Filed Pursuant to Rule 424(b)(3)
Registration No. 333-195185
PROSPECTUS
DCT Industrial Operating Partnership LP
OFFER TO EXCHANGE
$275,000,000 aggregate principal amount of its
4.500% Senior Notes due 2023
which have been registered under the Securities Act of 1933, as amended,
for any and all of its outstanding 4.500% Senior Notes due 2023
| The exchange offer expires at 5:00 p.m., New York City time, on May 26, 2014, unless extended. |
| We will exchange all outstanding private notes that are validly tendered and not validly withdrawn for an equal principal amount of new notes which are registered under the Securities Act of 1933, as amended, or the Securities Act. |
| You may withdraw tenders of outstanding private notes at any time before the exchange offer expires. |
| The exchange of notes will not be a taxable event for U.S. federal income tax purposes. |
| We will not receive any proceeds from the exchange offer. |
| The terms of the new notes are substantially identical to the outstanding private notes, except the new notes will not be subject to transfer restrictions or any increase in annual rate. |
| The outstanding private notes are, and the new notes will be, fully and unconditionally guaranteed by DCT Industrial Trust Inc., a Maryland real estate investment trust, our sole general partner, and each of our wholly owned subsidiaries that guarantees borrowings under our revolving credit facility. |
| You may tender outstanding private notes only in denominations of $2,000 and integral multiples of $1,000 in excess thereof. |
| Our affiliates may not participate in the exchange offer. |
| No public market exists for the outstanding private notes. We do not intend to list the exchange notes on any securities exchange and, therefore, no active public market is anticipated for the exchange notes. |
| Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. The letter of transmittal delivered with this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding private notes where such outstanding private notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. |
Investing in our securities involves various risks. See Risk Factors beginning on Page 7 as well as the risk factors contained in documents DCT Industrial Trust Inc. files with the Securities and Exchange Commission and which are incorporated by reference in this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is April 25, 2014.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
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You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should assume that the information contained in this prospectus, as well as information that DCT has previously filed with the Securities and Exchange Commission and incorporated by reference, is accurate only as of the date of the applicable document. Our business, financial condition, results of operations and prospects may have changed since those dates.
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer will acknowledge by participating in this exchange offer, as a condition to participating in this exchange offer, that it will deliver a prospectus in connection with any resale of such exchange notes. By so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding private notes where such outstanding private notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, starting on the expiration date of the exchange offer and ending on the close of business one year after such expiration date, subject to extension in limited circumstances, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See Plan of Distribution.
This summary highlights the information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before participating in the exchange offer. You should read this prospectus, as well as the documents incorporated herein by reference. Unless otherwise indicated, property and financial information in this prospectus is presented as of, or for the year ended, December 31, 2013.
Except as otherwise indicated herein, the terms Company, we, our and us refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP, which is referred to as DCTOP. When we use the term DCT, we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term DCTOP, we are referring to DCT Industrial Operating Partnership LP, by itself and not including any of its subsidiaries. The term you refers to a prospective investor.
We are 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. DCT was formed as a Maryland corporation in April 2002 and has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. 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, a Delaware limited partnership, for which DCT is the sole general partner. We own our properties through DCTOP and its subsidiaries. Each subsidiary guarantor was formed under the laws of Delaware, with the exception of Run Deep, L.L.C., Western Avenue Associates, L.L.C. and Route One Hundred Limited Partnership, which are Maryland entities. As of December 31, 2013, we owned approximately 94.8% of the outstanding equity interests in DCTOP.
As of December 31, 2013, the Company owned interests in approximately 75.5 million square feet of properties leased to approximately 900 customers, including:
| 62.1 million square feet comprising 396 consolidated operating properties, which were 93.3% occupied, including 0.2 million square feet comprising one building classified as held for sale; |
| 12.3 million square feet comprising 38 unconsolidated properties which were 94.1% occupied and operated on behalf of four institutional capital management partners; |
| 0.2 million square feet comprising two consolidated properties under redevelopment; and |
| 0.9 million square feet comprising two consolidated buildings which are shell-complete and in lease-up and eight land sites under construction. |
As of December 31, 2013, our total consolidated portfolio consisted of 400 properties with an average size of 158,000 square feet and an average age of 21 years.
The principal executive offices of DCT Industrial Operating Partnership LP, DCT Industrial Trust Inc., and the subsidiary guarantors are located at 518 Seventeenth Street, Suite 800, Denver, Colorado 80202; our telephone number is (303) 597-2400. We also maintain regional offices in Atlanta, Georgia; Baltimore, Maryland; Chicago, Illinois; Cincinnati, Ohio; Dallas, Texas; Houston, Texas; Paramus, New Jersey; Newport Beach, California; Emeryville, California; Orlando, Florida; and Seattle, Washington. Our website address is www.dctindustrial.com.
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The Exchange Offer | We are offering to exchange the 4.500% Senior Notes due 2023 offered by this prospectus, referred to as the exchange notes, for the outstanding 4.500% Senior Notes due 2023, referred to as the private notes, that are properly tendered and accepted. You may tender outstanding private notes only in denominations of $2,000 and integral multiples of $1,000 in excess thereof. We will issue the exchange notes on or promptly after the exchange offer expires. As of the date of this prospectus, $275,000,000 aggregate principal amount of private notes is outstanding. | |
Expiration Date | The exchange offer will expire at 5:00 p.m., New York City time, on May 26, 2014 (the 21st business day following commencement of the exchange offer), unless extended, in which case the expiration date will mean the latest date and time to which we extend the exchange offer. | |
Conditions to the Exchange Offer |
The exchange offer is not subject to any condition other than that it not violate applicable law or any applicable interpretation of the staff of the SEC. The exchange offer is not conditioned upon any minimum principal amount of private notes being tendered for exchange.
We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement with respect to the private notes and the applicable requirements of the Securities Act, the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations of the SEC. | |
Procedures for Tendering
Private |
If you wish to tender your private notes for the exchange notes pursuant to the exchange offer, you must complete and sign a letter of transmittal in accordance with the instructions contained in the letter and forward it by mail, facsimile or hand delivery, together with any other documents required by the letter of transmittal, to the exchange agent (as defined below), either with the private notes to be tendered or in compliance with the specified procedures for guaranteed delivery of notes. Certain brokers, dealers, commercial banks, trust companies and other nominees may also effect tenders by book-entry transfer. Holders of private notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender private notes pursuant to the exchange offer. See The Exchange OfferProcedures for Tendering.
