Q2 2021 Duke Realty Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Duke Realty Earnings Conference call. At this time all participants are in listen only mode. Later, we will have an opportunity to you for your question.
If you should require assistance day he made.
Zero, an operator will assist you offline as a reminder, today's conference is being recorded on I'd like to turn the conference over to Ron Hubbard. Please go ahead.
Thank you Amy and good afternoon, everyone and welcome to our second quarter earnings call. Joining me today are Jim Connor, Chairman and CEO Mark Janine.
<unk> Chief Financial Officer, Steve Schnur, Chief Operating Officer Index.
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 going on.
Results from <unk>.
Information about those risk factors for free to our 10-K or 10-Q that we have on file with the SEC.
On a couple other SEC filings on.
All forward looking statements speak only as of today July 29.2021.
No obligation to update or revise any forward looking statements.
A reconciliation to GAAP of the non-GAAP financial measures that we provided this call is included in our earnings release.
Our earnings release and supplemental package were distributed last night after the market closed.
You did not receive a copy these documents are available in the Investor Relations section.
Of our web site at Duke Realty Dot Com.
You can also find on earnings release supplemental package SEC reports and an audio webcast of this call in the Investor Relations section on our website.
Now from our prepared statement ill turn it over to Jim Connor.
Thanks, Ron and Hello, everybody.
<unk> of our business continue.
Continue to be the best we've ever seen we've now had 3 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 billion.
Well with.
With strong value creation raised our full year guidance starts once again.
Cap rate compression and rent growth have well outpaced material cost increases and allowed us to drive improved margins.
Our core portfolio achieved record rent growth on second generation leasing on our total in service.
This portfolio is an all time high of 97, 9% leased.
Sold 4 assets in non tier 1 markets during the quarter for over $180 billion.
On coupled with the recently announced joint venture in the St. Louis market disposition, we've raised over $600 million of capital from portfolio management activities.
But also improved our tier 1 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 <unk> growth now expected to be 12, 5% and growth in <unk> per share of 11, 6%.
Then mark will provide you more details and color on his prepared remarks with that I will turn it over to Steve to cover the operations update and outlook.
Thanks, Jim I'll first cover market fundamentals and a review of 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.
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 projected demand for the full year to surpass 350 million square feet and break the all time to 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 in asking rents to grow over 10.
10% on average in 2021 with a range of mid single digits to the mid Twenty's in the best Submarkets. This is consistent with what we're seeing on the ground it on our own markets.
Growth in retail sales on ecommerce sales across the 2 month may and June period were up 20% or 9% year over year.
And perhaps more notably when measured against the 2019 pre pandemic timeframe. The recent may and June figures were up 19% and 37%.
Continued strength on the supply chain caused the retail inventory to sales ratio to remain at a record low 1.1 level times.
Demand.
Demand by Occupier type remains broad based on very active with <unk>, leading the way 3 PL activity nearly doubled the square feet absorbed year to date compared to a year ago Jen.
General retailer on wholesale of categories were also up over 85% from a year ago.
Of course ecommerce is still exceptionally strong and even with Amazon.
Using 33 million square feet, which is down 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 on leases.
Strong lease activity for the quarter resulted in cash.
On lead growth in rents in our portfolio as we reported 19% cash from 30, 36% on a GAAP basis.
Both of which were all time records for our portfolio Bob.
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 mark.
About 40%.
As we've been saying our lower rollover on these coastal markets compared to our portfolio exposure results in outsized future opportunities for rent growth in 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.
<unk> have a strong overall growth in rents that continue.
We started a $197 million on new development. This quarter that consisted of 5 speculative projects.
As we alluded to last quarter, given the strength across our Submarkets and strategically located land. We believe these projects offer a great risk adjusted return for Us in fact.
Expect within 2 months after starting construction, we've already signed a lease for 100% of the space at the Columbus project totaling 582000 square feet with an a rated global <unk> customer at a rent well above our underwritten levels.
Our development pipeline at quarter end is $1.4 billion with 84%.
Fact is tier 1 markets and expected value creation of almost 50%.
This pipeline was 49% pre leased as of June 30.
