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Duke Realty Corp (NYSE:DRE)
Q2 2020 Earnings Call
Jul 30, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Duke Realty earnings results conference call. [Operator Instructions] And as a reminder, today's conference is being recorded.

I'd now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Ron Hubbard. Please go ahead.

Ron Hubbard -- Investor Relations

Thank you, John. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien, Chief Financial Officer; Nick Anthony, Chief Investment Officer; and Steve Schnur, Chief Operating Officer. Before we make our prepared remarks today, let me remind 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 and future results. For more information about those risk factors, we would refer you to our 10-K or 10-Q that we have on file with the SEC and the company's other SEC filings. All forward-looking statements speak only as of today, July 30, 2020, 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 in 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 on the Investor Relations section of our website at dukerealty.com. You can also find our earnings release supplemental package, SEC reports and audio webcast of this call in the Investors section of our website as well.

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

James B. Connor -- Chairman And Chief Executive Officer

Thank you, Ron. Good afternoon, everyone. First of all, we hope all of you and your families are safe and healthy during this pandemic. When we last gathered for the quarterly earnings call in April, the world was grappling with the onset of the pandemic. At that time, I outlined about a half a dozen risk management strategies that we had implemented tied to safety, remote working, capital preservation and more closely engaging with our customers. While there's still a lot of uncertainties around the pandemic and its ultimate impact on the economy, we are in a considerably better place from a capital markets liquidity and consumer confidence perspective compared to three months ago. Even more encouraging has been the resiliency of the industrial sector overall and more specifically, the performance of our portfolio.

Second quarter highlights. We achieved 27% growth in rental rates on second-generation leases on a GAAP basis and 11% on a cash basis. We reduced 75% of our expiring leases, and including immediate backfills, we released 96% of expiring leases. We signed 7.6 million square feet of leases, which contributed to a 100 basis point increase in our total portfolio occupancy to 95.3%. Leasing was broad-based across all industries with about 20% tied to e-commerce. Monthly rent collections remained strong at 99.9%, including executed short-term rent deferral agreements. On the balance sheet side, we further bolstered our liquidity and lowered our cost to capital by executing a $350 million unsecured note issuance that achieved an all-time record low 10-year coupon in the REIT sector of 1.75%. In addition, we tapped the equity market, generating $71 million of proceeds through our ATM program. We published our fifth annual corporate responsibility report in May. We highlighted our achievements and new initiatives in environmental, social and governance, such as maintaining our long-term track record of top-tier corporate governance, continuing to drive and improve the diversity and the health of our workplace, and being respectful of and positively impacting the environment.

Now let me turn it over to Steve to cover the operations side in more detail.

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Thanks, Jim. I'll first cover overall market fundamentals and then review our quarterly operational results. The quarter ended up relatively strong on the demand front, given the mostly soft economic data points in the broader economy. Demand was estimated in the 20 million square foot range. Deliveries were up as expected to about 56 million square feet, which pushed vacancies up 20 basis points to about 4.7%. For the full year, the major research firms project about 250 million square feet of deliveries with about 120 million to 150 million square feet of demand. Given this outlook, we expect the year to end roughly at about 5% vacancy on a national basis.

As we look into the future a bit, a key factor we've learned over the last four months is that the pandemic impact to consumer behavior and supply chains have materially elevated demand for logistics real estate. As an example, CBRE is now estimating we can see 330 million square feet of demand in 2022, which, if correct, would be an all-time record in demand. And over the next five years, CBRE is also projecting about one million square feet of demand in total. What happens with supply going forward is a little bit harder to predict at this time. While we do have some color on deliveries for this year, it's difficult to project the magnitude of new starts. So I think we'll have to watch this closely over the next quarter or so. With all the strong data points in e-commerce, supply chain resiliency and increased inventory levels, it's probable that new spec development start to ramp up some. But as I said, we need another quarter or two to comment on that trend in the next year.

Turning to our own portfolio. And as Jim noted, we had an excellent quarter from a leasing standpoint. With a total leasing volume of 7.6 million square feet, we executed 1.9 million square feet of renewal leases and either renewed or immediately released 96% of second quarter lease expirations. Rental rate growth on second-gen leases signed in the quarter was 27% on a net effective basis and 11% on a cash basis. We believe the rent growth for the second half of the year will remain strong, and we'll see similar performance levels to our recent history. A few of the more notable transactions included an 800,000 square foot lease in a spec development in Southern California scheduled to deliver toward the end of this quarter. We also signed a 300,000 square foot new lease encompassing two facilities in Raleigh. On the renewal side, we executed transactions with a major home improvement retailer in Northern California, the American Standard Corporation in South Dallas, Wayfair, New Jersey and a reverse logistics company in Nashville. Across all leases, the average size was 138,000 square feet, and our average lease term was about six years, which is fairly representative for our performance.

