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DCT > SEC Filings for DCT > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for DCT INDUSTRIAL TRUST INC.

Form 10-Q for DCT INDUSTRIAL TRUST INC.


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

We make statements in this report that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are usually identified by the use of words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "seeks," "should," "will," and variations of such words or similar expressions. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation:

national, international, regional and local economic conditions, including, in particular, the impact of the economic downturn and the strength of the economic recovery and the potential impact of the financial crisis in Europe;

the general level of interest rates and the availability of capital;

the competitive environment in which we operate;

real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;

decreased rental rates or increasing vacancy rates;

defaults on or non-renewal of leases by tenants;

acquisition and development risks, including failure of such acquisitions and development projects to perform in accordance with projections;

the timing of acquisitions, dispositions and development;

natural disasters such as fires, floods, tornadoes, hurricanes and earthquakes;

energy costs;

the terms of governmental regulations that affect us and interpretations of those regulations, including the costs of compliance with those regulations, changes in real estate and zoning laws and increases in real property tax rates;

financing risks, including the risk that our cash flows from operations may be insufficient to meet required payments of principal, interest and other commitments;

lack of or insufficient amounts of insurance;

litigation, including costs associated with prosecuting or defending claims and any adverse outcomes;

the consequences of future terrorist attacks or civil unrest;

environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us; and

other risks and uncertainties detailed in the section entitled "Risk Factors."

In addition, our current and continuing qualification as a real estate investment trust, or REIT, involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, or the Code, and depends on our ability to meet the various requirements imposed by the Code through actual operating results, distribution levels and diversity of stock ownership.

We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The reader should carefully review our financial statements and the notes thereto, as well as the section entitled "Risk Factors" in this Report.


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Overview

DCT Industrial Trust Inc. is a leading industrial real estate company specializing in the acquisition, development, leasing and management of bulk distribution and light industrial properties located in high-volume distribution markets in the United States and Mexico.

We were formed as a Maryland corporation in April 2002 and have elected to be treated as a real estate investment trust ("REIT") for United States ("U.S.") federal income tax purposes. As used herein, "DCT Industrial Trust," "DCT," "the Company," "we," "our" and "us" refer to DCT Industrial Trust Inc. and its consolidated subsidiaries and partnerships except where the context otherwise requires. We are structured as an umbrella partnership REIT under which substantially all of our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP (the "operating partnership"), a Delaware limited partnership, for which DCT Industrial Trust Inc. is the sole general partner. We own our properties through our operating partnership and its subsidiaries. As of September 30, 2012, we owned approximately 92% of the outstanding equity interests in our operating partnership.

As of September 30, 2012, the Company owned interests in approximately 75.2 million square feet of properties leased to approximately 840 customers, including:

58.0 million square feet comprising 388 consolidated properties owned in our operating portfolio which were 91.8% occupied;

16.7 million square feet comprising 51 unconsolidated properties which were 84.2% occupied and operated on behalf of five institutional capital management partners;

0.2 million square feet comprising two consolidated properties under redevelopment; and

0.3 million square feet comprising two consolidated buildings in development.

The Company also has four consolidated buildings and one unconsolidated expansion project under construction and several projects in predevelopment. See "Notes to Consolidated Financial Statements Note 3 - Investment in Properties" for further detail related to our development activity.

Our primary business objectives are to maximize long-term growth in earnings and Funds from Operations, or FFO, as defined on pages 43 and 44, and to maximize the value of our portfolio and the total return to our stockholders. In our pursuit of these long-term objectives, we seek to:

maximize cash flows from existing operations;

deploy capital into quality acquisitions and development opportunities which meet our asset, location and financial criteria; and

recycle capital by selling assets that no longer fit our investment criteria and reinvesting in higher return opportunities.

Outlook

We seek to maximize long-term earnings growth and value within the context of overall economic conditions, primarily through increasing rents and operating income at existing properties and acquiring and developing high-quality properties in major distribution markets.

Fundamentals for industrial real estate continue to modestly improve in response to general improvement in the economy. According to national statistics, net absorption (the net change in total occupied space) of industrial real estate turned positive in the second quarter of 2010 and national occupancy rates have increased each quarter since then. We expect moderate economic growth to continue throughout 2012, which should result in continued positive demand for warehouse space as companies expand their distribution and production platforms. Rental rates in our markets appeared to have bottomed and in a number of markets have begun to increase, although they do remain below peak levels. Consistent with recent experience and based on current market conditions, we expect average net effective rental rates on new leases signed in 2012 to be slightly higher than the rates on expiring leases. As positive net absorption of warehouse space continues, we expect the rental rate environment to continue to improve. According to a national research company, average market rental rates nationally are expected to continue to increase moderately in 2012 as vacancy rates drop below 10% of available supply.