This 49% moves up to 54%. When you include the recently completed lease and Columbus I. Just mentioned I would also add that we have a land bank to continue to support these levels of new.
Alex on that going forward. Our teams have also taken critical steps to mitigate schedule risk related to materials. We believe we are well positioned to continue to lead our sector in growth through new development looking forward our outlook for new development is as strong as it's ever been and as reflected by our revised guidance of 150.
Developing from the midpoint I will now turn it over to Nick Anthony to cover the acquisition positions. Thanks, Steve for the quarter, we sold $183 million of assets comprised of 2 facilities in Raleigh, 1 in St. Louis and 1 in Columbus.
And in aggregate was that an in place cap rate of 4.2% partly from very strong growth in Africa.
<unk> 50 money, but also from exceptionally strong fundamentals and investor demand even in these non tier tier 1 markets.
Yeah.
Okay.
Yeah.
Okay.
Yeah.
Okay.
Acre stores container and the Newark, Submarket in New Jersey.
I think we expect to stabilize yield across both projects is 4.4% with IRR is expected in the mid 6% range.
756000 square foot facility acquired as a unique big box assets Ie West and anthem has extra trailer parking and in a market with only 1% vacancy.
<unk>.
Approximately 2 years with current rents about 75% below market.
After selling is an irreplaceable location near the point of view on 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 in the interim the investment.
<unk> is an excellent return and an income producing logistics asset.
I'll now share on update on 2 other large portfolio management transactions, we've been talking about over the last few quarters first most of you saw the press release on Tuesday announcing that we formed a joint venture with CBRE global investors as part of our previously stated.
And with <unk> to manage manage our exposure to Amazon.
The initial tranche encompasses 2 facilities totaling 1.3 million square feet and a 17 acre train a lot which in aggregate reduces exposure to Amazon from 8% to about 7.3%.
And also generates approximately 141 million.
<unk> straddle, including new debt financing placed on the pool of assets.
The second tranche consists of 2 facilities in 1 tree on a lot in Baltimore, we expect to close later in the third quarter.
Third tranche consists of 3 facilities located in Pennsylvania, Seattle on South, Florida, which are expected to close in early 2022.
The JV is.
On an cowboy months' leveraged in the 50% to 60% range.
Secondly, last quarter, we announced our plan to exit the St. Louis market. This year and we've 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, 1 and 2 of the JV contribution.
<unk>.
The NOI from our NOI from our development pipeline, our tier 1 market NOI exposure is 67%.
In our coastal tier 1 market exposures, 40% on.
I'll now turn it over to Mark to discuss our financial results and guidance update thanks.
Thanks, Nick and good afternoon, everyone core <unk> for the quarter.
Shen <unk> <unk> per share, which represents nearly 16% growth over the 38 per share from the second quarter of last year, <unk> totaled $150 million per quarter compared to $135 million from second quarter of 2020, we expect this level of high performance to continue through the remainder of 2021.
Reflected in our revised guidance.
Same property NOI growth on a cash basis from the 3 and 6 months ended in 2021 compared to the same periods. In 2020 was 5.5% 6.2% respectively. The growth in same property NOI from the second quarter of 'twenty, 1 compared to the second quarter of 'twenty. It was mainly due to rent.
As 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 sales $3.4 million shares under our ATM program. We also redeemed the remaining $84 million of our 3.9%.
Growth 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 culled from the redemption of $250 million of unsecured notes, which had a scheduled maturity in April 2023, and bear interest at an effective rate.
<unk>, 7%. After this redemption, we do not have any significant debt maturities until late 2024, we will use the proceeds from the July dispositions, Nick just mentioned to repay our line of credit and funds redemption, leaving us plenty of dry powder to fund our growing development pipeline.
As a result of our operational.
Rate of solution through the first half of 2021, we announced revised core <unk> guidance for 2021, and a range of $1.69 to $1.73 per share compared to the previous range of $1.65 to $1.71 per share book.
$1.71 midpoint of our revised core <unk> guidance represents a 12, 5%.