Letters of transmittal and certificates representing private notes should not be sent to us. Such documents should only be sent to the exchange agent. Questions regarding how to tender private notes and requests for information should be directed to the exchange agent. See The Exchange OfferExchange Agent. You do not have any appraisal or dissenters rights under the indenture in connection with the exchange offer. | |
Acceptance of the Private Notes and Delivery of the Exchange Notes |
Subject to the satisfaction or waiver of the conditions to the exchange offer, we will accept for exchange any and all private notes which are validly tendered in the exchange offer and not withdrawn before 5:00 p.m., New York City time, on the expiration date. | |
Withdrawal Rights | You may withdraw the tender of your private notes at any time before 5:00 p.m., New York City time, on the expiration date, by complying with the procedures for withdrawal described in this prospectus under the heading The Exchange OfferWithdrawal of Tenders. |
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U.S. Federal Tax Consequences | The exchange of notes will not be a taxable event for U.S. federal income tax purposes. For a discussion of material federal tax considerations relating to the exchange of notes, see U.S. Federal Income Tax Consequences. | |
Exchange Agent | U.S. Bank National Association, the registrar and paying agent for the notes under the indenture governing the notes, is serving as the exchange agent for the notes. | |
Consequences of Failure to Exchange | If you do not exchange your private notes for the exchange notes, you will continue to be subject to the restrictions on transfer provided in the private notes and in the indenture governing the private notes. In general, the private notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not currently plan to register the resale of the private notes under the Securities Act. | |
Registration Rights Agreement | You are entitled to exchange your private notes for the exchange notes with substantially identical terms. This exchange offer satisfies this right. After the exchange offer is completed, you will no longer be entitled to any exchange or registration rights with respect to your private notes. |
We explain the exchange offer in greater detail beginning on page 24.
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The following summary contains basic information about the exchange notes and is not intended to be complete. It does not contain all the information that may be important to you. For a more complete understanding of the exchange notes, please refer to the section entitled Description of Notes.
The form and terms of the exchange notes are the same as the form and terms of the private notes, except that the exchange notes will be registered under the Securities Act and, therefore, the exchange notes will not be subject to the transfer restrictions, registration rights and provisions providing for an increase in the interest rate applicable to the private notes. The exchange notes will evidence the same debt as the private notes, and both the private notes and the exchange notes are governed by the same indenture.
The following summary of the offering is provided solely for your convenience. This summary is not intended to be complete. You should read the full text and more specific details contained elsewhere in this prospectus. For a more detailed description of the notes, see Description of Notes. As used in this section and Description of Notes references to we, us, our and similar terms refer to DCT Industrial Operating Partnership LP and not to DCT Industrial Trust Inc. or any of its subsidiaries.
Issuer of Notes |
DCT Industrial Operating Partnership LP | |
Notes Offered |
$275,000,000 aggregate principal amount of 4.500% senior notes due 2023. | |
Interest |
The notes will bear interest at a rate of 4.500% per year. Interest will be payable semi-annually in arrears on April 15 and October 15 of each year, beginning April 15, 2014. | |
Maturity |
The notes will mature on October 15, 2023 unless previously redeemed by DCTOP at its option prior to such date. | |
Guarantees |
The notes will be initially guaranteed by DCT Industrial Trust Inc. and each of our wholly owned subsidiaries that guarantees borrowings under our revolving credit facility. In addition, we will cause any consolidated subsidiary (including any future subsidiary) that guarantees our indebtedness for money borrowed in an amount greater than $5.0 million at any time after the issuance of the notes to also guarantee the notes. The guarantors will jointly and severally guarantee our obligations under the notes, on a senior unsecured basis.
A subsidiary guarantor will be automatically released from its guarantee if, among other things, it ceases to guarantee our indebtedness for money borrowed in an amount greater than $5.0 million. We currently intend to pursue an amendment to our revolving credit facility and term loan facilities to remove all of the subsidiary guarantors as guarantors thereunder and the requirement for our future subsidiaries to guarantee these facilities in order to enable our subsidiary guarantors to be released from their guarantees under our outstanding senior unsecured notes and the notes offered hereby. | |
Ranking of Notes |
The notes and the guarantees will be our and the guarantors senior unsecured obligations and will rank equally in right of payment with all of such entities existing and future senior indebtedness. The notes and guarantees, however, will be effectively subordinated to all of our and the guarantors existing and future secured indebtedness (to the extent of the value of the collateral securing such indebtedness). The notes and the guarantees will also be structurally subordinated to all existing and future indebtedness and other obligations, including preferred stock, of our subsidiaries that do not guarantee the notes. As of December 31, 2013, we and the guarantors had $1.5 billion of indebtedness ($291.0 million of which was secured indebtedness), and our consolidated subsidiaries that will not guarantee the notes had $256.5 million of indebtedness and $25.0 million of other liabilities, all of which would have been structurally senior to the notes, and $528.2 million of assets, representing 16.2% of DCTs and its consolidated subsidiaries consolidated total assets. |
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Optional Redemption | We may redeem the notes at our option and in our sole discretion, at any time in whole or from time to time in part, at the applicable redemption price specified herein. If the notes are redeemed on or after 90 days prior to the maturity date, the redemption price will be equal to 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date. See Description of NotesRedemption of the Notes at the Option of the Partnership. | |
Certain Covenants | The indenture governing the notes contains certain covenants that, among other things, limit our and our subsidiaries ability to:
consummate a merger, consolidate or sell all or substantially all of our consolidated assets; and
incur secured and unsecured indebtedness.
