Duke Realty Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

Key Takeaways

  • Company reported record demand with three consecutive quarters near all-time highs and market‐level rent growth rising to ~10% nationally (up to 25% in top submarkets).
  • Initiated nearly $200 million of new developments in Q2 and maintains a $1.4 billion pipeline (84% in Tier 1 markets) with ~54% pre-leased, enabling ~50% projected value creation.
  • Formed a joint venture with CBRE Global Investors to reduce Amazon exposure from 8% to 7.3%, generating $141 million in capital, and sold $600 million+ of non-core assets to bolster Tier 1 holdings.
  • Q2 core FFO of $0.44/share (+16% YoY) and AFFO of $150 million drove an increase in 2021 guidance to $1.65–$1.73/share (12.5% growth) and 4.75–5.25% same-property NOI growth.
  • Industrial fundamentals remain robust as Q2 net absorption hit 85 million sq ft (3rd highest on record), vacancy fell to 4%, and full-year rent growth is projected above 10%.
AI Generated. May Contain Errors.
Earnings Conference Call
Duke Realty Q2 2021
00:00 / 00:00

There are 16 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Duke Realty Earnings Conference Call. At this time, all participants are in listen only mode. Later, we'll have an opportunity to refer your questions. As a reminder, today's conference is being recorded.

Operator

I would now like to turn the conference over to Ron Hubbard. Please go ahead.

Speaker 1

Thank you, Amy. Good afternoon, everyone, and welcome to our Q2 earnings call. Joining me today are Tim Conner, Chairman and CEO Mark Denien, Chief Financial Officer Steve Schnur, Chief Operating Officer and Mick Anthony, Chief Investment Officer. Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be forward looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks and other factors could adversely affect our business For more information about those risk factors, we would refer you to our 10 ks or 10 Q that we have on file with the SEC and in the company's other SEC filings.

Speaker 1

All forward looking statements speak only as of today, July 29, 2021, and and we assume no obligation to update or revise any forward looking statements. A reconciliation to GAAP of the non GAAP financial measures that we provide on This call is included in our earnings release. Our earnings release and supplemental package were distributed last night after the market closed. If You did not receive a copy, these documents are available in the Investor Relations section of our website at dukerealty.com. You can also find our earnings release, supplemental package, SEC reports and an audio webcast of this call in the Investor Relations section of our website.

Speaker 1

Now for our prepared statement, I'll turn it over to Jim Connor.

Speaker 2

Well, thanks, Ron, and hello, everybody. The fundamentals of our business continue to be the best we've ever We've now had 3 successive quarters of demand at or near all time records, and projected market level rent growth risen from the 6% to 7% range to the 10% range nationally, with some submarkets as high as 25%. During the quarter, we began just under $200,000,000 of new developments with strong value creation, raised our full year guidance starts once again. Continued cap rate compression and rent growth have well outpaced material cost increases and allowed us to drive improved margins. Our core portfolio achieved record rent growth on 2nd generation leasing, and our total in service portfolio was at an all time high of 7.9 percent leased.

Speaker 2

We sold 4 assets in non Tier 1 markets during the quarter for over $180,000,000 When coupled with the recently announced joint venture and the St. Louis market disposition, we've raised over $600,000,000 of capital from portfolio management activities and also improved our Tier 1 geographic exposure. These quarterly results and our improved outlook for the balance of the year resulted in raising key components Our 2021 guidance, including year over year core FFO growth now expected to be at 12.5% and growth in AFFO per share of 11.6 Mark will provide you more details and color in his prepared remarks. With that, I will turn it over to Steve to cover our operations update and outlook. Thanks, Jim.

Speaker 2

I'll first cover market fundamentals, then review our operational results. Industrial net absorption registered an impressive 80 5,000,000 square feet, which is the 3rd highest quarter on record. This was more than enough to offset new supply as completions dipped to 52,000,000 square feet. This positive absorption over deliveries for the quarter reduced vacancy down to 4%. The strong fundamentals increased asking rents during the 2nd quarter by 9.8 compared to the previous year.

Speaker 2

CBRE now projects demand for the full year to surpass 350,000,000 square feet and break the all time 2016 record of 327,000,000 square feet. Completions are projected to be around 300,000,000 square feet for the year. With this setup, we expect national asking rents to grow over 10% on average in 2021, with a range of mid single digits to the mid-20s in the best submarkets. This is consistent with what we're seeing on the ground in our own markets. Growth in retail sales and e commerce sales across the 2 month May June period were up 20% and 9% year over year, And perhaps more notably, when measured against the 2019 pre pandemic time frame, the recent May June figures were up 19% 37%.

Speaker 2

Continued strains in the supply chain caused the retail inventory to sales ratio to remain at a record low 1.1 level times. Demand by occupier type remains broad based and very active with 3PLs leading the way. 3PL activity nearly doubled the Square feet absorbed year to date compared to a year ago. The general retailer and wholesale categories were also up over 85% from a year ago. Of course, e commerce is still exceptionally strong.