Electric case over 2020 results, we also announced revised guidance for growth in <unk> on share adjusted basis to range between 10, 1% and 13 points euro per cent with a midpoint of 11, 6% compared to our previous range of 8% to 12, 3%.
For same property NOI on a cash basis.
Basis, we've increased our guidance to a range of $4.75 to 5.5%.
We continue to outperform underwriting assumptions per specular development spoke to the timing of lease up and in the rental rates. We're achieving while we have maintained a solid list of build to suit prospects as well as land sites in various stages of due diligence and entitlements.
And these prospects our revised guidance for development starts is between $1.1 billion and $1.3 billion compared.
Compared to the previous range of between $950 million and 115 billion.
Our guidance for dispositions of properties has been revised to between 1.0 billion and $1.2 billion.
Based on 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.
David a few other components of our guidance based on a more optimistic outlook as detailed in a range of estimates exhibits included on our supplemental on our.
I'll now turn it back to Jim for a few closing remarks, 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 result.
<unk> outlook for the year have clearly exceeded our expectations from the beginning of the year.
I'd also like to take this opportunity to deploy it out on our recently published annual corporate responsibility report, which most of you should have received if not I would urge everyone to review it on our website. It's an important element of our culture and strategy we believe.
And our ESG characteristics on 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 I would ask that you limit your questions to 1 or perhaps 2 short questions. You are of course welcome to get back into queue also remember the prompt.
Believe on Q&A is 1 zero not star 010 with that operator, we'll open it up and take questions.
If you'd like to ask a question you May press, 1 and then zero at this time.
Our first question will come from John Kim. Please go ahead.
Thank you I was wondering on the CBRE joint.
Thanks, Jerry if you could disclose.
The total value of the 3 tranches.
And also the cap rate on Nick on on the sale and if there was an Amazon premium.
Yes. This is dirk.
The total <unk> value of all 3 tranches, just north of $700 million and the cap rate is.
For mid to upper 3 cap.
Yes, Amazon Amazon deals do training relatively well along with a lot of other assets in this environment.
So on.
Sure.
Thank you and our next question will come from Vince He bone. Please go ahead.
Hi, good afternoon.
You discussed the marketing process on 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've thought given this current.
And the transaction market and some other comps or just any other additional color on that portfolio deal would be helpful. Yes.
Yes, Vince this is Nick again, we broke that transaction in the queue.
Pieces.
1 asset traded at a low for GAAP and the other part of it traded at a mid to upper 5 as you alluded to.
On trend.
Yes.
The turnout was good.
1 difference on this portfolio different from all the other assets is the rents on the remaining <unk>.
Ladder portfolio is 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.
Got it.
Why why were they above mark where these build to suits that are you know how to build out we were above market.
What was the reason they were above.
Well.
There's tax abatement in that market and I think thats part of the reason why they are a little bit above market.
I will tell you the IRR.
With that transaction was still on the mid fives.
Got it that's really helpful. On makes a lot of thats non on where it lands, but maybe 1 more from me I just wanted to follow up on Jim's opening comments that certain submarkets could add up good price, 25% rent growth this year.
Could you provide a little bit more detail on where you are you're seeing the strongest fundamentals.
Sure Vince this is Steve.
I think it's no secret Southern California, Northern New Jersey, nor.
Northern California.
Are performing exceptionally well I think I saw reported recently at Seabee said, Northern New Jersey.
North of 30% year over year, so yes.
We're seeing it on our own portfolio I think with the numbers, we put up on a national basis, we're best in our sector.
You broke it out by Submarket attracts certainly with those 3 that I just outlined to you for being on top of the class.
Makes.
He was thank you.
Thank you and next we'll go to Blaine Heck. Please go ahead. Your line is open.
Great. Thanks, Good afternoon, Jim can you talk a little bit more about the thought process behind forming a JV for the the Amazon assets instead of net.
Right sales I think past commentary.
As pointed more towards selling the asset outright. So was there anything meaningful that kind of changed your mind there.
No. If you go back to the conversations I think we were trying to guide people towards a combination.
There are a number of the assets when you look at our overall Amazon Holdings.
From you guys that we determined.
