Duke Realty Corporation (DRE) Q2 2021 Earnings Call Transcript

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Duke Realty Corporation (DRE)
Q2 2021 Earnings Call
Jul 29, 2021, 3:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Duke Realty Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ron Hubbard. Please go ahead.

Ronald M. Hubbard -- Vice President and Investor Relations

Thank you, Amy. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; and Mark Denien, Chief Financial Officer; Steve Schnur, Chief Operating Officer; and Nick 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 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 29, 2021, 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'll 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 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. Now for our prepared statement, I'll turn it over to Jim Connor.

James Connor -- Chairman and Chief Executive Officer

Well, thanks, Ron, and hello, everybody. The fundamentals of our business continue to be the best we've ever seen. We've now had three successive quarters of demand at or near all-time records, and projected market level rent growth has 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 million 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 that allowed us to drive improved margins.

Our core portfolio achieved record rent growth on second-generation leasing, and our total in-service portfolio was an all-time high at 97.9% leased. We sold four assets in non-Tier one markets during the quarter were over $180 million. When coupled with the recently announced joint venture and the St. Louis market disposition, we've raised over $600 million of capital from portfolio management activities that also improved our Tier one geographic exposure. These quarterly results and our improved outlook for the balance of the year resulted in our raising key components of 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 operations update and outlook.

Steve Schnur -- Executive Vice President and Chief Operating Officer

Thanks, Jim. I'll first cover market fundamentals and review our operational results. Industrial net absorption registered an impressive 85 million square feet, which is the third highest quarter on record. This was more than enough to offset new supply as completions dipped to 52 million square feet. This positive absorption over deliveries for the quarter reduced vacancy down to 4%. The strong fundamentals increased asking rents during the second quarter by 9.8% compared to the previous year. CBRE now projects demand for the full year to surpass 350 million square feet and break the all-time 2016 record of 327 million square feet. Completions are projected to be around 300 million 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 two month May and 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 and June figures were up 19% and 37%. 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 wholesaler categories were also up over 85% from a year ago. Of course, e-commerce is still exceptionally strong.

And even with Amazon leasing 33 million 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 7.6 million 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%. 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 and 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 million of new development this quarter that consisted of five speculative projects. As we alluded to last quarter, given the strength across our submarkets and strategically located land, we believe these projects offer a great risk-adjusted return for us. In fact, within two 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 our underwritten levels. Our development pipeline at quarter end is $1.4 billion, with 84% allocated to Tier one 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 these levels of new development going forward. Our teams have also taken critical steps to mitigate schedule risk related to materials. We believe we're well positioned to continue to lead our sector and grow through new development. Looking forward, our outlook for new development is as strong as it's ever been and is reflected by our revised guidance of $150 million from the midpoint. I'll now turn it over to Nick Anthony to cover the acquisitions and dispositions.

Nick Anthony -- Executive Vice President and Chief Investment Officer

Thanks, Steve. For the quarter, we sold $183 million of assets comprised of two facilities in Raleigh, one in St. Louis and one 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 -- Tier one markets. [Indecipherable] stores container in the New York submarket of New Jersey. We expect to stabilize yield across both projects is 4.4% with IRRs expected in the mid-6% 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 two years with current rents about 75% below market. The container of our facility is an irreplaceable location near the Port of New York, the Newark Airport and the New Jersey Turnpike and leased for 12 years to a local investor and logistics firm. 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 two 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 two facilities totaling 1.3 million square feet and a 17-acre trailer lot, which in aggregate, reduces exposure to Amazon from 8% to about 7.3%. It also generates approximately $141 million in capital, including new debt financing placed on the pool of assets. The second tranche consists of two facilities and one trailer lot in Baltimore, expect to close later in the third quarter. The third tranche consists of three facilities located in Pennsylvania, Seattle, and 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. Louis market this year, and we closed on sales during the second quarter and early in the third quarter with a blended cap rate in the mid-5% range. If you include the St. Louis transaction and tranche one and two of the JV contributions, the NOI from our development pipeline, our Tier one market NOI exposure is 67% and our coastal Tier one market exposure is 40%.

I'll now turn it over to Mark to discuss our financial results and guidance update.

