because it's different submarkets, or the size of the spaces and the office build outs in the spaces. So, we think we are generally outperforming on a leasing standpoint, simply because of the great locations of most of our properties and the quality to begin with and one of the things we are experiencing rather than say a direct comparison to competitors is a overall higher quality spaces are experiencing better rent growth than B minus or C spaces, there still is somewhat of a [fight] to quality when the opportunity is there as companies get more confident in their own futures.

Vance Edelson - Morgan Stanley

Okay. And then just final quick question you talked about housing becoming more of a driver, how about the interactions with FedEx and UPS, I think you've indicated from time to time that there's been an uptick in negotiations. How do you feel about those types of relationships right now?

David Hoster

We feel good about them and we signed in a number of markets, new leases and expansions with FedEx and continue to enjoy being a provider for services our space for them in many markets that's still positive.

Vance Edelson - Morgan Stanley

Okay, that's great. Thanks.

David Hoster

Thank you.

Operator

We'll go next to the side of Alex Goldfarb with Sandler O'Neill. Go ahead your line is open.

Alex Goldfarb - Sandler O'Neill

Hello, thank you, good morning.

David Hoster

Good morning.

Alex Goldfarb - Sandler O'Neill

Just quickly, just a few questions here. First the NOI and re-leasing seemed to be much better this quarter than prior quarters. But just given that can be influenced, quarter-to-quarter depending on what's rolling, what should we expect for the balance of the year, should we expect third and fourth quarter to be similar to the second quarter or was this just unusually tough, strong just because of the leases is happened to be rolling in this period?

David Hoster

I think in some markets it will be the same and I think some of our rents in Florida were better from as you said leases that were rolling. So I've always been a believer that one quarter isn't a trend, so we'll talk to you again in October to see how we did. From the same property operating standpoint, we're going to have lower growth in the third and fourth quarters, we have in our guidance and we did in the second quarter with the main reason being and last year we had occupancies of over 94% in both third and fourth quarter. So the comparisons are more difficult from that standpoint and but we still believe they'll be positive.

Alex Goldfarb - Sandler O'Neill

Okay, and then you guys have ramped up your -- you outlined before you ramped up your development starts and assuming that this trend continues of just improving fundamentals, it will seem reasonable that you guys would continue to ramp up development team and more as the year progresses, wouldn't it, or is there some sort of capital restructuring maybe a Keith has locked the money box that you can't start anything new, I mean how should we think about the balance for the year as things continue as they are?

David Hoster

I would say, you'd go with our guidance which shows a good many additional starts and those are all projects that we are working on today's in terms of either pre-leasing or permits or confirming that we think that the market will accept those assets with open arms, so that you know I think the issue is how can we continue that pace next year? And the answer to that is all based on the leasing of what we are doing now.

Alex Goldfarb - Sandler O'Neill

Okay. And just finally and specific in Orlando on Horizon, maybe you said it earlier, is that project pre-leased or you are doing spec?

David Hoster

That will be a spec development.

Alex Goldfarb - Sandler O'Neill

Okay.

David Hoster

And one of the reasons that we are comfortable doing that is the last building in Southridge that we started I think in January we pre-leased all of that building to a single user before it was done. So we believe that shows the demand for high quality first generation space and then an attractive part.

Operator

We will go next to the site of Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo

I'm not sure if it's Keith or David, but looking at your guidance for Q3 and then for Q4, the mid-point of your guidance for Q3 is $0.81, which suggests $0.83 in Q4. Is that ramp between Q3 and Q4 because you've got some financing tailwinds in the fourth quarter from the path of those high interest mortgages or is it more that you think the overall NOI level and fundamental performance gets better as we move sequentially throughout the year?

Keith McKey

In the fourth quarter we are projecting more NOI, so it's mainly geared to more property NOI.

Brendan Maiorana - Wells Fargo

Okay. It's helpful. And then, Keith, so if I think about the balance sheet, I guess with the payoff of those mortgages, any other, the other capital sources that you got, you got little ATM issuance and asset sales, but you also have some developments pending. Your line balance, your credit facility balance was still be probably, 65 million, 70 million sort of towards the end of the year. Is that kind of a rough target level that you think is about right for the size of the company in the balance sheet?