We didn't want to own long term and those are the ones that we're selling outright.
As Nick alluded to getting unbelievable premium price. It other ones are in markets that we really would like to at least keep.
<unk>.
Interest in those properties and we also want to maintain as many of those came from a relationship perspective, so it's a little bit of a balancing keeping some wholly owned some of 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.
So we will go into the venture on some of you sold outright.
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 on any other assets being sold beyond the 3 tranches that you talked about or any other agreement the stipulations within the JV.
<unk> that we should be aware of.
No. Yes, there can give you some color was it a little bit of.
Close by property.
Things like that.
Blaine This is Nick we control our destiny there.
If we want to sell something outright we can sell it.
We went on hold something we can hold it now if we wanted to do something in another JV than they do have some rights of first refusal of course.
Got it thanks guys.
Yeah.
Thank you. Our next question will come from Michael Caroll. Please go ahead. Your line is open.
Yeah, Thanks, Jim or Nick.
With the announced St. Louis sales how is the company thinking about the geographic concentration today are there any other markets, you'll want to exit or reduce your exposure to and I know Indianapolis has been something you talked about a little bit I'm not sure. If you are happy with that concentration today, but.
But how should we think about how that should change going forward.
Yes.
I guess, Mike it's an ongoing evaluation.
We said for the last few years, we like our portfolio.
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.
At the bottom of the list whether.
There is a below market rent growth rent escalations the agent clear height of the asset whatever the case may be.
But as we continue to focus on tier 1 assets will always be looking to prune.
Out of the portfolio, whether we do market wide decisions like we did in St. Louis we have done before.
Or we continue to do smaller portfolio simply remains to be seen based on the opportunities. We see in the marketplace. I don't know Nick if you have any additional I think thats right I think thats always 1 of the capital raising levers that we use and then there's always going to be some lower performing assets, although the bars.
For getting higher and higher from those assets.
We will continue to look at it on an ongoing basis.
Okay, and then I guess with the with the joint.
To reduce the Amazon exposure I mean is there a goal.
What type of tenant concentration are you 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.
Net.
We've had a stated goal of trying to keep it in the 4% to 7% range on on ongoing basis.
The challenges as fastest Nick could push it out the back door and dispositions of joint ventures, Steve's guys are bringing it into the front door.
By the Amazon Prime truckloads so.
Ours.
It's kind of the same answers are used with blade, it's a bit of a balancing act.
We want to be clear the number is going to fluctuate up and down as we 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 and sortation.
In fulfillment centers, and we hope to keep having more and more of those opportunities and.
We will manage our exposure and manage the balance sheet accordingly.
Thank you and next we'll go to a day.
Dave Rodgers your line is open.
Yes, good afternoon, everybody maybe wanted to talk about development.
Jim and Steve probably for you, but I guess as you look at the development pipeline about half of it goes in service in the third quarter and then I think after that you'd see the occupancy rate dropped down a little bit you start another $600 million or so on the back half of the year. If you start more on spec.
How low could that kind of pre leased component go.
Obviously, youre 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 on how many build to suit you might have in that pipeline.
Yes.
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 towards the 40% to 50% range in the pipeline in the third quarter for the exact reasons that you outlined.
Buildings coming in service.
New projects that we're starting.
So I think the low point would be in the low the low forties, but.
As Steve alluded to given the volume of spec leasing so far in advance of buildings completing.
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 of the ins and outs I don't think youre going to see us lose 50% of our pre lease.
Percentage I don't know, Steve do you have any other color.
The only thing I'd add in.
To your question is I think Youll 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 as strong so I don't see us fall off there, but I do think.
Some of the comments.
Commentary around material shortages and things that we're dealing with I do think youll see build to suits maybe.
Get a little tougher.
In the next 6 to 12 months.
As as materials shortages to start to push that push that out a bit.
Got you that's helpful and then Steve maybe 1 last 1 for you in terms of the size range of tenants or the size spaces.
Are you seeing a meaningful difference in terms of either demand or rent growth overall.
Yes, I would tell you for US $2.50 to 500 was the strongest sector net.
<unk> was $102.50.