Mark Denien -- Executive Vice President and Chief Financial Officer

Thanks, Nick. 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 second quarter of last year. AFFO totaled $150 million for the quarter compared to $135 million in the second quarter of 2020. 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 three and six 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 second quarter of '21 compared to the second quarter of '20 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 million of proceeds from the sale of 3.4 million shares under our ATM program. We also redeemed the remaining $84 million of our 3.9% unsecured notes that were set to mature in October of next year. We finished the quarter with $265 million of outstanding borrowings on our line. Early in July, we also called for the reduction of $250 million of unsecured notes, which have a scheduled maturity in April of 2023 and bear interest at 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 reduction, leaving us plenty of dry powder to fund our growing development pipeline.

As a result of our operational execution through the first half of 2021, we announced revised core FFO guidance for 2021 in a range of $1.69 to $1.73 per share compared to the previous range of $1.65 to $1.71 per share. 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% and 13% with a 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 to the range of 4.75% to 5.25%. We continue to outperform underwriting assumptions for 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-suits prospects as well as land sites in various stages of due diligence and entitlements.

Based on these prospects, our revised guidance for development starts is between $1.1 billion and $1.3 billion compared to the previous range of between $950 million and $1.15 billion. Our guidance for dispositions of properties has been revised to between $1.0 billion and $1.2 billion compared to the previous range of $900 million to $1.1 billion. 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 our range of estimates exhibit included in our supplemental on our website. I'll now turn it back to Jim for a few closing remarks.

James Connor -- Chairman and Chief Executive Officer

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 year.

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. It's an important element of our culture and strategy. We believe our ESG characteristics and initiatives are unique and a positive differentiator for Duke Realty investment proposition. Thank you for your interest and your support, and we'll now open up the lines for questions. [Operator Instructions] With that, operator, we'll open it up and take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from John Kim. Please go ahead.

John Kim -- BMO Capital Markets Equity Research -- Analyst

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

Nick Anthony -- Executive Vice President and Chief Investment Officer

Yes. This is Nick. The total agreed value of all three tranches is just north of $700 million, and the cap rate is a mid- to upper 3% cap. And 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.

Vince James -- Tibone, Green Street Advisors -- Analyst

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.

Nick Anthony -- Executive Vice President and Chief Investment Officer

Yes, Vince, we -- this is Nick again. We broke that transaction into two pieces. One asset traded at a 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. One difference on this portfolio, different from all the other assets, is the rents on the latter portfolio 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.

Vince James -- Tibone, Green Street Advisors -- Analyst

Got it. That makes sense. So why were they above market? Were these build-to-suits that are -- had special build-outs and were above market? What was the reason they were above?

Nick Anthony -- Executive Vice President and Chief Investment Officer

Well, 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 that transaction was still in the mid-5s.

Vince James -- Tibone, Green Street Advisors -- Analyst

Got it. That's really helpful. That makes a lot of sense on where -- why it landed at that spot. Maybe one more for me. I just wanted to follow up on Jim's opening comments that certain submarkets could have up to as high as 25% rent growth this year. Can you provide a little bit more detail on where you're seeing the strongest fundamentals?

Steve Schnur -- Executive Vice President and Chief Operating Officer

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

Vince James -- Tibone, Green Street Advisors -- Analyst

Make sense. Thank you.

Operator

Thank you. And next, we'll go to Blaine Heck. Please go ahead your line is open.

Blaine Heck -- Wells Fargo Securities -- Analyst

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 an outright sale? I think past commentary from you guys pointed more toward selling the assets outright. So was there anything meaningful that kind of changed your mind there?

James Connor -- Chairman and Chief Executive Officer

No. If you go back to the conversations, I think we were trying to guide people toward 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 Nick 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. 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.

Blaine Heck -- Wells Fargo Securities -- Analyst

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

James Connor -- Chairman and Chief Executive Officer

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

Nick Anthony -- Executive Vice President and Chief Investment Officer

Yes, I mean, Blaine, this is Nick. We control our destiny there. If we want to sell something outright, we can sell it outright. If we want to hold something, we can hold it. Now if we want to do something in another JV, then they do have some rights to first refusal, of course.

Blaine Heck -- Wells Fargo Securities -- Analyst

Got it. Thanks guys.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Thanks. Jim or Nick, I guess, with the announced St. Louis sales, how is the company thinking about 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. But how should we think about how that should change going forward?

James Connor -- Chairman and Chief Executive Officer

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 height of the asset, whatever the case may be. But as we continue to focus on Tier one assets, we'll always be looking to prune out of the portfolio, whether we do marketwide decisions like we did in St. Louis, and we have done before, or we continue to do smaller portfolio, simply remains to be seen based on the opportunities that we see in the marketplace. I don't know, Nick, if you have any additional comments?

Nick Anthony -- Executive Vice President and Chief Investment Officer

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.