Keith McKey

We usually try to keep it around 100 million. We will drop it when we do financing and go below and then we run it up about 175 million mark. We own now is about as high as we want to go. We got 100 million that we intentionally put off until August start yet to write our bank line a little longer to close on and get benefit from that, but as we go above 100 million, we start trying to line up financing and then take it back down.

Brendan Maiorana - Wells Fargo

Sure. And then last one foe me. So if I look at the term loan, I think the 60 million that you've got, assumed in the back half of the year at 4.5%, is that an apples-to-apples rate today versus the 3.8% that you locked in early in the year. So, is it up 70 basis points or is that not a fair comparison?

Keith McKey

I think it's up 70 basis points and the 60 million is not a done deal, that's just a projection. And what we did was take, told a few people and see what today's rate were and looked at other debt market and it was around 4.5%. So, that's just a guess. We don't have anything lot to answer that.

Brendan Maiorana - Wells Fargo

Yeah, okay. But 70 basis points is your projection of the change, okay. That's helpful thanks.

Operator

We will go next to the site of John Guinee with Stifel.

John Guinee - Stifel, Nicolaus & Co.

John Guinee here, guys very impressive quarter. Just couple of more curiosity questions and anything. If you look at your development over the last couple of years which evolve fairly nicely, how much of the tenants are existing tenants were moving and how many of the tenants just on a percentage basis are new tenants who aren't exiting your existing space and moving into new product? There is one question.

And then the second question is, you've done a good job of keeping your tenant improvement costs low, how much of your tenant improvement costs or what how we call basic costs versus special purpose and way I define special purposes is tenant specific, what you should want to be paid them simply to build out for them?

David Hoster

Let me answer the first, probably do the first part first, we have not calculated a number, that's as a good question, we will have to go back and look at it, but I would say that probably six, two-thirds of our tenants (inaudible) 50-50 that 50%, each city is different, but 50% to two-thirds are new users for development and the other third, 40% are existing customers, but we're not going to do a new building for an existing customer, unless of course it's an expansion. So everyone, I can think of is a really good size expansion, for example the Southridge building is just being finished now, that user I think is going up about three times in size their existing customers at Southridge.

The side like they provide services for users to convention center. So in Houston, we've done, Houston three build-to-suits or pre-leases for freight forwarders, two of those we had no relationship with the fourth and third.

We've done one build-to-suit and they had bought some other companies and came to us and said they wanted to do a second build-to-suit. So it wasn't an expansion of an existing facility, but an expansion for them. So we did the build-to-suit.

Pre-leased building in Charlotte is little over doubling of freight forwarders space and in most of those cases, if we haven't been able to provide that additional space, we would have lost them as a customer.

To answer to your question on tenant improvements, one of the things that it's harder to breakout is once, many times when our figure is higher than average it's because we're taking a larger space and splitting it for two customers or three customers and so you put in the demising wall, add new office pods and those really are building improvements overtime but they will show up in our statistics as tenant improvements.

We obviously try to avoid special TIs unless it is a long-term lease with the current user. Interesting one where we didn't have to do that is in Tampa. We signed a lease with Norwegian Cruise Line for 47,000 feet. They are spending all the TIs themselves and they are going to use the warehouse to train their entertainers that will be on the cruise ships.

I mean that's an unusual use for a warehouse. They are doing all the tenant improvements themselves. We try to keep it that way if we don't think we will be able to reuse them. Example in the new building, you want the office space in the front, you don't want it in the down side of the building, you don't want it in the back near the doors, you want it to (inaudible) that. The next potential user is going to make as little change to it as possible.

Hopefully, I answered your question.

John Guinee - Stifel, Nicolaus & Co.

That was just great color on how [softness] that you've actually made in the business, thank you. I would also comment that you probably don't need to go any further on training for entertainment on cruise ships, thanks.

Operator

We will go next to the side of John Stewart with Green Street Advisors. Go ahead your line is open.

John Stewart - Green Street Advisors

David, you are going to call for a seasonal summer slowdown this year?