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New development has begun to increase modestly in certain markets where fundamentals have improved more rapidly, however construction levels are still very modest in absolute terms and well below peak levels and we expect they will remain so until rental rates, other leasing fundamentals and the availability of financing improve sufficiently to justify new construction on a larger scale. With limited new supply in the near term, we expect that the operating environment will become increasingly favorable for landlords with meaningful improvement of rental and occupancy rates.

For DCT Industrial, we expect same store net operating income to be higher in 2012 than it was in 2011. The benefit of higher occupancy in 2012 is expected to be somewhat offset by the impact of declining net effective rental rates on leases signed in 2011.

In terms of capital investment, we will continue to pursue acquisitions of well-located distribution facilities at prices where we can apply our leasing experience and market knowledge to generate attractive returns. During the nine months ended September 30, 2012, we acquired 12 buildings comprising 2.0 million square feet and two parcels of land totaling approximately 60.4 acres for development for a total purchase price of approximately $128.4 million. Going forward, we will pursue the acquisition of buildings and land and consider selective development of new buildings in markets where we perceive demand and market rental rates will provide attractive financial returns.

We anticipate having sufficient liquidity to fund our operating expenses, including costs to maintain our properties and distributions, though we may finance investments, including acquisitions and developments, with the issuance of new shares, proceeds from asset sales or through additional borrowings. Please see "Liquidity and Capital Resources" for additional discussion.

Inflation

Although the U.S. economy has recently been experiencing a slight increase of inflation rates, and a wide variety of industries and sectors are affected differently by changing commodity prices, inflation has not had a significant impact on us in our markets. Most of our leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. In addition, most of our leases expire within five years which enables us to replace existing leases with new leases at then-existing market rates.

Significant Transactions During 2012

Summary of the nine months ended September 30, 2012

Acquisitions

During the nine months ended September 30, 2012, we acquired 12 buildings comprising 2.0 million square feet in the Phoenix, Atlanta, Chicago, Houston, Miami, Dallas, New Jersey, Southern California and Seattle markets for a total purchase price of approximately $107.4 million.

Development Activities

As of September 30, 2012, seven projects were under construction in our Baltimore/Washington D.C., Chicago, Houston, Miami and Southern California markets. We have leased two buildings in Baltimore/Washington D.C. which total approximately 0.2 million square feet of which 0.1 million square feet stabilized in July 2012. During the three months ended September 30, 2012, we purchased a shell-complete building in Houston, which is now in lease up, which totals approximately 0.3 million square. We are continuing construction of an approximately 0.2 million square foot building on the first of two parcels of land we acquired last year in Miami and have began construction of another 0.2 million square foot building on the second parcel of land. These projects are expected to be shell-complete in the fourth quarter of 2012 and the second quarter of 2013, respectively, and are 90% and 74% leased, respectively. We are continuing construction of a 0.6 million square foot building on the 32.6 acre land parcel we purchased earlier this year in Chicago, which is expected to be completed in the fourth quarter of 2012. We also began


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construction of a 0.2 million square foot expansion of an unconsolidated building in Southern California, which is expected to be completed in the fourth quarter of 2012 and is 100% leased. Finally, we began construction of a 0.1 million square foot building, which is being built to sell in Baltimore/Washington D.C. This project is expected to be completed in 2013. The total costs incurred on these projects as of September 30, 2012 was $65.1 million.

Dispositions

During the nine months ended September 30, 2012, we sold 31 operating properties totaling approximately 2.0 million square feet to third-parties for combined gross proceeds of $85.5 million.

Debt Activity

In September 2012, we issued $90.0 million of fixed rate, senior unsecured notes through a private placement offering. These senior unsecured notes mature in September 2022 and have a fixed interest rate of 4.21%. The notes require semi-annual interest payments.

During the nine months ended September 30, 2012 we retired mortgage notes totaling approximately $43.0 million previously scheduled to mature in September 2012, October 2012 and January 2013 using proceeds from the Company's senior unsecured revolving credit facility and proceeds from our equity offering.