Speaker 2

And even with Amazon leasing 33,000,000 square feet, which is down some from a year ago, These data points are a very good indicator that demand is broadening out past pure e commerce players. Turning to our own portfolio. We executed a very solid quarter by signing 7,600,000 square feet of leases. The strong lease activity for the quarter resulted in continued growth in rents in our portfolio as we reported 19% cash and 36% on a GAAP basis, both of which were all time records for our portfolio. About 35% of these deals were in coastal markets, which is higher than our historical run rate but still lower than our current portfolio exposure to these markets of about 40%.

Speaker 2

As we've been saying, our lower rollover in these coastal markets compared to our portfolio exposure results in outsized future opportunities for rent growth, This quarter certainly demonstrates this concept. We expect rollover in coastal markets for the remainder of the year to moderate to recent historical levels, but we still expect Strong overall growth in rents to continue. We started $197,000,000 of new developments this quarter that consisted of 5 speculative projects. As we alluded to last quarter, given the strength across our submarkets and strategically located land, we believe these projects offered a great risk adjusted return for us. In fact, within 2 months after starting construction, we've already signed a lease for 100% of the space at the Columbus project totaling 582,000 square feet with an A rated global 3PL customer at a rent well above or underwritten levels.

Speaker 2

Our development pipeline at quarter end is $1,400,000,000 with 84% allocated to Tier 1 markets And expected value creation of almost 50%. This pipeline was 49% pre leased as of June 30. This 49% moves up to 54% when you include the recently completed lease in Columbus I just mentioned. I'd also add that we have a land bank to continue to support We believe we're well positioned to continue to lead our sector in growth through new development. Looking forward, our outlook for new development is as strong as it's ever been and and is reflected by our revised guidance of $150,000,000 from the midpoint.

Speaker 2

I'll now turn it over to Nick Anthony to cover the acquisitions and dispositions.

Speaker 3

Thanks, Steve. For the quarter, we sold $183,000,000 of assets comprised of 2 facilities in Raleigh, 1 in St. Louis and 1 in Columbus. The pricing in aggregate was at an in place cap rate of 4.2%, partly from very strong credit and asset quality, but also from exceptionally strong fundamentals and investor demand even in these non tier 1 markets.

Speaker 4

In

Speaker 3

a 3 8 Acre Storage Container in the Newark, New Jersey. We expect to stabilize yield across both projects is 4.4% with IRRs expected in the mid-six percent range. The 766,000 square foot facility acquired is a unique big box asset in IE West and has extra trailer parking and in a market with only 1% vacancy. The lease expires in approximately 2 years with current rents about 75% below market. The container yard facility is in an irreplaceable location near the Port of Newark, the Newark Airport and the New Jersey Turnpike and leased for 12 years to a local investor and logistics firm.

Speaker 3

There is also a long term redevelopment possibility on this site. Yet in the interim, the investment will generate an excellent return as an income producing logistics asset. I'll now share an update on 2 other large portfolio management transactions we've been talking about over the last few quarters. First, Most of you saw the press release on Tuesday announcing that we formed a joint venture with CBRE Global Investors as part of our previously stated strategy to Manage our exposure to Amazon. The initial tranche encompasses 2 facilities totaling 1,300,000 Square Feet In a 17 acre trailer lot, which in aggregate reduces exposure to Amazon from 8% to about 7.3%.

Speaker 3

It also generates approximately $141,000,000 in capital, including new debt financing placed on the pool of assets. The second tranche consists of 2 facilities and 1 trailer lot in Baltimore, expect to close later in the Q3. The third tranche consists of 3 facilities located in Pennsylvania, on South Florida, which are expected to close in early 2022. The JV is expected to employ modest leverage in the 50% to 60% range. Secondly, last quarter, we announced our plan to exit the St.

Speaker 3

Louis market this year, and we closed on sales during the second quarter and early in Q3 with a blended cap rate in the mid-five percent range. If you include the St. Louis transaction And tranche 1 and 2 of the JV contributions, the NOI from our development pipeline, our Tier 1 market NOI exposure is 67%, and our Coastal Tier 1 market exposure is 40%. I'll now turn it over to Mark

Speaker 4

to discuss our financial results and guidance update. Thanks, Dick. Good afternoon, everyone. Core FFO for the quarter was $0.44 per share, which represents nearly 16% growth Over the $0.38 per share from the Q2 of last year. AFFO totaled $150,000,000 for the quarter compared to $135,000,000 in the Q2 of 2020.

Speaker 4

We expect this level of high performance to continue through the remainder of 2021 as reflected in our revised guidance. Same property NOI growth on a cash basis for the 3 6 months ended 2021 compared to the same periods of 2020 was 5.5% and 6.2%, respectively. The growth in same property NOI for the Q2 of 'twenty one compared to the Q2 of 'twenty was Mainly due to rent growth and some free rent burn off, partially offset by a slight decrease in occupancy in our same property portfolio compared to the previous year. During the quarter, we generated $156,000,000 of proceeds from the sale of 3,400,000 shares under our ATM program. We also redeemed the remaining $84,000,000 of our 3.9% unsecured notes that were set to mature in October of next year.