David Hoster

So far we have not been told that from the field other than possibly in Phoenix. The first quarter, first four months of the year in Phoenix were very strong especially for the big boxes and maybe just used up a lot of pent-up demand and a bunch of new big boxes where we started is under construction and that seems to, it's still positive I think in the second quarter but its little way down and maybe because Phoenix gets the hottest summers but that's the only one where we've been told by our people who feel that they have seen a slowdown.

John Stewart - Green Street Advisors

How about the small acquisition you did in Charlotte in July? What was the cap rate on that deal?

David Hoster

That's a high seven and to say it's next door to our Interchange One which has been a very successful building because major two interstates coming together in Charlotte. It's a longer term lease with the user and there is the potential to add I think about 16,000 square feet to the building. So that combination of factors gave it some extra appeal for a building of that size.

John Stewart - Green Street Advisors

Sure. And then what cap rate or yield do you expect on the $10 million that you've got [keyed] up to sell in the second half and then maybe if you could speak more broadly to the investment market given the 70 basis point back up that Keith mentioned?

David Hoster

We are assuming about 7% cap rate on the sales and that's we have a mix of assets that we are talking about selling or about to put on the market or where in one case a tenant has an option to buy and say they want to and that's just an average for all those together so they will probably end up a little different than that. I don't think enough time has passed for there to be any significant statistical change in cap rates but in talking to brokers and it's my own opinion is there if there's going to be effect on cap rates, it will be B minus and C assets where they're less well capitalize buyers or local buyers who are going to, who're always looking to finance the acquisition as high leverage is possible and that the institutional type buyers REITs, pension fund advisors, private REITs already have their capital and doing little or no debt on it. So not heard any of the quality assets so far suffering any cap rate deterioration but this could take another three, four, five months I think to get some real feedback on that.

John Stewart - Green Street Advisors

Sure and then lastly, one for Keith. On the $60 million unsecured target for the fourth quarter, what format is that going to take? Is that going to be another private placement or will it be a term loan?

Keith McKey

Right now, it looks like a private placement. We are (inaudible) to a number of people directly and so we hope to add something lined up pretty soon.

Operator

We will go next to the side of Erin Aslakson with Stifel. Go ahead, your line is open.

Erin Aslakson - Stifel

You mentioned that you think concessions are actually in decline now in many Asian markets. The free rents actually coming in but when you look at the CapEx actually spent this quarter versus last quarter and the previous quarter continues to go up, when do you think that trend actually changes?

David Hoster

We look at TIs, I think that's I guess which you're referring to.

Erin Aslakson - Stifel

Yeah.

David Hoster

Two different ways. If you look at it on just the TIs per lease they're up significant this quarter and I think that's a combination and looking that the individual leases a combination of they splitting some spaces, we're doing some over spaces like building in Jacksonville, and some service center spaces that are closer to had higher office finishes. If you divide the average link leases into the little over $2 per square foot is more in line where we've been over the last four quarters.

Now do we expect that to come down over the next year and year and a half? Yes, but not significantly, but it will come down because there's still, I think I would say Phoenix and some of the Florida markets, when there is skills although improving, still soft enough where we do a little more in TIs than we'd like to do but are still pleased with the economics of the overall lease. It generally if we're doing higher TIs, we're getting a little higher rent.

Erin Aslakson - Stifel

Right, right, right. And then just going back to the I guess the cap rate question and adjustments for increasing or expected to or increasing interest rates, have you made any adjustments in your underwriting in terms of exit cap rates for the assets you're looking to acquire?

David Hoster

We don't have a specific hurdle rate for each market, what we look at is our gets a call rightful approach, cost of capital today. What's our cost to equity, what's our cost to ten year money blend that on a 35, 65 basis, and so that, pretty much where our minimum would be. And then have a sense of what properties should sell for different qualities and different markets. And so each one is different with interest tenure rate up a bit, our cost to capital is up some but not somewhat should it's effected our approach on any acquisitions or development.

Erin Aslakson - Stifel

Okay, well. Thank you very much.

David Hoster

Thank you.

Operator

And we'll go next to the line of James Feldman with Bank of America. Go ahead your line is open.