In June 2012, we assumed two mortgage notes with outstanding balances of approximately $4.5 million and $2.5 million in connection with two property acquisitions. The assumed notes bear interest at 6.08% and 6.25%, respectively, and require monthly payments of principal and interest. The notes mature in August 2016 and July 2020, respectively.

Equity activity

On September 12, 2012, we issued approximately 19.0 million shares of common stock in a public offering at a price of $6.20 per share for net proceeds of $112.6 million before offering expenses.

Leasing Activity

The following table provides a summary of our leasing activity for the three and nine months ended September 30, 2012:

                                                                             Net Effective                            Weighted
                                    Number of                                  Rent Per              GAAP             Average          Turnover Costs         Weighted
                                     Leases            Square Feet              Square            Basis Rent           Lease             Per Square            Average
                                     Signed               Signed                Foot(1)            Growth(2)          Term(3)             Foot(4)             Retention
                                                      (in thousands)
Third Quarter 2012                          62                  3,041       $          3.96              3.80 %              61       $           2.86             70.20 %
Year to date 2012                          231                 12,194       $          3.74              2.00 %              55       $           1.78             72.80 %

(1) Does not include month to month leases.

(2) Net effective rent is the average base rent calculated in accordance with GAAP, over the term of the lease.

(3) GAAP basis rent growth is a ratio of the change in monthly Net Effective Rent (on a GAAP basis, including straight-line rent adjustments as required by GAAP) compared to the Net Effective Rent (on a GAAP basis) of the comparable lease. New leases where there were no prior comparable leases, due to extended downtime or materially different lease structures, are excluded.

(4) The lease term is in months. Assumes no exercise of lease renewal options, if any.

(5) Turnover costs are comprised of the costs incurred or capitalized for improvements of vacant and renewal spaces, as well as the commissions paid and costs capitalized for leasing transactions. Turnover costs per square foot represent the total turnover costs expected to be incurred on the leases signed during the period and does not reflect actual expenditures for the period.

(6) Represents the weighted average square feet of tenants renewing their respective leases.

During the three months ended September 30, 2012, we signed 31 leases with free rent, which were for 1.2 million square feet of property with total concessions of $1.2 million. During the nine months ended September 30, 2012, we signed 105 leases with free rent, which were for 5.2 million square feet of property with total concessions of $4.4 million.


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Customer Diversification

As of September 30, 2012, there were no customers that occupied more than 1.5%
of our consolidated properties based on annualized base rent. The following
table reflects our 10 largest customers, based on annualized base rent as of
September 30, 2012, who occupy a combined 5.9 million square feet of our
consolidated properties.



                                                     Percentage of
                                                    Annualized Base
             Customer                                     Rent
             Deutsche Post World Net (DHL & Exel)                1.5 %
             The Glidden Company                                 1.3 %
             United Parcel Service (UPS)                         1.2 %
             YRC, LLC                                            1.2 %
             Technicolor                                         1.2 %
             Crayola, LLC                                        1.1 %
             Iron Mountain                                       1.1 %
             The Dial Corporation                                1.0 %
             CEVA Logistics                                      1.0 %
             United Stationers Supply Company                    0.9 %

             Total                                              11.5 %

Although base rent is supported by long-term lease contracts, tenants who file bankruptcy have the legal right to reject any or all of their leases. In the event that a tenant with a significant number of leases in our properties files bankruptcy and cancels its leases, we could experience a reduction in our revenues and tenant receivables.

Reports have indicated that the parent company, YRC Worldwide, Inc., of one of our top ten tenants has encountered financial difficulties and therefore has the potential to file for bankruptcy. Their subsidiary, YRC, LLC currently leases three truck terminals in infill locations of Los Angeles, at below market rents totaling $13.5 million, net of accumulated amortization as of September 30, 2012. YRC, LLC has paid all rents due and has no balances outstanding through September 30, 2012.

We continuously monitor the financial condition of our tenants. We communicate often with those tenants who have been late on payments or filed bankruptcy. We are not currently aware of any significant financial difficulties of any other tenants beyond those described above that would individually cause a material reduction in our revenues, and no tenant represents more than 5% of our annualized base rent.