In addition, we and our subsidiaries are required to maintain at all times total unencumbered assets of not less than 150% of the aggregate outstanding principal amount of our unsecured debt. These covenants are subject to a number of important exceptions and qualifications. See Description of Notes. | |
Use of Proceeds | The exchange offer satisfies an obligation under the registration rights agreement. We will not receive any cash proceeds from the exchange offer. The net proceeds from the sale of the private notes after deducting discounts and offering expenses were approximately $269.6 million. We used the net proceeds from the sale of the private notes to repay borrowing under a $175.0 million senior unsecured term loan, $50.0 million of senior unsecured notes, borrowings under our revolving credit facility and for general corporate purposes. | |
Trading | The notes are a new issue of securities with no established trading market. We do not intend to apply for listing of the notes on any securities exchange or for quotation of the notes on any automated dealer quotation system. | |
Book-Entry Form | The notes will be issued in the form of one or more fully-registered global notes in book-entry form, which will be deposited with, or on behalf of, The Depository Trust Company, commonly known as DTC, in New York, New York. Beneficial interests in the global certificate representing the notes will be shown on, and transfers will be effected only through, records maintained by DTC and its direct and indirect participants and such interests may not be exchanged for certificated notes, except in limited circumstances. | |
Additional Notes | We may from time to time, without notice to or consent of existing noteholders, create and issue additional notes having the same terms and conditions as the notes offered by this prospectus in all respects, except for the issue date and, under certain circumstances, the issue price, interest accrued prior to the issue date and first payment of interest thereon. Additional notes issued in this manner will be consolidated with and will form a single series with the previously outstanding notes, provided, however, that such additional notes may not be fungible with the previously outstanding notes for U.S. federal income tax purposes, in which case the additional notes would have a different CUSIP number than the notes offered hereby. | |
Risk Factors | See Risk Factors included in this prospectus and in DCTs most recent Annual Report on Form 10-K, as updated by its subsequent filings under the Exchange Act, as well as other information included in this prospectus, for a discussion of factors you should carefully consider before deciding to invest in the notes. | |
Trustee and Paying Agent | U.S. Bank National Association is the trustee and paying agent under the indenture relating to the notes. | |
Governing Law |
The indenture, the notes and the guarantees endorsed on the notes will be governed by the laws of the State of New York. |
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You should carefully consider the risks described below as well as other information and data included in this prospectus before making a decision to exchange your private notes for the exchange notes in the exchange offer. If any of the events described in the risk factors below occur, our business, financial condition, operating results and prospects could be materially adversely affected, which in turn could adversely affect our ability to repay the notes. The risk factors set forth below are generally applicable to the private notes as well as the exchange notes.
RISKS RELATED TO RECENT ECONOMIC CONDITIONS
Adverse economic conditions will negatively affect our returns and profitability.
Our operating results may be affected by weakness in the national and/or international economy as well as in the local economies where our properties are located. Specific impacts, among others, may include:
| increased levels of tenant defaults under leases; |
| re-leasing which may require concessions, tenant improvement expenditures or reduced rental rates due to reduced demand for industrial space; |
| overbuilding which may increase vacancies; |
| adverse capital and credit market conditions may restrict our development and redevelopment activities; and |
| reduced access to credit may result in tenant defaults, non-renewals under leases or inability of potential buyers to acquire our properties held for sale, including properties held through joint ventures. |
The value of our investments may not appreciate or may decline in value significantly below the amount we pay for these investments. The length and severity of any economic slowdown or downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic slowdown or downturn is prolonged or becomes more severe.
RISKS RELATED TO OUR BUSINESS AND OPERATIONS
Our investments are concentrated in the industrial real estate sector, and our business would be adversely affected by an economic downturn in that sector.
Our investments in real estate assets are primarily concentrated in the industrial real estate sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.
We depend on key personnel.
Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our management group, each of whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results, financial condition and cash flows could suffer. Our ability to retain our management group, attract suitable replacements, or to attract new hires as needed, is dependent on the competitive nature of the employment market. Further, the loss of key personnel, or our inability to replace them, could be negatively perceived in the capital markets. We do not carry key man life insurance on any of our personnel.
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Our operating results and financial condition could be adversely affected if we do not continue to have access to capital on favorable terms.
DCT, as a REIT, must meet certain annual distribution requirements. Consequently, we are largely dependent on asset sales or external capital to fund our development and acquisition activities. Further, in order to maintain DCTs REIT status and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Additionally, our ability to sell assets or access capital is dependent upon a number of factors, including general market conditions and competition from other real estate companies. To the extent that capital is not available to acquire or develop properties, profits may not be realized or their realization may be delayed, which could result in an earnings stream that is less predictable than some of our competitors and result in us not meeting our projected earnings and distributable cash flow levels in a particular reporting period. Failure to meet our projected earnings and distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition.
Our long-term growth will partially depend upon future acquisitions of properties, and we may be unable to consummate acquisitions on advantageous terms or acquisitions may not perform as we expect.
We acquire and intend to continue to acquire primarily high-quality generic bulk distribution warehouses and light industrial properties. The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect, that we may be unable to integrate our new acquisitions into our existing operations quickly and efficiently and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. Further, we face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including both publicly-traded REITs and private institutional investment funds, and these competitors may have greater financial resources than us and a greater ability to borrow funds to acquire properties. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated. Similarly, we seek to acquire new properties in off-market transactions, because such properties are typically more attractively priced, but we may be unable to obtain off-market deal flow in the future. In addition, we expect to finance future acquisitions through a combination of borrowings under our senior unsecured credit facility, proceeds from equity or debt offerings and proceeds from property contributions and sales which may not be available and which could adversely affect our cash flows. Any of the above risks could adversely affect our financial condition, results of operations and cash flows.
Our real estate development strategies may not be successful.
We are involved in the construction and expansion of distribution facilities and we intend to continue to pursue development and renovation activities as opportunities arise either on our own or in joint ventures. We will be subject to risks associated with our development and renovation activities that could adversely affect our financial condition, results of operations and/or cash flows.
Actions of our joint venture partners could negatively impact our performance.
Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies or joint ventures, and we intend to selectively continue to develop and acquire properties through joint ventures, limited liability companies and partnerships with other persons or entities when warranted by the circumstances. Such partners may share certain approval rights over major decisions. Such investments may involve risks not otherwise present with other methods of investment in real estate, including, but not limited to:
| that our partner in an investment might become bankrupt, which would mean that we could generally remain liable for the joint ventures liabilities; |
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| that such partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals; |
| that such partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our current policy with respect to maintaining DCTs qualification as a REIT; |
| that, if our partners fail to fund their share of any required capital contributions, we may be required to contribute such capital; |
| that joint venture agreements often restrict the transfer of a partners interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; |
| that our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the agreements and, in such event, we may not continue to own or operate the interests or assets underlying such relationship or may need to purchase such interests or assets at an above-market price to continue ownership; |
| that disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable partnership, limited liability company or joint venture to additional risk; |
| that we may in certain circumstances be liable for the actions of our partners; and |
| that we may, as a general partner investing in a limited partnership, have liability for all of the liabilities of such partnership, even if we do not have full management rights or control, and our liability may far exceed the amount or value of the investment we initially made or then had in the partnership. |
We generally seek to maintain sufficient control of our partnerships, limited liability companies and joint ventures to permit us to achieve our business objectives; however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations and/or cash flows.
Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition. We may decide to dispose of select real estate assets, thereby changing the holding period assumption in our valuation analyses for those assets, which could result in material impairment losses and adversely affect our financial results.
Economic conditions have required or could require us to recognize real estate impairment charges on some of our assets and equity investments. We conduct a comprehensive review of all our real estate assets in accordance with our policy of accounting for impairments (see further discussion of our accounting policies in Notes to the Consolidated Financial Statements, Note 2Summary of Significant Accounting Policies and Item 7Critical Accounting Polices and Estimates). The principal factor which has led to impairment charges in the recent past was the severe economic deterioration in many markets resulting in a decrease in leasing demand, rental rates, rising vacancies and an increase in capitalization rates.