Speaker 4

We finished the quarter with $265,000,000 of outstanding borrowings on our line. Early in July, we also called for the redemption of 2 $1,000,000 of unsecured notes, which have a scheduled maturity in April of 2023 and bear interest in an effective rate of 3.7%. After this redemption, we do not have any significant debt maturities until late 2024. We'll use the proceeds from the July dispositions Nick Just mentioned to repay our line of credit and fund this redemption, leaving us plenty of dry powder to fund our growing development pipeline. As a result of our operational execution through the first half of twenty twenty one, we announced revised core FFO guidance for 2021 in a range $0.69 to $1.73 per share compared to the previous range of $1.65 to $1.71 per share.

Speaker 4

The $1.71 midpoint of our revised core FFO guidance represents a 12.5% increase over 2020 results. We also announced revised guidance for growth in AFFO on a share adjusted basis to range between 10.1% 13.0% with to midpoint of 11.6% compared to our previous range of 8% to 12.3%. For same property NOI on a cash basis, we've increased our guidance in a range of 4.75% to 5.25%. We continue to outperform underwriting assumptions speculative developments, both in the timing of lease up and in the rental rates we're achieving, while we have maintained a solid list of build to suit prospects as well as land sites in various stages Based on these prospects, our revised guidance for development starts is between $1,100,000,000 and $1,300,000,000 compared to the previous range of between $950,000,000 $1,150,000,000 Our guidance for dispositions of properties has been revised to between $1,000,000,000 $1,200,000,000 Compared to the previous range of $900,000,000 to $1,100,000,000 This increase in disposition guidance is primarily attributable to favorable pricing rather than additional asset sales. We've updated a few other components of our guidance based on our more optimistic outlook as detailed in the range of estimates exhibited included in our supplemental on our website.

Speaker 4

I'll now turn it back to Jim for a few closing remarks.

Speaker 2

Thanks, Mark. In closing, I'm really proud of our team's execution through midyear. Market fundamentals are exceptionally strong, and we're driving significant growth in rental rates as well as capturing new development opportunities with new and existing customers. The year to date results and our outlook for the year have clearly exceeded our expectations from the beginning of the I'd also like to take this opportunity to point out our recently published annual corporate responsibility report, which most of you should have received. If not, I would encourage everyone to review it on our website.

Speaker 2

It's an important element of our culture and strategy. We believe our ESG characteristics and initiatives are unique Thank you for your interest and your support, and we'll now open up the lines for questions. I would ask that you limit your questions to 1 or perhaps 2 short questions. You're, of course, welcome to get back in the queue. Also remember, the prompt

Operator

Thank you. And our first question will come from John Kim. Please go ahead.

Speaker 5

Thank you. I was wondering on the CBRE joint venture, if you could disclose the total value of the 3 tranches And also the cap rate on the sale and if there was an Amazon premium.

Speaker 3

Yes. This is Nick. The Total agreed value of all three tranches is just north of $700,000,000 and the cap rate is mid to upper 3 cap. Yes, Amazon deals do trade relatively well along with a lot of other assets in this environment.

Operator

Thank you. And our next question will come from Vince Tibone. Please go ahead.

Speaker 6

Hi, good afternoon. Could you discuss the marketing process and pricing on the St. Louis deal? Based on your disclosure, it looks like that portfolio sold at a high 5 Cap rate, which is maybe a little higher than I would have thought given just current trends in the transaction market and some other comps. So just any other additional color on that portfolio deal would be helpful.

Speaker 3

Yes. Vince, this is Nick again. We broke that transaction into 2 pieces. One asset traded at Low 4% cap and the other part of it traded at a mid to upper 5% as you alluded to. Yes, The turnout was good.

Speaker 3

One difference on this portfolio, different from all the other assets is the rents on the remainder Oil was a little bit above market, about 4%. So I think that drove the pricing a little bit higher than probably what you might have expected.

Speaker 6

Got it. No, that makes sense. So why were they above market? Were these build to suits that are had special build outs We're above market. Is it what was the reason they were above?

Speaker 3

Well, and there's tax abatement in that market, and I think that's part of the reason why they're a little bit above market. I will tell you the IRR was on the that transaction was still in the mid fives.

Speaker 6

Got it. That's really helpful. That makes a lot of sense on where then why it landed at that spot. Maybe one more for me. I just wanted to follow-up on Jim's Can you provide a little bit more detail on where you're seeing the strongest fundamentals?

Speaker 2

Sure. Vince, this is Steve. I think it's No secret. Southern California, Northern New Jersey, Northern California are performing exceptionally well. I think I saw a report recently that CB said Northern New Jersey was north of 30% year over year.

Speaker 2

So we're seeing it in our own portfolio. I think with The numbers we put up on a national basis were best in our sector. And if you broke it out by submarket, it tracks Certainly with those 3 that I just outlined to you for being at the top of the class.

Speaker 7

Makes sense. Thank you.

Operator

Thank you. Next, we'll go to Blaine Heck. Please go ahead. Your line is open.

Speaker 8

Great. Thanks. Good afternoon. Jim, can you talk a little bit more about the thought process behind forming a JV for the Amazon asset instead of In outright sale, I think, past commentary from you guys pointed more towards selling the assets outright. So was there anything meaningful that kind of changed your mind there?