We believe the size and term of our transactions represents an element of differentiation in terms of lower portfolio volatility and typically more creditworthy tenants. I'd also add that we are definitely seeing stronger demand for larger spaces across all of our markets.In addition, we now only have 3% of our leases expiring in 2020 and 9% in 2021. These low expirations, coupled with 15% to 18% mark-to-market estimate in our entire portfolio, should continue to contribute to lower volatility and strong stable NOI growth over time. We've added new exhibits in the supplemental report posted last night on our rent collections, deferrals and bad debt expense. We hope this provides helpful information. As you know, it can be difficult to compare results between companies. Overall, we are very pleased with our rent collection results and tenant creditworthiness, and we now believe our total bad debt exposure will be much less than we had feared last quarter. As of this morning, 99.9% of our originally due second quarter rents and 99.9% of our originally due July rents have either been collected or deferred pursuant to agreements in place. The terms of many of the short-term partial deferment agreements that we've executed required tenants to begin paying deferred rents in July, and we're happy to report we've collected 100% of those amounts.

Turning to development. We had no new starts during the quarter. However, we have a very optimistic outlook on the [increased] development starts for the remainder of the year. There are a number of improved demand indicators, particularly a few months of very strong data points in online retail sales, business community reaction to recent supply chain bottlenecks and as well as diversified supply chains and increased inventory stocking that will require new facilities. Specific to our own situation, we leased up space and our speculative developments faster than we had forecasted and we've improved overall occupancy in addition to our strong rent collections I discovered. We also have an inventory of strategic infill land in the best submarkets and Tier one logistics cities such as Southern California, South Florida, Northern California and Seattle that will be highly attractive to capture incremental demand going forward.

We'll continue to focus on build-to-suit development opportunities, and I'm happy to report we have a very healthy build-to-suit prospect list. If supported by the economy and local market fundamentals, we may also look to resume speculative development in certain submarkets on the land I just mentioned. Our development pipeline at quarter end totaled $846 million, with 82% of these dollars allocated to coastal Tier one markets. These developments have projected value creation in the mid-30% range. This pipeline is 65% pre-leased, which is very impressive given we delivered nine projects during the quarter, totaling 3.2 million square feet that had 82% leased at the end of this quarter.

I'll now turn it over to Nick to discuss the acquisition and disposition environment.

Nick Anthony -- Executive Vice President And Chief Investment Officer

Thank you, Steve. For the quarter, we had no acquisitions or dispositions, which is not unexpected given the environment we were in between March and June of this year. Looking forward on dispositions, most of the originally identified assets are now back in the process of being marketed given the extremely high interest in industrial real estate, and we anticipate pricing to be at pre-COVID levels or better. As you're aware, our dispositions are a key component of our strategy to increase our exposure to coastal Tier one markets, diversify our tenant base and is also an integral part of our funding strategy. With regard to the tenant exposure topic, we recognize that our exposure is running slightly higher than historical levels. Given our temporary pause in capital transactions in the second quarter, our disposition timing is a little behind schedule.