There can be no assurance that the estimates and assumptions we use to assess impairments are accurate and will reflect actual results, or that we will not change our intended holding period for real estate assets. A worsening real estate market or the failure for that market to continue to improve may cause us to reevaluate the assumptions used in our impairment analysis and our intent to hold, sell, develop or contribute properties. Changes in these assumptions, or changes in our anticipated holding period, may result in impairment charges or losses that could adversely affect our financial condition and/or results of operations. An impairment loss could be material to our results of operations in the period that it is recognized.
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Events or occurrences that affect areas in which our properties are geographically concentrated may impact financial results.
In addition to general, regional, national and international economic conditions, our operating performance is impacted by the economic conditions of the specific markets in which we have concentrations of properties. We have significant holdings in the following markets of our consolidated portfolio: Atlanta, Baltimore/Washington D.C., Chicago, Cincinnati, Columbus, Dallas, Houston, Miami, Memphis, Nashville, Northern California, Pennsylvania, Seattle and Southern California. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties.
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.
Although continuously reviewed, the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations and could materially adversely affect our business, reputation, results of operations, financial condition or liquidity.
RISKS RELATED TO CONFLICTS OF INTEREST
Our UPREIT structure may result in potential conflicts of interest.
As of December 31, 2013, DCT owned 94.8% of the units of limited partnership interest in DCTOP, or OP Units, certain unaffiliated limited partners owned 4.7% of the OP Units and certain of our officers and directors, owned the remaining 0.5% of the OP Units. Persons holding OP Units in DCTOP have the right to vote on certain amendments to the limited partnership agreement of DCTOP, as well as on certain other matters. Persons holding such voting rights may exercise them in a manner that conflicts with the interests of our holders of the notes. Furthermore, circumstances may arise in the future when the interest of limited partners in DCTOP may conflict with the interests of holders of our notes. For example, the timing and terms of dispositions of properties held by DCTOP may result in tax consequences to certain limited partners and not to holders of our notes.
GENERAL REAL ESTATE RISKS
Our performance and value are subject to general economic conditions and risks associated with our real estate assets.
The investment returns from equity investments in real estate depend in part on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from, and the value of, our properties may, in addition to risks discussed elsewhere in this section, be adversely affected by:
| changes in supply of or demand for similar or competing properties in an area; |
| changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive or otherwise reduce returns; |
| changes in or increased costs of compliance with governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder; |
| our ability to provide adequate maintenance and insurance; |
| customer turnover; |
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| general overbuilding or excess supply in the market areas; and |
| disruptions in the global supply chain caused by political, regulatory or other factors including terrorism. |
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. Future terrorist attacks may result in declining economic activity, which could reduce the demand for, and the value of, our properties. To the extent that future attacks impact our customers, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.
For these and other reasons, we cannot assure holders of our notes that we will be profitable or that we will realize growth in the value of our real estate properties.
Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties.
We compete with other developers, owners and operators of real estate. If our competitors offer space at rental rates or terms more attractive than we currently offer to our customers, we may lose customers or we may be pressured to reduce our rental rates or provide more favorable lease terms. As a result, our financial condition, cash flows, cash available for distribution, and ability to satisfy our debt service obligations could be materially adversely affected.
We are dependent on customers for our revenues.
Lease payment or performance defaults by customers could adversely affect our financial condition. A default by a customer on its lease payments could force us to find an alternative source of revenues to pay any mortgage loan on the property. In the event of a customer default, we may experience delays in enforcing our rights as landlord and may incur substantial costs, including litigation and related expenses, in protecting our investment and re-leasing our property. If a lease is terminated, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss.
Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our business.
Our results of operations and distributable cash flows would be adversely affected if we are unable to lease, on economically favorable terms, a significant amount of space in our operating properties.
We may be unable to sell or re-lease a property if or when we decide to do so, including as a result of uncertain market conditions or vacancy.
We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment objectives. Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers, the availability of attractive financing for potential buyers of our properties and the rate of occupancy of the property. We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure holders of our notes that we will be able to sell our properties at a profit in the future. Accordingly, our financial condition will be dependent upon fluctuating market conditions.
Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure holders of our notes that we will have funds available to correct such defects or to make such improvements.
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In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
A property may incur a vacancy either by the continued default of a customer under its lease or the expiration of one of our leases. We have significant lease expirations in 2014, as outlined in Business and PropertiesLease Expirations. In addition, certain of the properties we acquire may have some level of vacancy at the time of closing. We may have difficulty obtaining a new customer for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in reduced cash flows. In addition, the resale value of a property could be diminished because of vacancy.
The fact that real estate investments are not as liquid as other types of assets may reduce economic returns to investors.
Real estate investments are not as liquid as other types of investments, and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. In addition, our ability at any time to sell assets or contribute assets to property funds or other entities in which we have an ownership interest may be restricted by the potential for the imposition of the 100% prohibited transactions tax on gains from certain dispositions of property by REITs unless a safe harbor exception applies. This lack of liquidity may limit our ability to change our portfolio composition promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations and cash flows.
Delays in acquisition and development of properties may have adverse effects.
Delays we encounter in the selection, acquisition and development of properties could adversely affect our returns. Where land is acquired for purposes of developing a new property prior to the start of construction, it will typically take 12 to 18 months to complete construction and lease up the newly completed building. Therefore, there could be delays in the payment of cash distributions attributable to those particular properties.
Acquired properties may be located in new markets where we may face risks associated with investing in an unfamiliar market.
We have acquired, and may continue to acquire, properties in markets that are new to us. When we acquire properties located in these markets, we may face risks associated with a lack of market knowledge or understanding. We work to mitigate such risks through extensive diligence and research; however, there can be no guarantee that all such risks will be eliminated.
Uninsured losses relating to real property may adversely affect our returns.
We attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced, and we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Any such losses could adversely affect our financial condition, results of operations and cash flows. In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure that any such sources of funding will be available to us for such purposes in the future.
A number of our consolidated operating properties are located in areas that are known to be subject to earthquake activity. Properties located in active seismic areas include properties in Northern California, Southern California, Memphis and Seattle. We carry reasonable and customary earthquake insurance on all of our
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properties located in areas historically subject to seismic activity with coverage limitations and deductibles that we believe are commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.
A number of our properties are located in Houston, Miami and Orlando, which are areas that are known to be subject to hurricane and/or flood risk. We carry replacement-cost hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity with coverage limitations and deductibles that we believe are commercially reasonable. We evaluate our hurricane and flood damage insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.