Speaker 2

No. If you go back to the conversations, I think we were trying to guide people towards a combination. There are a number of the assets, when you look at our overall Amazon holdings, that we determined We didn't want to own long term, and those are the ones that we're selling outright. And as Dick alluded to, getting Unbelievable premium pricing. Other ones are in markets that we really would like to At least keep an interest in those properties.

Speaker 2

And we also want to maintain as many of those as we can from a relationship perspective. So it's a little bit of a balancing act, keeping some wholly owned, some in the joint venture and then some selling outright. And I think Going forward, you'll continue to see us do all of the above. Some will be 100% wholly owned, some will go into the venture, and some will be sold outright.

Speaker 9

Yes, that makes a lot

Speaker 8

of sense. And then just as a quick follow-up, is there any type of right of first refusal that CDRE has On any other assets being sold beyond the 3 tranches you talked about or any other agreements or stipulations within the JV that we should be aware of?

Speaker 2

No. Nick can give you some color. There's a little bit of close by property and

Speaker 10

Yes. Things like

Speaker 3

that. Blayne, this is Nick. We control our destiny there. If we want to sell something outright, we can sell it Right. If we want to hold something, we can hold it.

Speaker 3

Now if we want to do something in another JV, then they do have some rights to pursue, of course.

Speaker 8

Got it. Thanks guys.

Operator

Thank you. Our next question will come from Michael Carroll. Please go ahead. Your line is open.

Speaker 11

Yes, thanks. Jim or Nick, I guess with the announced St. Louis sales, how is the company thinking about the geographic Concentration today, are there any other markets you want to exit or reduce your exposure to? I know Indianapolis has been something you talked about a little bit. I'm not sure if you're happy with that concentration today.

Speaker 11

But how should we think about how that should change going forward?

Speaker 2

Mike, it's an ongoing evaluation. We've said for the last few years, we like our portfolio. We continue on an annual basis to try and be good stewards of the portfolio And look at asset allocation, look at the assets that are performing at the bottom of the list, Whether it's below market rent growth, rent escalations, the age and clear high of the asset, whatever the case may be. But as we continue to focus on Tier 1 assets, we'll always be looking to prune Out of the portfolio, whether we do market wide decisions like we did in St. Louis and we have done before or we continue to do smaller portfolios It definitely remains to be seen based on the opportunities that we see in the marketplace.

Speaker 2

I don't know, Nick, if you have any additional color.

Speaker 3

No, I think that's right. I think that's always One of the capital raising levers that we use and then we there's always going to be some lower performing assets, although the bar is Getting higher and higher for those assets. So we'll continue to look at it on an ongoing basis.

Speaker 11

Okay. And then I guess With the joint venture to reduce the Amazon exposure, I mean, is there a goal of, what type of tenant concentration you're comfortable with? I mean, it's around 8 I mean, do you want to get it down to 5%? Or how should we think about that?

Speaker 2

We've had a stated goal of trying to keep it in the 4% to 7% range on an ongoing basis. The challenge is as fast as Nick can push it out the back door and Dispositions and joint ventures, Steve's guys are bringing it in the front door by the Amazon Prime Truckload. It's kind of the same answer as I used with Blaine. It's a bit of a balancing act. And we want to be clear, the number is going up and down as we continue to do other deals in our partnership with Amazon.

Speaker 2

And look, they've been great partners, and we've done Last mile facilities and sortation and fulfillment centers, and we hope to keep having more and more of those opportunities. And We'll manage our exposure and manage the balance sheet accordingly.

Operator

Thank you. Next, we'll go to Dave Rodgers. Your line is open.

Speaker 12

Yes. Good afternoon, everybody. Maybe wanted to talk about development Jim and Steve, probably for you. But I guess as you look at the development pipeline, about half of it goes in service in the Q3. And then I think after that, See the occupancy rate drop down a little bit.

Speaker 12

You start another $600,000,000 or so in the back half of the year. If you start more on spec, how low could that Kind of pre leased component go, obviously, you're leasing quite a bit at the same time. But I guess I'm just trying to think about where you might head in the second With that rate overall and how many build to suits you might have in that pipeline.

Speaker 2

Yes. Dave, I'll start and then Steve can give you a little bit of color. Starting at The June NAREIT meetings, we started guiding people towards the 40% to 50% range in the pipeline in the 3rd quarter For the exact reasons that you outlined, buildings coming in service and new projects that we're starting. So I think the low point would be in the low 40s. But as Steve alluded to, given the volume of spec leasing So far in advance of buildings completing, I don't I'm pretty confident we're not going to go that low.

Speaker 2

I mean effectively sitting here today, we're at 54%. So even with all the ins and outs, I don't think you're going to see us lose 50% of our preleased percentage. Steve, do you have any other color? Yes. Dave, the only thing I'd add to your question is, I think you'll see us start More spec projects like we've outlined in the latter half of the year.