As we have done in the past, we are in the process of monetizing some Amazon assets later in the year or early 2021, which will bring our exposure back down to more historical levels. Amazon continues to be a great partner with a fabulous growth profile. Given all that's going on in the world, having slightly elevated exposure on a temporary basis to a AA-rated company, growing at over 20% a year with a $1.5 trillion market cap isn't necessarily a bad thing. On the acquisition front, the market remains competitive, but we continue to look for and find strategic opportunities and have the balance sheet to react quickly to them. Subsequent to quarter end, we've closed on one transaction and have another three under agreement. I will now turn our call over to Mark to discuss our financial results and guidance update. Thanks, Nick. Good afternoon, everyone. Core FFO for the quarter was $0.38 per diluted share compared to $0.33 per diluted share in the first quarter of 2020 and $0.36 per share in the second quarter of 2019. The increase to core FFO in the second quarter of 2020 compared to the first quarter was partly driven by a $0.03 per share decrease in general and administrative expenses due to accelerated noncash expense on our first quarter annual stock compensation grant. Our positive second quarter results were also a result of higher occupancy, rental rate growth and lower bad debt expense. Bad net expense during the second quarter of 2020 was only $463,000, compared to $5.5 million in the first quarter, almost all of which was on a straight-line basis. We reported FFO as defined by NAREIT of $0.33 per diluted share for the second quarter of 2020 compared to $0.28 per diluted share in the first quarter of 2020. AFFO totaled $135 million for the quarter, compared to $126 million for the first quarter of this year and $122 million for the second quarter of 2019. We continue to produce impressive AFFO growth, especially given the current operating environment. Same-property NOI growth on a cash basis for the three and six months ended June 30, 2020, was 5% and 5.8%, respectively. Same-property NOI growth for the quarter was mainly driven by increased occupancy and rent growth. Same-property NOI for the three and six months on a GAAP basis was 2.8% and 2.2%, respectively. Same-property NOI on a GAAP basis for the six month period was negatively impacted by the straight-line rent collectibility reserves we recognized during the first quarter of 2020. From a capital standpoint, we issued $350 million of 10-year unsecured notes at a coupon rate of 1.75% and an all-in yield of 1.85%, which was the lowest ever by a REIT for a 10-year unsecured note issuance and was among the lowest all-time 10-year rates among all corporate issuers. We used a portion of the proceeds of these notes to extinguish $216 million of our 3.875% unsecured notes, which had a scheduled maturity in October 2022 through a tender offer. We also used available cash to pay down the $200 million of line of credit borrowings that were outstanding at the end of the first quarter. I would now like to address the changes to our 2020 guidance that we have made, which are based on our better-than-expected second quarter operations and considerably improved outlook for demand and tenant credit worthiness. First, we've increased our guidance for core FFO to a range of $1.48 to $1.54 per diluted share from the previous range of $1.41 to $1.51 per diluted share, which equates to a $0.05 per share increase to the midpoint. The increased guidance for core FFO is driven by a midpoint decrease of about $8 million or $0.02 per share compared to the $16 million of bad debt expense we estimated when we updated our guidance in April. Again, I'll point out Page 16 of our supplemental information which details our bad debt expense estimates for the year and note that our approximate 100 basis point total bad debt expense estimate, only about 45 basis points of this is on a cash basis. For similar reasons to core FFO, we have also increased our guidance for NAREIT FFO to a range of $1.35 to $1.43 per diluted share from the previous range of $1.32 per share to $1.44 per share. This increase was less than our increase to core FFO due to the loss of debt extinguishment we took in the second quarter in connection with the tender offer for our October 2022 notes. We have also increased our guidance for the change in adjusted funds from operations on a share adjusted basis to range between an increase of 3.1% to 7.7% from the previous range of 0% to 6.2%. For same-property NOI growth on a cash basis, we have increased our guidance to a range of 3.5% to 4.5% from a previous range of 1.75% to 3.25%. This increase in guidance is premised largely on a revised low expectations for cash bad debt expense and increases in occupancy. We also increased our guidance for all of our occupancy metrics, as outlined in our supplemental information on our website. The increased occupancy guidance is a result of better tenant demand for our properties and the expectation of fewer tenant defaults compared to our previous guidance. On development, Steve presented an update in fundamentals that supports a more positive landscape in the second half of the year for new starts. Our revised guidance for 2020 development starts is between $350 million and $550 million compared to the previous range of between $275 million to $425 million. We've updated a couple of other components of our guidance based on our more optimistic outlook as detailed in our range of estimates exhibit, included in our supplemental information on our website. I'll now turn it back to Jim for a few closing remarks.

James B. Connor -- Chairman And Chief Executive Officer

Thanks, Mark. Last quarter's results were very strong, highlighted by solid leasing that led to a 1% increase in total portfolio occupancy, 27% rent growth and the strengthening of our already solid balance sheet. Even amid a global pandemic negatively impacting many sectors of the economy, our state-of-the-art portfolio has, thus far, proven to be extremely resilient and performed better than we had initially expected last quarter. Coupled with our strong balance sheet and strategic land inventory, we are in a position to gradually ramp up our growth and value creation via development. With this, we're pleased to raise guidance on a number of our earnings and operational metrics. Although we have ways to go to see through to the other side of the pandemic, what is now clear is that the logistics real estate business is an exceptionally strong position. We're optimistic and excited to leverage our operations development platforms to continue to grow our cash flow and dividend growth over the long term.

And lastly, let me thank the extraordinary efforts by our team to continue to execute our plan from primarily remote locations. And thanks to our customers in the brokerage community for collaborating remotely with us for the last three months and for the foreseeable future.

With that, we'll now open up the lines to our audience for questions. [Operator Instructions] Operator, we'll now take questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Blaine Heck with Wells Fargo. Your line is open. Sir

Blaine Matthew Heck -- Wells Fargo Securities -- Analyst

So clearly, 2020 development starts have trended down from where you've been in the past few years. But looking forward and taking into account everything Steve went over in his remarks, the pullback we've seen across the board in supply and demand, that seems to have held up well. Jim, how should we think about the potential for you guys to ramp up 2021 starts to a level that may be even comparable to pre-COVID?

James B. Connor -- Chairman And Chief Executive Officer

Well, I guess, I would give a general comment without giving a real indication of guidance. But clearly, we're a lot more optimistic about the second half of the year. And I think we can extrapolate from our increase in guidance for the second half of the year would put us back into a more normalized level in 2021 if things were to hold. Clearly, we need to maintain leasing on the development pipeline and our existing portfolio. We've got a great build-to-suit pipeline, as Steve alluded to, but things continue to stay solid, and that affords us an opportunity to suspect development, then I think you could see us put it back into kind of a more normalized level.