We call that 100 to 500 was our best category from a rent growth that also represented about 65 or 70% of our overall activity.
Honestly, we don't we don't have a lot of spaces available over 500000 feet I think that that market in the places we have space right now.
Now.
It's very hard I wish we had more of it.
Everything is doing well, it's all relative but I think for us that 100 to 500 was the best performer in the second quarter.
Great. Thank you.
Thank you next we'll go on.
Please go ahead your line is open.
Good afternoon, everyone.
Nick you gave a little bit of color on the acquisitions you did.
Net you're confident in raising our acquisition guidance.
Given where valuations have gone.
Is there anything special about the acquisitions youre going to look at going forward.
Markets different.
Different tenants every day.
Moving on from that.
Yeah Manny this.
We're going to continue to focus.
And lever our development teams on the ground on mainly in our coastal tier 1 markets.
Our pipeline right now is probably about $1 billion deep.
We may not.
Any of those deals.
But where b b looking it feels like the <unk> deal that we just did this quarter the container yard deals like that that are more lightly marketed.
That can be more creative on redevelopment place. So we still feel very good that we will 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 theyre getting very very expensive, we're starting to see a lot of sub 3 caps now.
And then just turning back to the JV discussions per second.
If you were to go and sell the next tranche of assets. So let's say, it's 8 through 15.
Is that something you've already discussed with the CBRE or do you think your go to market and figure out if theres going be a new partner or JV structure for that.
No I mean, we've got 9 assets identified now theyre going into the JV we've.
Our 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 what bucket that needs to go into.
And we will make those decisions 1 by 1 but we've got a strategy for every asset that we hold today.
Thank you.
Thank you.
Next we'll go to Mike Mueller Your line is open.
Yeah, Hi, I was wondering should we think of this year's disposition levels 1 billion plus as being a.
A bit inflated to jumpstart the JV or is.
This is basically the new norm when youre running at about 1 billion 3 of development starts.
Hi, Michael this is Nick.
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 you know, we're taking a captain.
We didn't know what's 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 on to remain at this level on a go forward basis.
Got it that was it thank you.
Yeah.
Thank you and as a reminder, if you'd like to ask a question you may do so by pressing 1 and then zero.
You may remove yourself from Q, but anytime by pressing 1 and then zero again.
And next we'll go to Brett.
Please go ahead your line is open.
Great. Thanks, Hey, guys.
Their prepared remarks, Steve talked about how a greater proportion of coastal renewals on <unk> led to a jump in.
Rent growth.
But said that mix is lower on 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.
Hey, Brent this is mark I'll start and Steve can add as you know we've been running at about 15% to 20% of our rollover has been on the coastal markets prior to this.
This quarter this quarter it did jump up to 35 like we mentioned.
The back half of the year I think youll 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 a 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% to 20% the back half the year like it has been prior.
So the 2 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 exposures.
Portfolio is that 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 the share, but we still think it's going to be very good so as.
As we sit here today, we still think youre going to see mid teens give or take.
Take on a cash basis.
30% plus or minus on a GAAP, we're still getting good rent growth everywhere.
The only thing I'd add to that as Mark said, it's pretty broad based I mean, im just looking through some of our numbers here I mean.
Central Florida, Cincinnati, Indianapolis, Nashville, where all markets that were north of what we reported at <unk>.
16% or 19% cash so.
Very broad based for us and what we're seeing on the growth side.
Okay perfect. Thanks, and then last 1 here on the tenants that haven't been renewing.
What types of tenants are electing not to renew and then since you are back filling so quickly what types of tenants are immediately back filling that space.
On the renewal side I would tell you.
The majority of the tenants we have.
Either not renewed or loss, however, you want to say it.
The majority would be a space need right.
They're needed more space or different space than what we what we had.
Right behind that would be.
They didn't want to pay what we expected to get.
And then on whose backfill I think that the top segments right now for our portfolio I mentioned in my remarks 3 pls.
<unk> business has been on fire.
Relative to supply chain increased inventory levels.
<unk> safety stock, we're seeing a lot of e-commerce requirements that need space quickly.
Turning to 3 pls to fulfill that need.