Speaker 2

The spec leasing pipeline, as Jim indicated, is strong. So I don't see us fall off there, but I do think some of the commentary around material shortages and things that we're dealing with, I I do think you'll see build to suits maybe get a little tougher in the next 6 to 12 months As material shortages start to push that out a bit.

Speaker 12

Got you. That's helpful. And then Steve, maybe one last one for you. In terms of the size range of tenants or the size spaces, are you seeing a meaningful difference in terms of either demand or rent growth overall?

Speaker 2

Yes. I'd tell you, for us, $250,000,000 to $500,000,000 was the strongest sector. Next was 100 to 250. So call that 100 to 500 was our best category from a rent growth. It also represented about 65% or 70% of our overall activity.

Speaker 2

Honestly, we don't have a lot of spaces available over 500,000 feet. I think that market in the places we have space right now is very hot. I wish we had more of it. Everything is doing well. It's all relative, but I think for us that 100 to 500 was the best performer in the second quarter.

Speaker 4

Great. Thank you.

Operator

Thank you. Next, we'll go to Manny Korchman. Please go ahead. Your line is open.

Speaker 5

Hey, good afternoon, everyone. Nick, you gave a little bit of color on acquisitions you did. You're confident in raising your acquisition guidance Given where valuations have gone, is there anything special about the acquisitions you're going to look at going forward, Same markets, different markets, different tenants, anything we can glean from that?

Speaker 3

Yes, Manny. This we're going to continue to focus And lever our development teams in the ground, mainly in our coastal Tier 1 markets. Our pipeline right now It's probably about $1,000,000,000 deep. We may not get any of those deals, but we'll be looking at deals Like the Doremus deal that we just did this quarter, the container yard, deals like that, that are more likely marketed, that we'd be more creative on, redevelopment plays. So we still feel very good that we'll get there, but it is challenging out there.

Speaker 3

Obviously, we talked about this in the past. The broadly marketed stuff, Class A, 10 year leases, They're getting very, very expensive. We're starting to see a lot of sub-three caps now.

Speaker 5

And then just Turning back to the JV discussion for a second. If you were to go and sell the next tranche of assets, so let's say assets 8 through 15, Is that something you've already discussed with the Seabury? Or do you think you'd go to market and figure out if there's going to be a new partner or a different JV structure for that?

Speaker 3

No. I mean, we've got 9 assets identified now that are going into the JV. We've got a pool of assets that we know that we're going to sell outright, and we've got another pool that we know we're going to hold. Each new deal that we do, we have a discussion internally What bucket that needs to go into, and we'll make those decisions 1 by 1. But we've got a strategy for every asset that

Speaker 9

we hold today. Thank you.

Operator

Thank you. Next, we'll go to Mike Mueller. Your line is open.

Speaker 5

Yes. Hi. I was wondering, should we think of this year's disposition levels of 1 Position levels of $1,000,000,000 plus is being a bit inflated to jump start the JV? Or is this Basically the new norm when you're running at about $1,300,000,000 of development starts.

Speaker 3

Hi, Michael. This is Nick. No, I think this is a bit inflated. We were doing a little bit of catch up on the Amazon exposure, was the primary reason behind it. And we are Taking account that we didn't know what was going to happen with the tax environment.

Speaker 3

So we are being a little bit cautious from that perspective as well. So I wouldn't expect them to remain at this level on a go forward

Speaker 5

Got it. That was it. Thank you.

Operator

Thank And next, we'll go to Brett Dilts. Please go ahead. Your line is open.

Speaker 13

Great. Thanks. Hey, guys. In the remarks, Steve talked about how a greater proportion of coastal renewals in 2Q led to a jump in rent growth, but said that mix is lower in the back half. Would you be able to quantify the coastal mix of upcoming renewals in the second half of this year and maybe into next year?

Speaker 4

Brent, this is Mark. I'll start and then Steve can add in. We've been running at about 15% to 20% of our rollover has been in the coastal markets prior to this quarter. This quarter, it did jump up to 35%, like we mentioned. The back half of the year, I think you'll see it back down in that 15% plus or minus range.

Speaker 4

And the reason I'm not Quoting exact numbers as we don't exactly know how many early renewals we'll pull forward, that's always the $1,000,000 question, right? But If we look at what we know that's coming at us, plus some slight early renewals we think we'll have, that coastal market rollover will probably be closer to 15%, 20% in the back half of the year like it has been prior. So, the two things I would take out of that is a little bit of the Record growth this quarter was driven because we had a little bit more exposure there, but it's still not the exposure that our portfolio is at, at 40%. So, I think That gives us some really good comfort going into 2022 and beyond that those numbers could even escalate further. It may moderate a little bit in the back half of this year, but we still think it's going to be very good.

Speaker 4

So, as we sit here today, we still think you're going to see Mid teens, give or take, on a cash basis and 30% plus or minus on a GAAP. We're still getting good rent growth everywhere.

Speaker 2

Yes. The only thing I'd add to that is, as Mark said, it's pretty broad based. I mean, I'm just looking through some of our numbers here. I mean, Central Florida, Cincinnati, Indianapolis, Nashville were all markets that were north of what we reported at 16% or 19% cash. So, Very broad based for us and what we're seeing on the growth side.