Blaine Matthew Heck -- Wells Fargo Securities -- Analyst

All right. That's helpful. Second for me, you guys signed some pretty significant early renewals this quarter. Can you just comment on how those types of discussions are happening? Are you guys approaching the tenant? Or are they approaching you? Are there any concessions being offered in exchange for that kind of "extension?" And then lastly, how long before lease expiration are you guys having in these discussions?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Blaine, this is Steve. I'll jump in. We have very good lease volume, I think, for the quarter overall. If your question was on the short-term extensions, I would say it was a little there's a little unique blip there with what was going on in April and May, where some tenants wanted to hold over short term or take advantage of some market conditions that we took advantage of to plug a couple of holes. I think you'll see that number moderate back down to 600,000 or 700,000 feet of short-term deals per quarter going forward. Relative to overall general discussions on extensions and renewals, I wouldn't say anything out of the ordinary right now. We had one unique situation in Northern California, where it was we acquired a piece of land, and the tenant is going to lease that on a long-term basis so we extended the existing lease with to coincide with that. So that's tied up long term. We had another situation in Northern California on another deal that was a little bit early that had to do with a government contract on a short-term basis. So.

James B. Connor -- Chairman And Chief Executive Officer

And Blaine, we broke those out separately in the supplemental, I think, for the first time this year. We've done blend, extends and things like that in the past. These were really not these were not blend extend deals. Like Steve said, it was really just a couple of unique circumstances. And because the original lease terms were not changed and the new term will kick in for two or three years down the road, we just didn't want to mislead everybody and think we're going to get substantial growth right away on those deals. So they are just a couple of unique situations.

Operator

Next, we'll go to the line of Frank Lee with BMO. Your line is open.

Frank Lee -- BMO Capital Markets Equity Research -- Analyst

It looks like most of the core assumptions that were raising your guidance were due to stronger leasing and lower bad debt. I guess, how does rent growth factor into this? What are you assuming for market rent growth? And did this change from your previous guidance?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

I think in my comments, I indicated, rent growth was solid at 27% GAAP and 11% cash. That's fairly consistent with where we are where we have been. I think last year, we were at 28% and 12%. I think you'll see us in that same sort of range for the balance of this year. I mean, rent growth, this is still a landlord's market. We're at 4.7% vacancy on a national basis. We're still happy with the conditions out there in terms of supply and demand.

James B. Connor -- Chairman And Chief Executive Officer

And Frank, I would just add to that. For the current year, like operating guidance on metrics like FFO and items like that, everything Steve just mentioned is going to be great for 2021 and beyond. It really is not impactful for current year numbers. It's more for the future.

Frank Lee -- BMO Capital Markets Equity Research -- Analyst

And then you noted potentially starting some spec developments in a few markets. Are there any markets that look particularly attractive for spec developments? And maybe how dependent are your spec starts on getting some leasing time on the four spec projects that are delivering next year?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

As Jim indicated, we're always mindful of where we stand with our spec space that's available. We've done a really nice job. That pipeline, for us, is down as low as it's been in a couple of years. So our teams have done a really nice job leasing up available spec space. The markets we'll look to, we're focused on infill, high rare Tier one markets. So I think you'll see us be active in Southern California, Northern California, Seattle, South Florida, maybe New Jersey. Those would be the markets we'd be looking to if we decide we want to pull the trigger on a spec building.

Operator

Next, we go to Nick Oliver with Scotiabank. Your line is open.

Nick Oliver -- Scotiabank. -- Analyst

This is Sumit in for Nick Yulico. So just a question on the bad debt exposure, guys. I think I appreciate that your bad debt expenses is trending down very fast, and it's almost de minimis. Just wanted to get a sense of how much the uncollected rent, which is default or deferred, could impact your cash NOI growth of 5% this quarter? And in addition, if I could also understand if there's some bad debt there that are lingering because you cannot evict the tenant because of local restriction moratoriums?

James B. Connor -- Chairman And Chief Executive Officer

Yes. So let me try to take that, so. First of all, when it comes to bad debt, de minimus is 0. We always strive for 0. We're not quite there yet, but it is coming down, that's for sure. Very little or really none of that, that we've got in our pipeline right now is due to moratoriums or anything like that. We're at 99.9% for the second quarter in July on collected plus executed deferment agreements. We firmly believe we're going to collect on those executed deferment agreements. I think it's important to understand that on those agreements, these are not just free rent with what I call a hope certificate on the end. These tenants are paying us current on operating expenses and half their base rents. We did put up a reserve for about $480,000 that we disclosed on current. That are current on those deferment agreements. The only bad debt we had in the quarter for what I call delinquent or really problem tenants currently was $200,000, which we also disclosed on Page 16. That's about the 0.1% that we have not collected for the last four to five months. That's what that $215,000 relates to. And we are in various stages of eviction on those tenants, but we don't think it will be a long-term issue because it's not under moratoriums or anything like that. So we'll get those tenants out of the space, and we'll get them released.