Contingent or unknown liabilities could adversely affect our financial condition.
We have acquired and may in the future acquire properties without any recourse, or with only limited recourse, with respect to unknown or contingent liabilities, including, without limitation, environmental liabilities. As a result, if a claim was asserted against us based upon current or previous ownership of any of these properties or related entities, we might have to pay substantial sums to settle it which could adversely affect our cash flows.
Environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, a single person may be held responsible for all of the clean-up costs incurred. In addition, third-parties may sue the owner or operator of a site for damages based on personal injury, natural resources, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of a government entity for costs it may incur to address the contamination, or otherwise could adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which a property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions enforceable by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending environmental claims, of complying with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business, assets or results of operations.
Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third-parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties may contain asbestos-containing building materials.
We invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties are adjacent to or near other properties that may have contained or currently contain underground storage tanks used to store petroleum products, or other hazardous or toxic substances. In addition, previous or current occupants of our properties and adjacent properties may have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.
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We maintain a portfolio environmental insurance policy that provides coverage for potential environmental liabilities, subject to the policys coverage conditions and limitations, for most of our properties. From time to time, we may acquire properties or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we underwrite the costs of environmental investigation, clean-up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
All of our properties were subject to a Phase I or similar environmental assessment by independent environmental consultants at the time of acquisition. Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. While some of these assessments have led to further investigation and sampling, none of our environmental assessments of our properties have revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations taken as a whole. However, we cannot give any assurance that such conditions do not exist or may not arise in the future. Material environmental conditions, liabilities or compliance concerns may arise after the environmental assessment has been completed. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of our properties will not be affected by customers, by the condition of land or operations in the vicinity of our properties (such as releases from underground storage tanks), or by third-parties unrelated to us.
Costs of complying with governmental laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Customers ability to operate and to generate income to pay their lease obligations may be affected by permitting and compliance obligations arising under such laws and regulations. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Leasing properties to customers that engage in industrial, manufacturing, and commercial activities will cause us to be subject to the risk of liabilities under environmental laws and regulations. In addition, the presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our customers operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third-parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines or damages we must pay will adversely affect our cash flows and results of operations.
In addition, changes in these laws and governmental regulations, or their interpretation by agencies or the courts, could occur.
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Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs.
Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flows may be adversely affected. While we believe that our properties are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us that will affect our cash flows and results of operations.
We may acquire properties with lock-out provisions which may affect our ability to dispose of the properties.
We may acquire properties through contracts that could restrict our ability to dispose of the property for a period of time. These lock-out provisions could affect our ability to turn our investments into cash and could affect cash flows. Lock-out provisions could also impair our ability to take actions during the lock-out period that would otherwise be in the best interest of our financial condition and, therefore, may have an adverse impact on the results of our operations relative to such results if the lock-out provisions did not exist.
RISKS RELATED TO OUR DEBT FINANCINGS
Our operating results and financial condition could be adversely affected if we are unable to make required payments on our debt.
Our organizational documents do not limit the amount or percentage of indebtedness that we may incur, and we are subject to risks normally associated with debt financing, including the risk that our cash flows will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness.
In particular, loans obtained to fund property acquisitions may be secured by first mortgages on such properties. If we are unable to make our debt service payments as required, a lender could foreclose on the property or properties securing its debt. This could cause us to lose part or all of our investment, which in turn could cause an adverse effect on our financial condition, results of operations or cash flows. Certain of our existing and future indebtedness is and may be cross-collateralized and, consequently, a default on this indebtedness could cause us to lose part or all of our investment in multiple properties.
Increases in interest rates could increase the amount of our debt payments or make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire.
We have incurred and may continue to incur variable rate debt whereby increases in interest rates raise our interest costs, which reduces our cash flows. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected, and the property securing such indebtedness may be sold on terms that are not advantageous to us or lost through foreclosure. Similarly, if debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.
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Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.
The terms of our senior credit facility and other indebtedness require us to comply with a number of customary financial and other covenants, such as covenants with respect to consolidated leverage, net worth and unencumbered assets. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations. As of December 31, 2013, we had certain non-recourse, secured loans which are cross-collateralized by multiple properties. If we default on any of these loans we may then be required to repay such indebtedness, together with applicable prepayment charges, to avoid foreclosure on all cross-collateralized properties within the applicable pool. In addition, our senior credit facility contains certain cross-default provisions which are triggered in the event that our other material indebtedness is in default. These cross-default provisions may require us to repay or restructure the senior credit facility in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions.
Some of our financing arrangements may require us to make a lump-sum or balloon payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the results of our operations and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.
FEDERAL INCOME TAX RISKS
Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.
DCT operates in a manner so as to qualify as a REIT for U.S. federal income tax purposes. DCTs qualification as a REIT will depend on its satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. The fact that we hold substantially all of our assets through DCTOP and its subsidiaries further complicates the application of the REIT requirements for us. No assurance can be given that DCT will qualify as a REIT for any particular year. If DCT were to fail to qualify as a REIT in any taxable year for which a REIT election has been made, we would not be allowed a deduction for dividends paid to DCTs stockholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates unless certain relief provision apply. As a consequence, we would not be compelled to make distributions under the Code. Moreover, unless we were to obtain relief under certain statutory provisions, DCT would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce our net earnings available for investment and cash flows because of the additional tax liability to us for the years involved. As a result of the additional tax liability, we might need to borrow funds or liquidate certain investments on terms that may be disadvantageous to us in order to pay the applicable tax. If DCT fails to qualify as a REIT but we are eligible for certain relief provisions, then DCT may retain its status as a REIT but we may be required to pay a penalty tax, which could be substantial.
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To qualify as a REIT, DCT must meet annual distribution requirements.
To obtain the favorable tax treatment accorded to REITs, among other requirements, we normally will be required each year to distribute to DCTs stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain. In addition, if we fail to distribute during each calendar year at least the sum of (a) 85% of our ordinary income for such year, (b) 95% of our capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the sum of (i) the amounts actually distributed by us, plus (ii) retained amounts on which we pay income tax at the corporate level. We intend to make distributions to DCTs stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation. However, differences between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis or partially pay dividends in shares of DCTs common stock to meet the distribution requirements of the Code. Certain types of assets generate substantial mismatches between taxable income and available cash. Such assets include rental real estate that has been financed through financing structures which require some or all of available cash flows to be used to service borrowings. As a result, the requirement to distribute a substantial portion of our taxable income could cause us to: (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with REIT requirements. Further, amounts distributed will not be available to fund our operations.