Speaker 13

Okay, perfect. Thanks. And then last one here. On the tenants that haven't been renewing, What types of tenants are electing not to renew? And then since you're backfilling so quickly, what types of tenants are immediately backfilling the space?

Speaker 2

On the renewal side, I will tell you the majority of the tenants we have Either not renewed or lost, however you want to say it. The majority would be a space need, right? They either needed more space or Based on what we had, right behind that would be they didn't want to pay what we expected to get. And then on who's backfilling, I think the top segments right now for our portfolio, I mentioned in my remarks, 3PLs the 3PL business has been on fire, relative to supply chain, increased inventory levels, Safety stock, we're seeing a lot of e commerce requirements that need space quickly. Turning to 3PLs to fulfill that need.

Speaker 2

E Commerce has been very active. Consumer Products and Retail has been very strong at the start of this year. So Again, very broad based, but hopefully those were some specifics for you.

Speaker 13

Yes. Appreciate that. Thanks, guys.

Operator

Thank you. Next, we'll go Jamie Feldman. Please go ahead. Your line is open.

Speaker 9

Great. Thanks. I was hoping to ask a similar question to the one on dispositions, But on development starts, so I mean as you think about you bumped your guidance for the year, is this something you think is sustainable Into next year, this level? Or are there pull forwards? Are you going to step that didn't start last year, you were able to start this year?

Speaker 9

Because how are you thinking about the run rate for starts?

Speaker 2

Yes. Jamie, I would tell you, as my General Counsel looks at me and makes sure I don't give guidance for next year, We're pretty optimistic about our ability to maintain a run rate that's several 100,000,000 higher than we've historically been. So we'll see when we get to January. But as we look at the pipeline for the next 18 months, We're pretty optimistic about build to suit, about spec development. There's been a lot of discussion about land.

Speaker 2

We control our own destiny On the land for all of our 22 pipeline, there's been a lot of talk about material. We've gotten way out ahead of that in terms of Contract development, design, securing steel and precast spots. All in all, we feel pretty good about it, and we look forward to sharing that optimistic guidance with you in January.

Speaker 9

Okay. Thank you. And then how far ahead can you plan and can you pre buy? Like as we think about, you said over the next 18 months,

Speaker 2

Well, if you're talking about structural steel, you're prebuying it virtually a year out right now. So and we can lock in material and production slots Probably almost 18 months out. And the newest one, we've talked about steel. Free cash has gotten out there. Roofing materials are also in significant demand.

Speaker 2

That's the other one. The lead times and prices We've been working diligently to secure all of those.

Speaker 9

And what does that add to your development cost to do that ahead of time?

Speaker 2

No, then I don't have to pay for it until they deliver it.

Speaker 9

Okay. All right, great. Thank you.

Operator

Thank you. Our next question will come from Nishu Leico. Please go ahead. Your line is open.

Speaker 14

Thanks. Hi, everyone. Just had a question in terms of cap rates. You did Inch down the cap rate, I guess, in your development page in terms of your margin creation assumption there. Maybe you can give some perspective on how much You think cap rates have moved year to date and over the past year?

Speaker 4

Before Nick chimes in, Nick, I just want to add one thing there just to clarify. We don't adjust cap rates on our development projects once they're in the pipeline unless Like a lease that gets signed with an Amazon or an Acredited tenant that causes us to think the cap rate change. So the changes in the cap rate there It's really due to population changes. So, it's new coastal markets that are getting started in a lower cap rate Market that maybe projects that got placed in service. So, I just want to clarify our methodology first, and then I'll let Nick comment on the actual cap rate changes.

Speaker 3

Yes. I would tell you over the last 6 months, cap rates have probably compressed 50 to 65 bps. Prominent Brokerage Group literally revised their cap rates in Norcao, New Jersey over the last 2 weeks to be sub-three now. That's the first time I've ever seen published cap rates South of 3, but we're seeing comps in that level, too. Now a lot of this can be attributed to just how fast rents are growing, too, because as these as rent growth Increases and in place leases get below market, people are willing to lower their cap rates.

Speaker 3

But it is moving very quickly, and it hasn't stopped yet.

Speaker 14

Okay, great. That's very helpful. Thanks. And then in terms of the guidance, I know you talked about this last quarter, but in terms of some of the slowdown in the Half of the year on same store, I think you said it was due to some burn off of free rent and as well You had some occupancy comps that

Speaker 5

were tough in the back of

Speaker 14

the year, but you did increase your occupancy guidance. So I guess I'm just trying to So, understand some of the nuances in the back half of the year we should be thinking about?

Speaker 4

Sure, Nick. I'll try. And as you've just laid out, there There's a lot of moving pieces here. So, a little bit of it is less uplift from free rent in the back half of the year compared to the 1st half of the year, but most of it is occupancy. And when I talk about occupancy, I'm not talking about a decrease in our occupancy From the first half of twenty twenty one to the back half, I'm talking about a tougher occupancy comp in twenty twenty one.