Nick Oliver -- Scotiabank. -- Analyst

Okay. And just following up on the impact to cash NOI. Is it nothing? Or I mean, does it move from 5% down slightly?

James B. Connor -- Chairman And Chief Executive Officer

Well, on we've got the $463,000 of cash that we booked this quarter hit NOI. And in our guidance for the remainder of the year, we have $3 million more of cash bad debt expense that is bringing that NOI number down. That is already included in our guidance. Now hopefully, we'll not need that $3 million, but that's our best estimate right now.

Operator

Our next question comes from Bruce Frankel with Green Street Advisors. Your line is open.

Eric Joel Frankel -- Green Street Advisors -- Analyst

Eric Frankel here. Just a couple of questions. Steve, could you provide a little more color on supply chain bottlenecks that are affecting demand? I mean, is that going to be the big demand boost you think, even in the near term?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Yes, Eric. I think there were a couple of examples to hit I mean obviously, the one everybody is familiar with is toilet paper. I think the you heard a lot of other examples. People ran out of soup. We've got clients that are looking at different facilities right now to the new term the term being used today is sort of the safety stock and where does that end up. People were running facilities at just-in-time inventory levels. And I think we're starting to see requirements pop up in different markets to house longer-term goods to ramp against any potential disruption in supply chains again.

Eric Joel Frankel -- Green Street Advisors -- Analyst

Okay. That will be an interesting trend to track. And then on the just going back to the deferrals, could you maybe clarify what types of tenants and what types of industries are requesting these types of agreements?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Yes, I guess the we covered some of this in the first quarter, and I'm happy to say that it hasn't changed much. Most of what we I'd say 95% of what we dealt with, we dealt with in April and in early May. The largest takeaway that I can give you from our portfolio is size related. The vast majority of our deferral request that we were ultimately willing to agree with and live with were under 100,000 square feet. And I guess another comment I would make on it, the way we chose to handle deferments and what we put in our supplemental was we gave short term, as Mark covered, we gave short-term deferrals of partial abatement. So most of the time, tenants were paying at least 50% of their base rent plus operating expenses for a short period of time, on average, three months, and that money was paid back to us within five to six months. We did not do any blended expense. If you look at our transaction volume, it's consistent with what we've done in the past. And so we did not take any tenants and extend term on the back end and just call it a new deal. So my biggest takeaway, not industry related. There's some obvious industries in there for travel and things like that, but it's more size related.

Operator

And next, we go to Jamie Feldman with Bank of America. Your line is open.

James Colin Feldman -- BofA Merrill Lynch -- Analyst

Great. I was hoping to get some color on movement in cap rates and just what pricing looks like? I know there haven't been a ton of deals so far, but just what do you think is going to happen here with cap rates, especially as you put these Amazon assets in the market?

Nick Anthony -- Executive Vice President And Chief Investment Officer

Yes, Jamie, this is Nick. I would tell you that early on, there were a few assets with credit in term that traded at slight discounts. Those discounts basically went away. And given the interest rate environment, we do expect those cap rates to potentially compress even further. There's a tremendous amount of demand for those type of assets going forward. It's not just Amazon, it's FedEx, on people, other ones like that. So yes, we think price is pretty good. There are a few transactions that we put under contract at slight discounts. But I even think those type of deals will slowly dissipate as well.

James Colin Feldman -- BofA Merrill Lynch -- Analyst

Okay. And then as we keep hearing about the big names, like you just mentioned, Amazon, FedEx, driving a lot of the leasing, but you also said it's kind of broad based. Can you give some examples of like some of the smaller companies maybe we haven't heard about or industries we haven't been thinking about that are also looking for space and maybe doing it for the first time or kind of changing their supply chains for the first time?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Sure. Jamie, this is Steve. I think when you look at I mean, our average deal size in the second quarter was 138,000 square feet that I think that's telling. That's a little less than our average tenant size. We did transactions with in food and beverage, consumer goods, a cellphone, nice lease with a cellphone company, reverse logistics. So I think it's been again, I think it's been broad-based. I would tell you, a majority of the activity, not surprisingly, is e-commerce-related. But that doesn't mean that that's one tenant. It's not just Amazon. I'd say Amazon is probably 20% to 25% of the market activity today, but there's a whole lot of other users out there that are benefiting from the online channel as well.

Operator

And our next question comes from Manny Korchman with Citi. Your line is open.

Emmanuel Korchman -- Citigroup Inc. -- Analyst

Jim, or maybe Steve, just if we think about your comments on the safety stock warehouses. Is there an opportunity or a risk that those go to the tertiary locations and they just become feeders to the better-located or close-to-demographic warehouses that you guys focus on?