E Commerce has been very active consumer products and retail has been very strong start to this year or so.
Again, very broad based but but hopefully.
Some specifics for you.
Yes, I appreciate that thanks, guys.
Thank you next we'll go on Jamie Feldman. Please go ahead your line is open.
Great. Thanks, I was hoping to ask a similar question to the 1 on disposition, but on development starts.
So I mean as you think about you bumped your.
Your guidance for the year is this something that you think is sustainable.
Into next year this level or are there pull forwards.
Are you on stuff that didn't start last year, you were able to start this year and.
How are you thinking about the run rate for starts.
Yes, Jamie I would tell you.
As my General Counsel looks at me make sure I don't.
Those were items for next year.
We're pretty optimistic about our ability to may.
Maintain a run rate.
Several hundred million dollars higher than we've historically been so.
We'll see when we get to January but as we look at the pipeline for the next 18 months.
<unk>.
We're pretty optimistic about build to suit spec development, you know theres 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 got way out ahead of that in terms of contract develop.
On the design.
During steel and free cash so.
All in all we feel pretty good about it.
We look forward to share on the optimistic guidance with you in January.
Okay. Thank you and then how far ahead can you plan and can you pre buy like as we.
He said over the next 18 months.
Yes.
The actual steel you are pre buying is virtually a year out right now.
So.
We could lock in we can lock in material.
<unk> slots.
Probably almost 18.
18 months out.
The newest 1 we've talked about steel free cash has gotten out there roofing materials are also significant demand thats. The other 1 the lead times in prices have gotten up there, but we've been working diligently to secure all of those.
And what does that.
We think about element costs debt ahead of time.
Sure.
Nothing I don't have to pay for it until the delivery.
Okay.
Alright, great. Thank you.
Thank you. Our next question will come from Nick you're like Oh. Please go ahead your line.
<unk> is open.
Thanks, Hi, everyone just.
I had a question in terms of cap rates.
Did inch down the cap rate I guess in your development page in terms of your margin accretion 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.
Before before Nick Nick I, just wanted to add 1 thing there just to clarify.
We don't adjust cap rates on our development projects, 1 sort of on pipeline unless there's.
Like a lease it gets signed it was on Amazon.
On a credit tenant to cause 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 popular new coastal markets that are getting started in a lower cap rate market that maybe projects that got placed in service. So I just wanted to clarify our methodology first and then I'll let.
Nick comment on the actual cap rate changes, yes, I would tell you that over the last 6 months cap rates have probably compressed 50% to 65 bps.
Prominent brokerage group Lynn.
Literally revised their cap rates and nor Cal cell count New Jersey over the last 2 weeks to be sub 3.
Free now.
That's the first time I've ever seen.
Publish cap rates SaaS.
SaaS III, but we're seeing comps on that level to know a lot of this can be attributed to just how fast rents are growing too because entities.
Rent growth increases.
And in place leases get below market.
Market people are willing to lower their cap rates.
It is moving very quickly.
And it hasn't it hasn't stopped yet.
Okay, Great. That's very helpful. Thanks, and then in terms of the guidance I know you talked about this last quarter, but in terms of some of the slowdown in the back half of the year on same store.
Or I think you said was due to some burn off of.
On the free rent and as well.
You had.
Some occupancy comps that were tough from the back of the year, but you did increase your occupancy guidance. So I guess I'm just trying to still understand some of it some of the nuances in the back half of the year, we should be thinking.
Thinking about <unk>.
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 the year compared to the first half of the year, but most of it is occupancy and when I talk about auction.
Occupancy I'm not talking about a decrease in our occupancy from the first half of 'twenty, 1 to the back half I'm talking about a tougher occupancy comp in 'twenty..1 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 'twenty.
1 from 'twenty to 'twenty, 1 we were $97.6 in the first half of 'twenty or <unk> 98 in the first half of 'twenty..1. So that's a 40 basis point positive impact when you look at the back half of the year, our occupancy comp in 2020 with 98 and a half. So we think our occupancy will be pretty flat from the.