Speaker 4

So for perspective, I have some numbers in front of me. If you look at the first half of this year, we actually had a 40 basis point favorable occupancy uplift From 2020 to 2021. We were 97.6% in the first half of twenty twenty or 98.0% in the first half of twenty twenty one. So that's a 40 basis point Positive impact. When you look at the back half of the year, our occupancy comp in 2020 was 98.5%.

Speaker 4

So, we think our occupancy will be pretty flat from the first half of twenty twenty one to the back half, maybe call it 97.9. But even with occupancy flat from the first half to the back half because of that hard comp, we go from a positive forty basis points in the first half of the year to a negative 60 in the back half. So if you look at it that way, you really have a 100 basis point change in occupancy solely because of the comp period, Not because of anything going bad in our portfolio now. So that's the main driver here. I also think that sets us up good for next year because next year won't have that 98.5 J.

Speaker 4

Rice:] Like we have this year. So I know there were a lot of numbers there, but if you write all that down and follow-up, hopefully that makes sense.

Speaker 14

Yes. Thanks, Mark. Appreciate it.

Speaker 2

Or just call Ron afterwards.

Operator

Thank you. Our next question will come from Caitlin Burrows. Please go ahead. Your line is open.

Speaker 15

Hi, there. Just a question on the land bank. I think you touched I've shown it briefly before, but could you give us some detail on what you're seeing on the land buying process these days? I imagine it's rather difficult and just being able to keep up that land bank to allow the development to continue.

Speaker 2

Yes. Caitlin, I can start Steve can give you some color. My guys would tell you how difficult it is, and yet they're having no problem Continuing to keep our land bank at over $300,000,000 We actually anticipate it to go up in the second half of So I'm not really worried. The old adage of they're not making it anymore, we continue to find The challenge is finding the right opportunities where we can create value, particularly in the coastal And so as we work our way through that, that affects the timing of when we can deliver sites for build to suits We're spec development. And that's really more the art of the deal that Steve and his guys are really, really good at.

Speaker 2

Yes. Caitlin, I'll just add. Our land bank today, we've 97% of our land bank is in coastal markets, which is great from The markets we want to develop in and grow rents in, it's also they also happen to be the tougher entitlement markets, as Jim indicated. So We're finding plenty of opportunities. We've got a lot of land under option agreement, under contract, can support us Probably 15,000,000 to 20,000,000 square feet going forward.

Speaker 2

We won't close out all of that. We're working through due diligence and $275,000,000 $400,000,000 in our land bank, and we buy $300,000,000 a year. We monetize $300,000,000 a year. So we've got Very good teams, as Jim indicated, on the ground and feel confident about it. But it is certainly one of the more challenging things we deal with day to day.

Speaker 2

And the last point that I would make, Caitlin, the perfect land acquisition from our perspective is we close on Tuesday And we put it in production on Wednesday. So you never see it hit the land bank at quarter end. And we're successful in doing that a lot of That, too, is getting a little bit more challenging given the constraints of the market out there. But we're pretty efficient processors. And I know there's been some analysis done about the number of years of production or the amount of production you have in land inventory.

Speaker 2

And I'm not worried about our development pipeline for the foreseeable future because we've got plenty of land that we own. We've got plenty of land that we control, that we could close in the coming years. So I think we'll be fine from that perspective.

Speaker 15

That's a good point. And then maybe one more. You mentioned earlier in the call that it's not the top that probably one of the top reasons people move out is that they just need space You don't have it, but I guess from the standpoint of tenants not wanting to pay the rents that you guys are commanding, I guess how are you guys thinking about that balance between occupancy and rate at this point and being aggressive or not, but it seems like aggressive on the rate side.

Speaker 2

We'll give you 2 answers. Jim will tell you we're not pushing high enough. Steve will tell you we're doing a great job because we just broke all the records and had Our highest ever cash and GAAP rent growth. So it's a balancing act. I've used that expression, but It costs more to re tenant a space.

Speaker 2

So we try and keep people as much as we can, but we have a pretty good handle on what market rent is. And if we continue to grow our rents at the level we are, I'm pretty satisfied that our guys are pushing.

Speaker 15

Thanks.

Operator

Thank you. Next, we'll go to Rich Anderson. Please go ahead. Your line is open.

Speaker 10

Thanks. Good afternoon. So on that topic, Jim, Isn't it true like 19% cash releasing spread, isn't that essentially you've given your tenant Interest for your loan for the life of their lease and they now are paying you back. I mean, it seems to me it's not a really So I wonder what you think about that. And if rent is not a pain point Thank you very much for customers.

Speaker 10

Is there an angle to maybe at least have more of a rent escalation and dialed into your leases as opposed Yes, 10% market rents and a couple of percentage points of rent escalation over the course of the lease.

Speaker 2

Well, I'll start out. That's a great theoretical question. I'm certainly not looking at it as an interest free loan. I think looking at the cash releasing spreads And look at your own rent on your own place. If your rent goes up effectively 20% From the end of your lease to the start of your new lease, that's a pretty healthy increase.

Speaker 2

And you add in And we're getting 3% to 3.5% annual rent escalation. So that's how you get the GAAP rent growth number. Pretty good numbers compared to our historical numbers and all of our peers.