James B. Connor -- Chairman And Chief Executive Officer

It's Jim, I'll start, and then Steve can chime in. I would tell you, it's early on in the discussions and analysis. If you're sitting in the real estate and facilities group at Procter & Gamble or Kimberly Clark or Clorox or Walmart, any of these major warehouse distribution users in the United States, people are saying, look, we need to have more inventory in the U.S. that's accessible to our stores. And it's not just necessarily COVID-related. This has been building for a while. Remember, issues that we had with China going back last year, tariffs and the trade wars and everything else. And major U.S. governors, we cannot put ourselves at risk. So I think a lot of the facility people are trying to figure this out right now. Do we expand an existing warehouse? Do we go into a completely new market? And it's all a function of how their logistics and supply chain operates and how much expansion they want to put on it. So I can't tell you that we've necessarily seen, maybe Steve or some of his guys have, specific leases that were identified as that. I just know there's a lot of those conversations going on right now and companies trying to figure out how they're going to add to it. Steve?.

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Yes, Manny, all I would add is there's some talk of different locations outside of major markets for slower-moving goods with some of our customers. But it's not product or supply that will be involved, I can assure you..

Emmanuel Korchman -- Citigroup Inc. -- Analyst

And maybe one for Nick. As we think about cap rates compressing and the amount of capital that continues to target the space, is there an opportunity to get out of sort of tougher assets or tougher geographies for what you have left, acknowledging that you've sold out of a lot of that stuff already?

Nick Anthony -- Executive Vice President And Chief Investment Officer

We've already sold it. We really don't I mean, we really don't have a lot of assets to really call from the portfolio going forward. I mean, we'll continue to be prudent and try to keep improving our portfolio. There's not a lot of that. You'll still see us sell, in addition to some Amazon. In the Midwest, you'll see us sell some assets periodically, but the volumes will be much lower than what they have been historically..

Operator

And next, we go to Dave Roger. Your line is open.

David Bryan Rodgers -- Robert W. Baird & Co. -- Analyst

Yes, I missed some of your comments earlier, but average size deal, I think you said 120,000, 130,000 square feet in the quarter. How much of that are holdover from just kind of activity on pause maybe come March and April and came back to you, versus how much of that goes back to the safety stock or the acceleration of e-commerce and the need for space more imminently? Was there a way to parse that out?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

I don't know that much was a holdover, Dave. I mean most of what happened on the pause button, I guess, if you look at our sector, what happened in April. So there was certainly more activity toward the end of the quarter for us. So more of what got paused in April and early May went into June. I will tell you, when we did this call 90 days ago, our build-to-suit pipeline, I think I've referenced at that time, was down probably 30%, 40% on a prospect basis. I would tell you, our build-to-suit pipeline today is every bit what it was pre-COVID. We felt like we would get some transactions signed in the second quarter for the build-to-suit side. Those didn't happen. The timing slipped some. So back to my comments I made earlier about feeling good about the development pipeline going forward. That's a good indicator for us. It's something we track closely, and we're happy to see it back at the pre-COVID levels..

David Bryan Rodgers -- Robert W. Baird & Co. -- Analyst

Helpful. And then maybe on the capital side. As you guys sell these Amazon buildings, as you talked about, Nick, at really strong pricing, have you guys thought about a joint venture fund or a way to kind of keep the asset value up even higher than it is currently for you guys? Obviously, with debt under 2%, willing to issue equity at kind of that 36 and change number, cost of capital only getting cheaper for you guys, is there a desire to own more assets and try to keep more in-house and look at other sources of capital as you move into the markets where you want to be ultimately?.

Nick Anthony -- Executive Vice President And Chief Investment Officer

Yes. I mean, we look at all the different levers to do that. But right now, primarily, it's out of out of sales of those assets. And it is a good way to raise capital for our development and acquisition pipeline..

David Bryan Rodgers -- Robert W. Baird & Co. -- Analyst

Given, I guess, your comments, Nick, that we're kind of down to the bottom of that and demand for build-to-suit and spec could be growing, should we anticipate you guys issuing more equity to be a component of that plan going forward?.

James B. Connor -- Chairman And Chief Executive Officer

I mean, I think it certainly could be, Dave. I mean we did a little bit this quarter. I would point out is it's not overly material. It was 0.5% of our total share count. But pricing we're at now, and if Nick can find good acquisitions or Steve's team has good development transactions, we can issue a little bit of equity. I don't think it will be substantive, but we could issue a little bit of equity and it will be very accretive to our overall returns.

Operator

Next, we go to Michael Carroll with RBC. Your line is open.

Michael Albert Carroll -- RBC Capital Markets -- Analyst

Steve, I just wanted to dive a little bit more on your comments regarding safety stock. I mean, how widespread are those conversations today? Is your customer base that you have, are they aggressively building space to hold more inventories or more just of a discussion point right now?.