Recharacterization of transactions under DCTOPs private placement may result in a 100% tax on income from prohibited transactions, which would diminish our cash flows.
The IRS could recharacterize transactions under DCTOPs private placement such that DCTOP is treated as the bona fide owner, for tax purposes, of properties acquired and resold by the entity established to facilitate the transaction. Such recharacterization could result in the income realized on these transactions by DCTOP being treated as gain on the sale of property that is held as inventory or otherwise held primarily for the sale to customers in the ordinary course of business. In such event, such gain would constitute income from a prohibited transaction and would be subject to a 100% tax. If this occurs, our cash flows and results of operations will be adversely affected.
In certain circumstances, we may be subject to federal and state income taxes, which would reduce our cash flows.
Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes in various circumstances. For example, net income from a prohibited transaction will be subject to a 100% tax. In addition, we may not be able to distribute all of our income in any given year, which would result in corporate level taxes, and we may not make sufficient distributions to avoid excise taxes. We may also decide to retain certain gains from the sale or other disposition of our property and pay income tax directly on such gains. In that event, our stockholders would be required to include such gains in income and would receive a corresponding credit for their share of taxes paid by us. We may also be subject to U.S. state and local and non-U.S. taxes on our income or property, either directly or at the level of DCTOP or at the level of the other entities through which we indirectly own our assets. In addition, any net taxable income earned directly by any of our taxable REIT subsidiaries, which we refer to as TRSs, will be subject to federal and state corporate income tax. In addition, we may be subject to federal or state taxes in other various circumstances. Any taxes we pay will reduce our cash flows.
Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.
From time to time, we may transfer or otherwise dispose of some of our properties, including the contribution of properties to our joint venture funds or other commingled investment vehicles. Under the Code,
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any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100% penalty tax, unless a safe harbor exception applies. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property or our contributions of properties into our joint venture funds, or commingled investment vehicles, are properly treated as prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The IRS may contend that certain transfers or disposals of properties by us or contributions of properties into our joint venture funds are prohibited transactions if they do not meet the safe harbor requirements. While we believe that the IRS would not prevail in any such dispute, if the IRS were to argue successfully that a transfer or disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a real estate investment trust for federal income tax purposes.
Congress has introduced legislation that, if enacted, could cause DCTOP to be taxable as a corporation for U.S. federal income tax purposes under the publicly traded partnership rules.
Congress has considered and the Obama administration has indicated its support for legislative proposals to treat all or part of certain income allocated to a partner by a partnership in respect of certain services provided to or for the benefit of the partnership (carried interest revenue) as ordinary income for U.S. federal income tax purposes. While more recent proposals would not adversely affect the character of the income for purposes of the REIT qualification tests, it is not clear what form any such final legislation would take. Additionally, while the more recent proposals purport to treat carried interest revenue as qualifying income of certain operating partnerships of publicly-traded REITs for purposes of the qualifying income exception to the publicly-traded partnership rules, DCTOP may not qualify under this exception in the proposed legislation. As a result, the proposed legislation, if enacted, could cause DCTOP to be taxable as a corporation for U.S. federal income tax purposes if it is a publicly-traded partnership and the amount of any such carried interest revenue plus any other non-qualifying income earned by DCTOP exceeds 10% of its gross income in any taxable year.
RISKS RELATED TO THE NOTES AND THIS EXCHANGE OFFERING
Our substantial indebtedness could adversely affect our financial condition and ability to fulfill our obligations under the notes and otherwise adversely impact our business and growth prospects.
We have a substantial amount of debt. At December 31, 2013, our total consolidated indebtedness was approximately $1.5 billion, consisting of approximately $1.1 billion of senior unsecured notes, which includes $225.0 million of term loans; $291.0 million of mortgage notes; and $39.0 million outstanding under our revolving credit facility. In addition, at December 31, 2013, our revolving credit facility had total undrawn availability of $261.0 million. Our total consolidated indebtedness also does not include our proportionate share of the indebtedness of our unconsolidated joint ventures, which was $44.4 million at December 31, 2013.
Our substantial indebtedness could have significant adverse consequences to holders of the notes, including the following:
| our cash flow may be insufficient to meet our required principal and interest payments with respect to the notes and our other indebtedness; |
| we could be more vulnerable to adverse economic and industry conditions and limited in our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| we may be unable to borrow additional funds as needed or on favorable terms; |
| we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness; |
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| because a portion of our debt bears interest at variable rates, increases in interest rates could increase our interest expense; |
| we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms, in order to meet our debt obligations; |
| in the event of a decline in the value of our assets, our ability to fully satisfy our obligations under the notes may be reduced; |
| if we violate restrictive covenants in the agreements governing our indebtedness, the lenders may be entitled to accelerate our debt obligations; and |
| as a result of cross default provisions contained in the terms of our senior unsecured notes and revolving credit facility, our default under indebtedness representing a small percentage of our total consolidated indebtedness would result in defaults under all of our senior unsecured notes and our revolving credit facility. |
In addition, our senior unsecured notes and our revolving credit facility require us to maintain specified financial ratios and comply with several restrictive covenants. All of these restrictions may limit our ability to execute our business strategy. Moreover, if operating results fall below current levels, we may be unable to maintain these ratios or comply with the covenants. If that occurs, our lenders could accelerate our indebtedness, in which case we may not be able to repay all of our indebtedness, and your notes may not be repaid fully, or at all.
The notes are effectively subordinated to our existing secured debt and any secured debt we may incur in the future.
The notes are not secured by any of our assets. As a result, the notes are effectively subordinated to our existing secured debt and any secured debt we may incur in the future to the extent of the value of the collateral securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, holders of our secured debt may assert rights against any assets securing such debt in order to receive full payment of their debt before those assets may be used to pay the holders of the notes. As of December 31, 2013, we had approximately $291.0 million of secured consolidated debt outstanding and we will be permitted to incur significant additional secured debt under the terms of the indenture governing the notes.
The notes are structurally subordinated in right of payment to all liabilities of our existing and future subsidiaries that do not guarantee the notes and, if the guarantees are deemed unenforceable, to those of our subsidiary guarantors, and the remaining assets of such subsidiaries may not be sufficient to make any payments on the notes. In addition, the guarantors guarantees may be released in the future if certain events occur.