Results of Operations

Summary of the three and nine months ended September 30, 2012 compared to the same periods ended September 30, 2011

DCT Industrial Trust is a leading industrial real estate company specializing in the acquisition, development, leasing and management of bulk distribution and light industrial properties located in high-volume distribution markets in the United States and Mexico. As of September 30, 2012, the Company owned interests in or had under development approximately 75.2 million square feet of properties leased to approximately 840 customers, including 16.7 million square feet managed on behalf of five institutional capital management joint venture partners. Also as of September 30, 2012, we consolidated 388 operating properties, two redevelopment properties and two development properties.

Comparison of the three months ended September 30, 2012 compared to the same period ended September 30, 2011

The following table illustrates the changes in rental revenues, rental expenses and real estate taxes, property net operating income, other revenue and other income (loss) and other expenses for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Our same store portfolio includes all operating properties that we owned for the entirety of both the current and prior year reporting periods for which the


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operations had been stabilized. Non-same store operating properties include properties not meeting the same store criteria and by definition exclude development and redevelopment properties. The same store portfolio for the periods presented totaled 359 operating properties and was comprised of 54.3 million square feet. A discussion of these changes follows in the table below (in thousands).


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                                                           Three Months Ended
                                                              September 30,
                                                           2012           2011        $ Change
Rental Revenues
Same store, excluding revenues related to early lease
terminations                                             $  61,454      $ 59,608      $   1,846
Non-same store operating properties                          5,677         1,149          4,528
Development and redevelopment                                   10            -              10
Revenues related to early lease terminations                   186           252            (66 )

Total rental revenues                                       67,327        61,009          6,318

Rental Expenses and Real Estate Taxes
Same store                                                  17,595        16,902            693
Non-same store operating properties                          1,607           278          1,329
Development and redevelopment                                   42            32             10

Total rental expenses and real estate taxes                 19,244        17,212          2,032

Property Net Operating Income (1)
Same store, excluding revenues related to early lease
terminations                                                43,859        42,706          1,153
Non-same store operating properties                          4,070           871          3,199
Development and redevelopment                                  (32 )         (32 )           -
Revenues related to early lease terminations                   186           252            (66 )

Total property net operating income                         48,083        43,797          4,286

Other Revenue and Other Income (Loss)
Institutional capital management and other fees                937         1,004            (67 )
Equity in earnings (loss) of unconsolidated joint
ventures, net                                                1,208          (967 )        2,175
Interest and other income (expense)                            194          (356 )          550

Total other revenue and other income (loss)                  2,339          (319 )        2,658

Other Expenses
Real estate related depreciation and amortization           30,862        30,495            367
Interest expense                                            17,299        16,515            784
General and administrative                                   6,838         6,346            492
Income tax (benefit) expense and other taxes                    68           (56 )          124

Total other expenses                                        55,067        53,300          1,767

Income from discontinued operations                         12,906           731         12,175
Net (income) loss attributable to noncontrolling
interests                                                     (713 )       1,015         (1,728 )

Net income (loss) attributable to common stockholders    $   7,548      $ (8,076 )    $  15,624

(1) Property net operating income, or property NOI, is defined as rental revenues, including reimbursements, less rental expenses and real estate taxes, which excludes institutional capital management fees, depreciation, amortization, casualty gains, impairment, general and administrative expenses, equity in earnings (loss) of unconsolidated joint ventures, interest expense, interest and other income (expenses) and income tax benefit (expense) and other taxes. We consider property NOI to be an appropriate supplemental performance measure because property NOI reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the property such as depreciation, amortization, impairment, general and administrative expenses and interest expense. However, property NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially


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impact our results of operations. Further, our property NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating property NOI. We believe net income attributable to DCT common stockholders, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance. For a reconciliation of our property net operating income to our reported "Loss from continuing operations," see "Notes to Consolidated Financial Statements, Note 12 - Segment Information."

Rental Revenues

Rental revenues, which are comprised of base rent, straight-line rent, amortization of above and below market rent intangibles, tenant recovery income, early lease termination fees and other rental revenues, increased by $6.3 million, or 10.4%, for the three months ended September 30, 2012 compared to the same period in 2011, primarily due to the following changes:

$4.5 million increase in our non-same store rental revenues, including development and redevelopment properties, primarily as a result of an increase in the number of properties and an increase in average occupancy period over period. The average occupancy of the non-same store properties increased to 84.9% for the three months ended September 30, 2012 from 67.4% for the three months ended September 30, 2011. Since September 30, 2011, we acquired 14 operating properties and two development properties and completed development or redevelopment of two properties; and

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