Speaker 10

No, I get it. It means the market is very healthy. But if it were run efficiently, you would be getting your market rent more quickly rather than waiting for it. That's my only point. I know it's a silly Theoretical question, but I figured No,

Speaker 2

no, no. That's a valid point. I mean, one of the things we've talked about is one of the Challenges of our portfolio, given the length of the lease terms, is we don't get the opportunity to get at the as frequently as some of our peers do. I think we all understand the value of lease term, particularly with the quality of credits We have, but that's why we're pushing when these things are rolling. And as Nick alluded to in that acquisition, We just bought a building with rent that's 75% under market.

Speaker 2

Somebody is going to get a hell of a price increase in about 2 years. Phil, I just had a couple

Speaker 4

of comments, Rich, and you touched on them actually is, well, first

Speaker 2

of all, I'd say

Speaker 4

the tenants are feeling this pain. To say that it's Painful form is not really right. They're feeling the pain, number 1. Number 2, the market is the market and the market has moved from what was a 1.5% to 2% escalator to now what's easily into the 3% s and pushing forward in some markets. So we're getting there, the lysate mortgage market.

Speaker 4

And then the last Thing I would say is, there is a cost associated with shorter term deals. The more often you're rolling deals, the more you're putting capital in those deals. So there is a cost associated with that and a risk associated with that too. So you got to look at everything a little bit on a risk associated basis risk adjusted basis, I'm sorry, And then also look at the totality of the cash flow stream and there is some savings to be had on the capital side I'm not rolling them this quick. So it's a balancing act, but you got to factor all those in.

Speaker 10

Okay. And then the second question is, if you were a private Company, would you be reducing or increasing your exposure to Amazon? In other words, you're owned by shareholders and that's And you're doing in some ways, you are responding to a balance and all that sort of stuff. But is it When you start reducing your exposure to Amazon, are you actually doing that and sort of cringing in a way because it's such a good company?

Speaker 2

No, Rich, I'll tell you, I'm a pretty substantial shareholder of this company, and I have input in all these decisions. I'll tell you we're doing the prudent Any good asset manager would tell you having more than 10% of your exposure to any one tenant, Even Amazon, who we love as a partner and who has a great profile, is probably taking on more risk than And we've looked at creative ways to reduce that and limit our exposure, still giving us the opportunity to So yes, I would tell you if we were a private company, I think we'd be doing the exact Same thing. We might get greedy and monetize more of it sooner, but that's a conversation for For a while, the next time we're all together.

Speaker 10

I'll catch you in Las Vegas on that one. I'll be there. Thanks very much, guys.

Operator

Thank you. And next, we'll go to Bill Crow. Please go ahead. Your line is open.

Speaker 7

Yes. Good afternoon and thanks. And I guess I'll apologize if you don't like philosophical questions because I'm going to ask you one

Speaker 2

as well.

Speaker 7

And it really Centers on Development Economics. It just seems like over the last couple of years, it's become much more popular to focus on And less on stabilized yields, which certainly makes sense if you're flipping Amazon boxes or merchant film. And I know both metrics are intertwined and revolve around cost of capital. But I wondered, is there Point in which the development yields get so low that they don't make sense despite the fact that the spreads may still be healthy?

Speaker 2

Yes. In theory, there is. I don't know where that is or what that number is. I mean, we look at the value creation spreads even though we're not monetizing the vast majority of the assets. We look at the spread of the stabilized yield and the 5 or 10 year average yield over our cost of capital and our ability to grow the top line and the bottom line.

Speaker 2

But the alternative is The yields on acquisitions are probably on average 2 to 2 50 basis points lower. So if you If you've got a healthy, strong company, you've got a really strong growing economy and strong markets, I think you want to put as much money as You can into the development side, supplement that with strategic acquisitions, and that's really the best way to run the ship, which is what we're trying to do.

Speaker 7

Right. I guess you're right. Vis a vis acquisitions, certainly, it makes a lot more sense. But maybe there's a time at which External growth just doesn't make as much sense. Maybe it takes trading at a discount to NAV or something like that to make that happen.

Speaker 7

Just a philosophical

Speaker 2

No, no. I mean, in theory, you're absolutely right. I mean, if land prices continue to rise, the entitlement process gets more and more challenging, Material costs rise, and we get to some softening in the overall market. And yields, Because of how we've got to underwrite the deals, get a lot thinner, then yes, we would dramatically pull back on

Speaker 3

But IRRs are still very strong on our development pipeline, and we do look at that as well.

Speaker 7

Yes. Let's hope we don't get to that point. Congratulations on a good quarter, guys. Appreciate

Speaker 2

it. Thank you.

Operator

Thank you. And next, we have a follow-up from John Kim. Your line is open.

Speaker 5

I think I had my fingers. I didn't mean to do that.

Operator

Apologies. That's okay. And we have no further questions in queue at this time.

Speaker 1

Thanks, Amy. I'd like to thank everyone for joining the call, and we look forward to engaging with many of you throughout the second half of the year. Operator, you may disconnect the line.

Operator

Thank you. And that does conclude your conference for today. You may now disconnect.

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