The first half of 'twenty, 1 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 from the first half of the year to a negative 60 in the back half. So if you'd 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 on our portfolio now. So that's the main driver here I also think that sets us up good for next year because next year, we 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 on follow up hopefully that makes sense.
Yes, thanks Mark.
I appreciate it.
Just call Ron afterwards.
Yeah.
Thank you. Our next question from Caitlin Burrows. Please go ahead your line is open.
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 youre seeing on the land buying process.
These days I imagine that's rather difficult.
And just being able to keep up that land bank to allow that development to continue.
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 are having no problems continue to.
To keep our land bank.
At over $300 billion, we actually anticipated to go up in the second half of the year. So.
I'm not really worried the old adage of Theyre, not making anymore, we continue to find opportunities.
The challenge is finding.
Finding the right opportunities, where we can create value, particularly in the coastal tier 1 markets and managing the entitlement process.
That's that's gotten a little bit more challenging and so as we work on our way through that that affects the timing of when we can deliver sites for.
For build to suit or spec development and that's that's really more of the art of the deal and Steve and his guys are really really good at.
Yes, Caitlin I'll just add on.
Land Bank today, 97% of our land bank is on coastal markets, which is great from the markets, we want to develop and grow rents and it's also they also happen to be.
The tougher entitlement markets as Jim indicated so.
We're finding plenty opportunities we've got a lot of land under option agreement under contract.
Can support us probably 15% to 20 million square feet going forward.
Won't close on all of that we're working through due diligence.
And things on those on those sites so we.
We feel very good about it and you look back over our last 4 years.
We've average between 275 and 400 million.
In our land bank and we buy 300, a year, we monetized 300, a year. So we've got very good teams as Jim indicated on the ground.
Still confident about it but it is.
Certainly 1 of the more challenging things we deal with day to day. It is and the last point that I would make the perfect land acquisition from our perspective is we closed 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 2 is getting a little bit more challenging gives.
Given the constraints on the market out there, but we're pretty efficient processors and I know theres been some analysis done on about.
A number of years.
Production or the.
The amount of production you have 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 got plenty of land that we control that we could close on.
In the coming year, So I think we'll be fine from that perspective.
That's.
Thanks, and then maybe 1 more you mentioned earlier in the call that it's not the top debt probably 1 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 I'm 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.
Point, and being aggressive or not but it seems like aggressive on the rate side.
Julien This is Jim will tell you, we're not pushing on Ida.
We're doing a great job because we just broke all the records and had our highest ever cash and GAAP.
GAAP rent growth so.
It's a balancing act I would use that express.
Expression, but.
The cross border re tenanted space so.
We try to keep people as much as we can but we have a pretty good handle on what market readiness.
If we can continue to grow our rents at the level, we are pretty satisfied that our guys are pushing.
Yeah.
Thanks.
Next we'll go to rich Anderson. Please go ahead your line is open.
Thanks, Good afternoon, so on that topic Jim.
Is it a true like 19% cash releasing spread isn't that essentially you've given your tenant.
Interest free loan for the life of their lease and they now are paying you back I mean.
It seems to me, it's 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 would be better for Duke to have that money before the lease expires.
So I wonder what you think about that and you know if 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 you know 10.
10% market rents on a couple percentage points of of rent escalation over the course of the lease.
Well.
I'll start.
Now.
That's a great theoretical questions.
Certainly not looking at it as an interest free loan.
I think.
Looking at the cash re leasing spreads.
And look at look at look at your own rent.
On your own.
1 place if your rent goes up effectively 20% from the other you're at least starting new lease that's a pretty healthy that's a pretty healthy increase and you add in that we're getting 3 to 3.5% annual rent escalations. So that's how you get that the GAAP rent growth number so.
Yeah.
Pretty good numbers compared to our historical numbers at all of our peers. So no.
No I get it.
Means the market is very healthy, but if it were on efficiently you would be getting your market rent more more quickly rather than waiting for it that's my only.
Yeah.
Theoretical question, but I figure no no no.
It's a valid point.
I mean, 1 of the things we've talked about as well.
1 of the.
Challenges of our portfolio given the length of the lease terms is we don't we.