Michael Carroll -- RBC Capital Markets -- Analyst

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% now. I mean do you want to get it down to 5%? Or how should we think about that?

James Connor -- Chairman and Chief Executive Officer

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. So 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 to fluctuate up and down as we continue to do other deals in our partnership with Amazon. And look, they've been great partners, and we've done last-mile facilities in 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. And next, we'll go to Dave Rodgers. Your line is open.

Dave Rodgers -- Robert W. Baird & Co. Incorporated -- Analyst

Good afternoon everybody. Maybe I 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 third quarter. And then I think after that, you'd see the occupancy rate drop down a little bit. You start another $600 million or so in the back half of the year. If you start more on spec, how low could that kind of pre-lease 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 half of the year with that rate overall and how many build-to-suits you might have in that pipeline?

James Connor -- Chairman and Chief Executive Officer

Yes, Dave, I'll start, and Steve can give you a little bit of color. Starting at the June NAREIT meetings, we started guiding people toward the 40% to 50% range in the pipeline in the third 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. 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 15% of our pre-leased percentage. I don't know, Steve, do you have any other color?

Steve Schnur -- Executive Vice President and Chief Operating Officer

Yes. Dave, the only thing I'd add in 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, 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 do think you'll see build-to-suits, maybe get a little tougher in the next six to 12 months as material shortages start to push that out a bit.

Dave Rodgers -- Robert W. Baird & Co. Incorporated -- Analyst

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

Steve Schnur -- Executive Vice President and Chief Operating Officer

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

Dave Rodgers -- Robert W. Baird & Co. Incorporated -- Analyst

Great thank you.

Operator

Thank you. Next, we'll go to Manny Korchman.

Manny Korchman -- Citigroup Inc. -- Analyst

Good afternoon everyone. Nick, you gave a little bit of color on the acquisitions you did. You're confident in raising your acquisition guidance given where valuations have gone. Is there anything special about the acquisitions that you're going to look at going forward, same markets, different markets, different tenants? Anything we can learn from that?

Nick Anthony -- Executive Vice President and Chief Investment Officer

Yes, Manny, this -- we're going to continue to focus and lever our development teams in the ground, mainly in our coastal Tier one markets. Our pipeline right now is probably about $1 billion 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. 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-3% caps now.

Manny Korchman -- Citigroup Inc. -- Analyst

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 eight through 15, is that something you've already discussed with the CBRE, or do you think you go to market and figure out if there's going to be a new partner or different JV structure for that?

Nick Anthony -- Executive Vice President and Chief Investment Officer

No. I mean we've got nine 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 then we've got another pool that we know we're going to hold. Each new deal that we do, we have a discussion internally on what bucket that needs to go into. And we'll make those decisions one by one. But we've got a strategy for every asset that we hold today.

Manny Korchman -- Citigroup Inc. -- Analyst

Thank you.

Operator

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

Mike Mueller -- JPMorgan Chase & Co -- Analyst

Hi. I was wondering, should we think of this year's disposition levels of $1 billion-plus as being a bit inflated to jump start the JV? Or is this basically the new norm when you're running at about $1.3 billion of development starts?

Nick Anthony -- Executive Vice President and Chief Investment Officer

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're taking into account that we didn't know what was going to happen with the tax environment. So we're 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 basis.

Mike Mueller -- JPMorgan Chase & Co -- Analyst

Got it. That was it. Thank you.

Operator

Thank you. [Operator Instructions] And next, we'll go to Brent Dilts. Please go ahead your line is open.

Brent Dilts -- UBS Investment Bank -- Analyst

Great thanks. In the prepared 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. But would you be able to quantify the coastal mix of upcoming renewals in the second half of this year and maybe into next year?

Mark Denien -- Executive Vice President and Chief Financial Officer

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. And the reason I'm not quoting exact numbers is we don't exactly know how many early renewals will pull forward. That's always the million-dollar 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. 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 gap. We're still getting good rent growth everywhere.

Steve Schnur -- Executive Vice President and Chief Operating Officer

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% -- 19% cash. So very broad-based for us and what we're seeing on the growth side.

Brent Dilts -- UBS Investment Bank -- Analyst

Okay. Perfect. 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?

Nick Anthony -- Executive Vice President and Chief Investment Officer

On the renewal side, I would 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 a different space than 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. 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.

Brent Dilts -- UBS Investment Bank -- Analyst

Yes, I appreciate that. Thanks guys.