Jamie Feldman - Bank of America Merrill Lynch

Great. Thank you. I was hoping you guys could just speak your macro [hat] on for a little and just talk a little bit more about what tenants are saying, I think we're seeing rents driving, people are trying to figure out as the economy is really holding up here. What kind of your thoughts about the markets going forward, the property markets going forward and maybe talking about some of your weaker markets, what your sense is that the recovery there as the recovery spreads?

David Hoster

Yeah. We think that the demand has become more broad based than it was 6 months, 12 months ago. And each one is a little different like Houston is certainly, the energy. The Houston now is starting because of the strong employment population growth, we're starting to see more housing related users, Orlando which commonly is based on a lot of tourism was, as I mentioned, receiving convention center. We are seeing like cruise ship tenant in Tampa. We are seeing the growth in medical across Florida and actually the growth in Charlotte also there. So it's becoming, I guess the fundamentals continue to improve say both in terms of demand and the type of demand. So that builds confidence for us.

Also as I mentioned in my remarks, users prospects, they are moving little bit faster, they don't feel real urgency yet, but a whole lot more than they did 6 to 12 months ago. So that is positive. You don't put have to proposal and wait three months to get a response, it comes back pretty quickly and they are making their decisions more quickly. And I think that impact reflects the confidence in those users businesses, so they are willing to make longer term commitments and start to pay for expansion in space.

So, I mean, it's positive, we look at the population and all of the job goes statistics in our individual markets and they were positive you know that. Some of you heard me mention statistic in Texas. So if you go at the trailing 12 months, you combine Dallas and Houston, it's 700 residents a day and something like 545 new jobs a day. Another example I have used it offers but it's certainly going to affect Houston.

Chevron announced a brand new tower downtown Houston, that's going to be 1.7 million square feet and 50 stories and they are going to move some employees from California, but they are talking about and they didn't give the time horizon, but they are talking about adding almost 1,800 new employees. So all of those people need a place to live and shop and consumer goods, so that's very positive for cities like that both shorter and longer term.

Jamie Feldman - Bank of America Merrill Lynch

And then as you think about, what's in your guidance for leasing spreads in the back half of the year?

David Hoster

About where we are today, we try not to be too specific, they bounce all over the place, but you know the real effect on our same property operating results tend to be more occupancy than leasing spreads right now.

Jamie Feldman - Bank of America Merrill Lynch

So if you are year-to-date, you are at minus 5.1% on cash leasing spread, do you think that's about right for the back half of the year?

David Hoster

You know I could get pinned down that.

Jamie Feldman - Bank of America Merrill Lynch

Right.

David Hoster

Yeah, probably on average.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then I know it's a little early, but just thinking about your largest expirations next year, it looks like you are weighted in Tampa, Houston and I guess those are the big ones. Do you have a sense of whether market, I mean those tend to be some of your better markets, I guess some of your better markets on leasing spreads and fundamentals, do you have a sense of where you are versus market in those leases?

David Hoster

I have somewhat of a gut feel on it, but I have not -- that can't really give you specific number on it at this point. And I think you have to look at the broader results.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then just thinking about rising rates, do you get a sense -- since you do focus on some of the smaller tenants, do you get a sense that some of those tenants might be impacted by rising rates, you know as their cost of borrowing rises and what impact that might have or drag that might have on their business conditions?

David Hoster

We have a feedback from people in the field is that is a reason for somebody now expanding or renewing or shrinking or anything like that. And so far, the rising rates are ten years, the short-term rates still haven't moved much or somebody's borrowing based on a LIBOR or prime metal I don't think it's really affected them yet. So we've not heard anything negative from users related to that really of any size.

Jamie Feldman - Bank of America Merrill Lynch

Yeah, I guess, I was thinking more about as they are thinking about the next couple of years, what kind of drive?

David Hoster

I guess I don't think out that far right now in terms of our planning. So it's more. Look what we think our prospects and our current customers are going to do over the next 12, 18 months and so far everybody we're talking to seems pretty positive and I think some of that is related just to the markets we're in.

Jamie Feldman - Bank of America Merrill Lynch

Great, thank you.

Operator

And we have no additional questions.

David Hoster

Well, thank you for your continued interest in EastGroup and as always keep an eye, we will be available to give any additional information or question answering that you like. So please don't hesitate to give us a call. Thank you.

Operator

This does conclude today's conference. You may disconnect at any time.

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