The notes are structurally subordinated to all liabilities of our current subsidiaries that are not subsidiary guarantors and will be structurally subordinated to all liabilities of any future subsidiaries that do not guarantee the notes. In addition, although the guarantees provide the holders of the notes with a direct claim as a creditor against the assets of the subsidiary guarantors, the guarantees may not be enforceable as described in more detail below. See Federal and state statutes allow courts, under specific circumstances, to void guarantees and require holders of notes to return payments received from guarantors. If the guarantees by the subsidiary guarantors are not enforceable, the notes would be effectively subordinated to all liabilities of the subsidiary guarantors, including trade payables. As a result of being effectively subordinated to the liabilities of a subsidiary, if there was a dissolution, bankruptcy, liquidation or reorganization of such subsidiary, the holders of the notes would not receive any amounts with respect to the notes until after the payment in full of the claims of creditors of such subsidiary.
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A subsidiary guarantor will be automatically released from its guarantee if, among other things, it ceases to guarantee DCTOPs indebtedness for money borrowed in an amount greater than $5.0 million. We currently intend to pursue an amendment to our revolving credit facility and term loan facilities to remove all of the subsidiary guarantors as guarantors thereunder and the requirement for our future subsidiaries to guarantee these facilities in order to enable our subsidiary guarantors to be released from their guarantees under our outstanding senior unsecured notes and the notes offered hereby.
As of December 31, 2013, DCTOP and the guarantors had $1.5 billion of indebtedness ($291.0 million of which was secured indebtedness), and our consolidated subsidiaries that will not guarantee the notes had $256.5 million of indebtedness and $25.0 million of other liabilities, all of which would have been structurally senior to the notes, and had $528.2 million of assets, representing 16.2% of our consolidated total assets.
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, including the notes, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. To a certain extent, our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness, including the notes, or to fund our other liquidity needs. Additionally, if we incur additional indebtedness in connection with future acquisitions or development projects or for any other purpose, our debt service obligations could increase.
We may need or otherwise seek to refinance all or a portion of our indebtedness, including the notes, on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
| our financial condition and market conditions at the time; and |
| restrictions in the agreements governing our indebtedness. |
As a result, we may not be able to refinance any of our indebtedness, including the notes, on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations, including payments on the notes. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, delaying development or acquisition activities or capital expenditures or disposing of properties or other assets, any of which could have a material adverse effect on our operations. We cannot assure you that we will be able to effect any of these actions on commercially reasonable terms, or at all.
Despite our substantial indebtedness, we may still incur significantly more debt, which could exacerbate any or all of the risks related to our indebtedness, including our ability to pay the principal of or interest on the notes.
Although the agreements governing our existing indebtedness limit, and the indenture governing the notes limits, our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. In addition, the indenture governing the notes will not prevent us from incurring obligations that do not constitute indebtedness. To the extent that we incur additional indebtedness or other such obligations, the risks associated with our substantial indebtedness described above, including our possible inability to service our debt obligations, would increase.
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A downgrade in our credit ratings could materially adversely affect the trading price of the notes and our business and financial condition.
In September 2013, we received investment grade corporate credit ratings from Moodys and S&P. Any downgrades in terms of ratings or outlook by any rating agency could have a material adverse impact on the trading price of the notes and on our cost and availability of capital, which could in turn have a material adverse impact on our financial condition, results of operations and liquidity.
The indenture governing the notes contains and our revolving credit facility and senior unsecured notes contain restrictive covenants that limit our operating flexibility and could adversely affect our financial condition.
The indenture governing the notes contains financial and operating covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest, including restrictions on our ability to:
| consummate a merger, consolidation or sale of all or substantially all of our assets; and |
| incur additional secured and unsecured indebtedness. |
In addition, our senior unsecured notes and our revolving credit facility require us to maintain specified financial ratios and comply with several restrictive covenants. All of these restrictions may limit our ability to execute our business strategy. Moreover, if operating results fall below current levels, we may be unable to maintain these ratios or comply with the covenants. If that occurs, our lenders could accelerate our indebtedness, in which case we may not be able to repay all of our indebtedness, and your notes may not be repaid fully, or at all.
There is currently no trading market for the notes, and an active public trading market for the notes may not develop or, if it develops, may not be maintained or be public. The failure of an active liquid trading market for the notes to develop or be maintained is likely to adversely affect the market price and liquidity of the notes.
The notes are a new issue of securities, and there is currently no existing trading market for the notes. We do not intend to apply for listing of the notes on any securities exchange or for quotation of the notes on any automated dealer quotation system. An active trading market may not develop for the notes and, even if one develops, may not be maintained. If an active trading market for the notes does not develop or is not maintained, the market price and liquidity of the notes is likely to be adversely affected, and holders may not be able to sell their notes at desired times and prices or at all. If any of the notes are traded after their purchase, they may trade at a discount from their purchase price.
The liquidity of the trading market, if any, and future trading prices of the notes will depend on many factors, including, among other things, prevailing interest rates and our financial condition, results of operations, business, prospects and credit quality and those of other comparable companies, the market for similar securities and the overall securities market, and may be adversely affected by unfavorable changes in any of these factors, some of which are beyond our control. In addition, market volatility or events or developments in the credit markets could materially and adversely affect the market value of the notes, regardless of our financial condition, results of operations, business, prospects or credit quality.
Federal and state statutes allow courts, under specific circumstances, to void guarantees and require holders of notes to return payments received from guarantors.
Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee, such as the guarantees provided by DCT and the subsidiary guarantors, could be voided, or claims in respect of a
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guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
| received less than reasonably equivalent value or fair consideration for the incurrence of the guarantee; and |
either:
| was insolvent or rendered insolvent by reason of the incurrence of the guarantee; |
| was engaged in a business or transaction for which the guarantors remaining assets constituted unreasonably small capital; or |
| intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature. |
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor. The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
| the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; |
| the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they became absolute and mature; or |
| it could not pay its debts as they become due. |
The court might also void such guarantee, without regard to the above factors, if it found that a guarantor entered into its guarantee with actual or deemed intent to hinder, delay, or defraud its creditors.
We cannot be certain as to the standards a court would use to determine whether reasonably equivalent value or fair consideration was received by a guarantor for its guarantee of the notes, but, as a result of the fact that the subsidiary guarantors generally will not directly benefit from the issuance of the notes, a court could find that a subsidiary guarantor did not receive reasonably equivalent value or fair consideration for its guarantee. If a court voided such guarantee, holders of the notes would no longer have a claim against such guarantor or the benefit of the assets of such guarantor constituting collateral that purportedly secured such guarantee and would be creditors solely of us. In addition, the court might direct holders of the notes to repay any amounts already received from a guarantor. If the court were to void the guarantee of DCT or any subsidiary guarantor we cannot assure you that funds would be available to pay the notes from any of our subsidiaries or from any other source.
Holders of the notes will not be entitled to require us to redeem or repurchase the notes upon the occurrence of change of control or highly levered transactions or other designated events.