Operator

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

Jamie Feldman -- BofA Securities -- Analyst

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, or even stuff that didn't start last year, you were able to start this year? Just how are you thinking about the run rate for starts?

Steve Schnur -- Executive Vice President and Chief Operating Officer

Yes, Jamie, I would tell you, as my General Counsel looks at me, make sure I don't give guidance for next year, we're pretty optimistic about our ability to maintain a run rate that's several hundred million higher than we've historically bid. 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. 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. So all in all, we feel pretty good about it, and we look forward to sharing that optimistic guidance with you in January.

Jamie Feldman -- BofA Securities -- Analyst

Okay. And then how far ahead can you plan? And can you prebuy? Like as we think about -- you said over the next 18 months, what's that...

Steve Schnur -- Executive Vice President and Chief Operating Officer

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 talk about steel, precast has gotten out there, roofing materials are also in significant demand. That's the other one, the lead times and prices have gotten up there. But we've been working diligently to secure all of those.

Jamie Feldman -- BofA Securities -- Analyst

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

Steve Schnur -- Executive Vice President and Chief Operating Officer

Not that I don't have to pay for it until they deliver.

Jamie Feldman -- BofA Securities -- Analyst

Alright great. Thank you.

Operator

Thank you. Your next question will come from Nick Yulico.

Nick Yulico -- Scotiabank Global Banking and Markets -- Analyst

Thanks. Hi everyone. Just I 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.

James Connor -- Chairman and Chief Executive Officer

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 there's like a lease that gets signed with an Amazon or an A-credit tenant that causes us to think the cap rate change. So the changes in the cap rate there is 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.

Nick Anthony -- Executive Vice President and Chief Investment Officer

Yes. I would tell you, over the last six months, cap rates have probably compressed 50 to 65 bps. A prominent brokerage group literally revised their cap rates in NorCal, SoCal, New Jersey over the last two weeks to be sub-3% 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. But it is moving very quickly, and it hasn't stopped yet.

Nick Yulico -- Scotiabank Global Banking and Markets -- Analyst

Okay. Great. That's very helpful. 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 back half of the year on same-store, I think you said was due to some burn off of free rent and as well, you had some occupancy comps that were tough in the back of the year, but you did increase your occupancy guidance. So I guess I'm just trying to still understand some of the nuances in the back half of the year we should be thinking about.

James Connor -- Chairman and Chief Executive Officer

Sure, Nick. I'll try. And as you've just laid out, 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 first 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 '21 to the back half. I'm talking about a tougher occupancy comp in '21. 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 '21 -- from '20 to '21.

We were 97.6% in the first half of '20 or 98% in the first half of '21. 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%. So we think our occupancy will be pretty flat from the first half of '21 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 40 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 this sets us up for next year because next year won't have that 98.5% comp like we had this year. So I know there were a lot of numbers there, but if you write all that down and follow, hopefully, that makes sense.

Operator

Thank you. Our next question from Caitlin Burrows.

Caitlin Burrows -- Goldman Sachs Group, Inc. -- Analyst

Hi there. Just a question on the land bank. I think you touched on 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?

James Connor -- Chairman and Chief Executive Officer

Yes, Caitlin, I can start and then 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 million. We actually anticipate it to go up in the second half of the year. So I'm not really worried. The old adage of they're not making it anymore, we continue to find opportunities. The challenge is finding the right opportunities where we can create value, particularly in the coastal Tier one markets and managing the entitlement process, that's gotten a little bit more challenging. And so as we work our way through that, that affects the timing of when we can deliver sites for build-to-suits or spec development. And that's really more the art of the deal that Steve and his guys are really, really good at.

Steve Schnur -- Executive Vice President and Chief Operating Officer

Yes, Caitlin, I'll just add. Our land bank today, 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 million to 20 million square feet going forward. We won't close on all of that. We're working through due diligence and things on those sites. So we feel very good about it. You look back over our last four years, we've averaged between $275 million and $400 million in our land bank, and we buy 300 a year. We monetize 300 a year. So we've got very good teams, as Jim indicated on the ground and feel confident about it, but it's certainly one of the more challenging things we deal with day-to-day.

James Connor -- Chairman and Chief Executive Officer

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 the time. 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. 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 on in the coming years. So I think we'll be fine from that perspective.

Caitlin Burrows -- Goldman Sachs Group, Inc. -- Analyst

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, and 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?

Mark Denien -- Executive Vice President and Chief Financial Officer

We'll give you two answers. Jim will tell you we're not pushing high enough. Steve would 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 retenant a space. 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.