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

I would say it's a discussion point, but it's certainly coming to fruition. And it's not just sort of the known suppliers and our retailers you think about. You think about e-commerce, and for those of you on this call that we're trying to order goods at your house during the pandemic and your 24-hour delivery window is not going to happen. That's included in the discussions on safety stock as well, right, which is just an increase in inventory levels. So yes, I mean it's active. I think we're seeing it come to fruition more from the e-commerce side right now, which is probably why some of the demand we're seeing in the market is showing up on the e-commerce side of the equation..

Michael Albert Carroll -- RBC Capital Markets -- Analyst

Okay. And then like is it sector-specific? I mean, are there companies in certain sectors that are being more aggressive? I guess, consumer discretionary, it sounded like that's what you're referring to earlier? Or is it just more widespread in most of the major industries in the economy?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

I think consumer discretionary, for sure, food and beverage. At NAREIT, we talked about the fact that there were 13 million users of online grocery a year ago, and that number is like 45 million users for online grocery today. So clearly, that's been a big area of growth as well, and we're seeing that in our portfolio as well.

Operator

And our next question is going to come from Vikram Malhotra with Morgan Stanley. Your line is open.

Vikram Malhotra -- Morgan Stanley. -- Analyst

This is Monina on for Vikram. I was just wondering if you could comment on how construction costs are trending. I know pre-COVID, things are getting a little bit more expensive. And then in turn, how you see development yields trending post COVID?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

This is Steve. Relative to construction cost, I think we've seen I wouldn't say we've seen anything that's not that's out of the normal. I think we've seen inflationary costs there, but nothing out of the normal. I would comment that land pricing, probably for a very brief moment in time, dropped, but is already back to what we call pre-COVID levels. So I think overall development costs are probably in line with where they were to start the year. Relative to development yields, I think it's a function of market. And there's certainly as cap rates compress, you start to see development rates yield to compress as well.

Operator

Next, we will go to Mike Mueller with JPMorgan. Your line is open.

Michael William Mueller -- JPMorgan Chase & Co -- Analyst

You mentioned seeing more demand for larger spaces. I'm just curious, what's the size cut off there where you start to see that pickup in demand?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

We track a whole lot of different stats over here. We typically break off between under 100,000, 100,000 to 250,000 and 250,000 to 500,000, over 500,000 in our portfolio. We've been more active, I would say, in size deals over 250,000 square feet, both in new deals in the market, looking at available spec projects. And then I'd tell you on the build-to-suit side, certainly more activity over 250,000 feet.. We signed as we said, we signed an 800,000 square foot lease in Southern California. That was a spec project that was done in the second quarter before the building was complete.

Operator

And our next question is going to come we're back to Mr. Eric Frankel with a follow-up. Your line is open.

Eric Joel Frankel -- Green Street Advisors -- Analyst

I guess my construction cost question was taken is a good one. I just wanted to talk about the development pipeline, going back to the development pipeline. Can you and I understand this Raleigh project that was placed to redevelopment, and it will be back in service next quarter. Do you have those types of properties in your portfolio that are going to have to be reconfigured in some shape or form. Is that going to be a common trend? I saw you kind of have to do that in Savannah, too?

Mark A. Denien -- Executive Vice President And Chief Financial Officer

Erik, this is Mark, and Steve can chime in or add. We have a few of those, you're right. We had a project in Raleigh at sort of a 2-building complex, very weird setup, and we sort of took that building off-line late last year, redeveloped it, got a lease signed, and that will come back in service this quarter here. I think we've got maybe a couple more of those. Yes. So we've done them from time to time in the past. We're not overly usually not overly material about a lot of them, but there's a couple of them out there.

Operator

[Operator Instructions] We'll go now to Nick Yulico with Scotiabank ahead. Your line is open.

Nick Oliver -- Scotiabank. -- Analyst

This is Sumit again. Just something Nick just spoke about, which is land pricing. Could you give us a little more color on how land pricing is trending across some of your key markets? I mean, interested to understand what the year-over-year inflation looks like after the brief speed bump..

Nick Anthony -- Executive Vice President And Chief Investment Officer

On land prices? Yes, this is Nick. I would tell you that there are distressed sellers of land right now, particularly where we're looking at the coastal Tier 1, land pricing has rebounded. I would say there's maybe a little less competition, but it's still pretty tough to go find land, particularly in the more infill markets that are constrained..

Operator

Next up, we have Ki Bin Kim with SunTrust. Your line is open.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

So Mark, you had some really excellent execution on your unsecured note deal, $350 million at 1.85%. I know you don't have much of that coming due for the next couple of years and you can probably self-fund most of your development. So a couple of questions. One, how does the breakeven math work with issuing this type of debt and buying back another debt? And second, with the availability and in fact, this cheap capital, does that make you guys want to think differently about capital deployment? Does it at all make you more inclined to do other things like mezz lending, leveraging your platform and your knowledge?