Operator

Next, we'll go to Rich Anderson.

Rich Anderson -- MBC Nikko Securities America, Inc. -- Analyst

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 loan for the life of their lease, and they now are paying you back. It seems to me it's not a really efficiently run machine. I know it feels good to say 19%, but in the interest of time value of money, it'd be better for Duke to have that money before the lease expires. So I wonder what you think about that. And if rent is not a pain point very much for customers, is there an angle to maybe at least have more of a rent escalation and dialed into your leases as opposed to 10% market rents and a couple of percentage points of rent escalation over the course of the lease?

James Connor -- Chairman and Chief Executive Officer

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

Rich Anderson -- MBC Nikko Securities America, Inc. -- Analyst

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

James Connor -- Chairman and Chief Executive Officer

No, 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 life of lease terms, is we don't get the opportunity to get at the space as frequently as some of our peers do. I think we all understand the value of lease term, particularly with the quality of credits that 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. Somebody is going to get a hell of a price increase in about two years.

Nick Anthony -- Executive Vice President and Chief Investment Officer

I'll just add a couple of comments, Rich, and you touched on them actually is, well, first of all, I'd say the tenants are feeling this pain to say that it's not painful for them is not really right. They're feeling the pain, number one. Number two, 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 3s and pushing 4% in some markets. So we're getting there, when I say market is market. 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 by not rolling them as quick. So it's a balancing act, but you got to factor all those in.

Rich Anderson -- MBC Nikko Securities America, Inc. -- Analyst

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 in sort of fringing in a way because it's such a good company?

James Connor -- Chairman and Chief Executive Officer

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 thing. 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 you should. And we've looked at creative ways to reduce that and limit our exposure, still gives us the opportunity to control the assets and maintain the relationship. 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 but sooner, but that's a conversation for a bar the next time we're all together.

Rich Anderson -- MBC Nikko Securities America, Inc. -- Analyst

Thanks very much guys.

Operator

Thank you. And next, we'll go to Bill Crow.

Bill Crow -- Raymond James & Associates, Inc. -- Analyst

Good afternoon and thanks. And I guess I apologize if you don't like philosophical questions because I'm going to ask you one as well. 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 spreads and less on stabilized yields, which certainly makes sense if you're flipping Amazon boxes or a merchant filled with it. And I know both metrics are intertwined and revolve around cost of capital. But I'm wondering, is there a 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?

James Connor -- Chairman and Chief Executive Officer

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 assets. We look at the spread on the stabilized yield in the 5- or 10-year average yield over our cost of capital, and our ability to grow the top line and the bottom line. But the alternative is the yields on acquisitions are probably on average, 200 to 250 basis points lower. So if you've got a healthy, strong company, if 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.

Bill Crow -- Raymond James & Associates, Inc. -- Analyst

Right. I guess you're right, these are the acquisitions, certainly, it makes a lot more sense. But maybe there's a time at which strong growth just doesn't make as much sense. Maybe it takes trade at a discount to NAV or something like that to make that happen. Just a philosophical question.

James Connor -- Chairman and Chief Executive Officer

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 development.

Nick Anthony -- Executive Vice President and Chief Investment Officer

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

Operator

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

John Kim -- BMO Capital Markets Equity Research -- Analyst

I think I had pressed -- I didn't mean to do that. Apologies.

Operator

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

Ronald M. Hubbard -- Vice President and Investor Relations

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

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Ronald M. Hubbard -- Vice President and Investor Relations

James Connor -- Chairman and Chief Executive Officer

Steve Schnur -- Executive Vice President and Chief Operating Officer

Nick Anthony -- Executive Vice President and Chief Investment Officer

Mark Denien -- Executive Vice President and Chief Financial Officer

John Kim -- BMO Capital Markets Equity Research -- Analyst

Vince James -- Tibone, Green Street Advisors -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Dave Rodgers -- Robert W. Baird & Co. Incorporated -- Analyst

Manny Korchman -- Citigroup Inc. -- Analyst

Mike Mueller -- JPMorgan Chase & Co -- Analyst

Brent Dilts -- UBS Investment Bank -- Analyst

Jamie Feldman -- BofA Securities -- Analyst

Nick Yulico -- Scotiabank Global Banking and Markets -- Analyst

Caitlin Burrows -- Goldman Sachs Group, Inc. -- Analyst

Rich Anderson -- MBC Nikko Securities America, Inc. -- Analyst

Bill Crow -- Raymond James & Associates, Inc. -- Analyst

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