Mark A. Denien -- Executive Vice President And Chief Financial Officer

Yes. So Kim, I'll start and anybody else can add their thoughts. As far as the breakeven on the tender offer we did, we weren't really targeting to get all that money in. So the tender offer pricing that we put out there, we were really targeting about $150 million of the $300 million. We were actually surprised and happy to get $220 million of it back in at the pricing we offered. And the way we looked at it, that breakeven was about 2.1%. So if you take the 1.85% yield that we issued a new debt at, you factor in the, what I'll call the debt prepayment penalty to buy back the $220 million of the 3.9% coupon, the breakeven to do that deal two years from now was 2.1%. So we thought that was pretty darn attractive.. And then you're right, I mean, the overall cost of capital is pretty attractive right now, and it seems like it continues to get more attractive by the moment. So I think it all comes down to you have to have a use for the proceeds. I think the balance sheet is in great shape. We're not targeting to go out and just do any debt refis or anything like that. So it will all come down to growth opportunities on both the development and acquisition side. And when those come to fruition, we'll we have the balance sheet to take advantage of it.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

And just second question, is there any noticeable difference in terms of the market rent dynamics within your core markets versus noncore markets?.

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Yes, Ki, this is Steve. I think our what we define as our high barrier coastal Tier one markets have performed better, I'd say, by 1% or 2% than our other markets. But by and large, we're seeing good rent growth in probably every market, except for Houston. That's been one market that's been tough for us, and I think has gotten headlines from others as well. But pretty good across the board, but certainly better and obviously, in high barrier Tier one markets..

Operator

And our last question comes from Rich Anderson with SMBC. Your line is open.

Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst

I snuck in there I had my mute on. Okay. First on the topic of the e-commerce versus other good sense bricks-and-mortar retailers or establishments. I assume I think I know this, it requires more chunkier in terms of the packaging for e-commerce utilization, and hence, perhaps more need for space. Is that does that have a real impact on space need if e-commerce becomes significantly more of the flow of activity in some of your warehouses where you just need more space because the packaging is more sort of substantial?

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Yes. I mean, I think the stat that's widely used is for $1 billion of retail sales, it's 1.2 million square feet of warehouse space needed.

James B. Connor -- Chairman And Chief Executive Officer

E-commerce sales.

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Of e-commerce sales, sorry. And I think it's whether that's plus or minus, it's pretty accurate. We've seen that when you look at historically, when you look at e-commerce sales and you look at industrial absorption and demand. So yes, we definitely see that. I mean, as you've outlined in your explanation, it's a way packages are one package and two the way they're shipped out of the warehouse. They're not going in massive pallets going to the stores and get broken down.

Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst

So 20% increase essentially e-commerce first or more. Okay. And then and I might have missed this, I got on a little bit late, but the behaviors of your tenants in terms of inventories, are you seeing perhaps it's too specific, but is there a glean toward having more inventory rather than less? I'm just curious if there's been any change in behavior there..

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

No, we track utilization in our warehouses. And that was a year ago, that number was at all-time high of about 92%. That's come down closer to 90%. I don't know. I can't tell you whether that's the fact that inventories have been somewhat depleted because of supply chain problems. In our conversations with customers, customers are not we don't have anyone giving us back space. We haven't had any sort of surge and sublease space within our portfolio. So I can't tell you whether that 2% change in utilization is a material trend or not..

Operator

We now have no additional questions in queue at this time.

James B. Connor -- Chairman And Chief Executive Officer

Thanks, John, and thank you to everyone for joining the call today. We look forward to engaging with many of you this fall. Operator, you may disconnect the line..

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Ron Hubbard -- Investor Relations

James B. Connor -- Chairman And Chief Executive Officer

Steven W. Schnur -- Executive Vice President And Chief Operating Officer

Nick Anthony -- Executive Vice President And Chief Investment Officer

Mark A. Denien -- Executive Vice President And Chief Financial Officer

Blaine Matthew Heck -- Wells Fargo Securities -- Analyst

Frank Lee -- BMO Capital Markets Equity Research -- Analyst

Nick Oliver -- Scotiabank. -- Analyst

Eric Joel Frankel -- Green Street Advisors -- Analyst

James Colin Feldman -- BofA Merrill Lynch -- Analyst

Emmanuel Korchman -- Citigroup Inc. -- Analyst

David Bryan Rodgers -- Robert W. Baird & Co. -- Analyst

Michael Albert Carroll -- RBC Capital Markets -- Analyst

Vikram Malhotra -- Morgan Stanley. -- Analyst

Michael William Mueller -- JPMorgan Chase & Co -- Analyst

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst

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