Other than as provided in Description of notesMerger, consolidation or sale, the indenture will not afford holders of the notes protection in the event of (1) a recapitalization transaction or other highly leveraged or similar transaction involving DCTOP or DCT, (2) a change of control of DCTOP or DCT or (3) a merger, consolidation, reorganization, restructuring or transfer or lease of all or substantially all of DCTOPs or DCTs assets or similar transactions that may adversely affect the holders of the notes. DCTOP or DCT may, in the future, enter into certain transactions, such as the sale of all or substantially all of DCTOPs or DCTs assets or a merger or consolidation that may increase the amount of DCTOPs or DCTs indebtedness or substantially change DCTOPs or DCTs assets, which may have a material adverse effect on DCTOPs ability to service its indebtedness, including the notes, or on DCTs ability to pay amounts due under its guarantees of the notes. Furthermore, the notes and the indenture will not include any provisions that would allow holders of the notes to require DCTOP or DCT to repurchase or redeem the notes in the event of a transaction of the nature described above.
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This prospectus and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of 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 strength of the United States economic recovery and global economic recovery; |
| 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.
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Purpose of the Exchange Offer
On October 9, 2013, DCTOP issued $275.0 million of the private notes to J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Comerica Securities, Inc., Mitsubishi UFJ Securities (USA), Inc., PNC Capital Markets LLC, Regions Securities LLC and U.S. Bancorp Investments, Inc., the initial purchasers, pursuant to a purchase agreement. The initial purchasers subsequently sold the private notes to qualified institutional buyers, as defined in Rule 144A under the Securities Act, in reliance on Rule 144A, and to certain non-U.S. persons located outside the United States, in reliance on Regulation S under the Securities Act. As a condition to the sale of the private notes, we entered into a registration rights agreement with the initial purchasers on October 9, 2013. The registration rights agreement provides that:
(1) DCTOP and DCT must use commercially reasonable efforts to cause an exchange offer registration statement to be declared effective by the SEC and to complete the exchange offer not later than 60 days after such registration statement becomes effective and not more than 270 days after the issuance of the private notes; and
(2) unless the exchange offer would not be permitted by applicable law or SEC policy or applicable interpretation of the staff of the SEC, DCTOP and DCT will commence the exchange offer promptly after the exchange offer registration statement is declared effective by the SEC and keep the exchange offer open for at least 20 business days (or longer, if required by applicable securities laws) after the date notice is sent to holders of entitled securities (as defined below); and
(3) if obligated to file a shelf registration statement, as discussed below, DCTOP and DCT will use all commercially reasonable efforts to file a shelf registration statement with the SEC as soon as reasonably practicable after such filing obligation arises, cause the shelf registration statement to be declared effective by the SEC and keep the shelf registration statement continuously effective until the securities cease to be registrable securities.
Upon the effectiveness of the exchange offer registration statement, we will offer the exchange notes in exchange for the private notes. The registration rights agreement is listed as an exhibit to the registration statement of which this prospectus is part.
Resale of the Exchange Notes
Under existing interpretations by the staff of the SEC contained in no-action letters to third parties, the exchange notes will generally be freely transferable by holders (other than by any holder that is an affiliate (as defined in Rule 405 of the Securities Act) of DCTOP or DCT) after the exchange offer without further registration under the Securities Act, except that participating broker-dealers (as defined below) will be required to deliver a prospectus in connection with any resale or other transfer of the exchange notes as described below.
If you wish to exchange your private notes for exchange notes in the exchange offer, you will be required to make certain representations. If you are not able to make these representations, you will not be entitled to participate in the exchange offer or to exchange your private notes for exchange notes.
Any broker-dealer who holds private notes acquired for its own account as a result of market-making activities or other trading activities (a participating broker-dealer) who exchanges those private notes for exchange notes in the exchange offer must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of those exchange notes. We understand that the staff of the SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to exchange notes, other than a resale of an unsold allotment from the initial offering of the private notes, with the prospectus contained in the exchange offer registration statement. Under the registration rights agreement, for a
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period of 180 days following the expiration date of the exchange offer, participating broker-dealers will be entitled to use the prospectus contained in the exchange offer registration statement in connection with the resale of the exchange notes (and we will agree to keep the exchange offer registration statement continuously effective and the related prospectus current during such period).
Terms of the Exchange Offer
Upon the terms and subject to the conditions described in this prospectus and in the accompanying letter of transmittal, which together constitute the exchange offer, we will accept any and all private notes validly tendered and not withdrawn before the expiration date. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding private notes surrendered pursuant to the exchange offer. You may tender private notes only in denominations of $2,000 and integral multiples of $1,000 in excess thereof.
The form and terms of the exchange notes are the same as the form and terms of the private notes except that:
| the exchange notes will be registered with the SEC and thus will not be subject to restrictions on transfer or bear legends restricting their transfer; and |
| the exchange notes will not provide for the payment of additional interest as described below or be entitled to registration rights under the registration rights agreement. |
The exchange notes will evidence the same debt as the private notes and will be issued under the same indenture, so the exchange notes and the private notes will be treated as a single class of debt securities under the indenture.
As of the date of this prospectus, $275.0 million in aggregate principal amount of the private notes are outstanding and registered in the name of DTC or its nominee. Only registered holders of the private notes, or their legal representative or attorney-in-fact, as reflected on the records of the trustee under the indenture, may participate in the exchange offer. We will not set a fixed record date for determining registered holders of the private notes entitled to participate in the exchange offer.
You do not have any appraisal or dissenters rights under the indenture in connection with the exchange offer. We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement and the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC.
We will be deemed to have accepted validly tendered private notes when, as and if we have given written notice of acceptance to the exchange agent. The exchange agent will act as your agent for the purposes of receiving the exchange notes from us.
If you tender private notes in the exchange offer you will not be required to pay brokerage commissions or fees with respect to the exchange of private notes pursuant to the exchange offer. We will pay all charges and expenses, other than the applicable taxes described below, in connection with the exchange offer.
Expiration Date; Extensions; Amendments
The term expiration date will mean 5:00 p.m., New York City time on May 26, 2014 (the 21st business day following commencement of the exchange offer), unless we extend the exchange offer, in which case the term expiration date will mean the latest date and time to which we extend the exchange offer.
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To extend the exchange offer, we will notify the exchange agent and each registered holder of any extension in writing by a press release or other public announcement before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. The notice of extension will disclose the aggregate principal amount of the private notes that have been tendered as of the date of such notice.
We reserve the right, in our reasonable discretion:
| to delay accepting any private notes due to an extension of the exchange offer; or |
| if any conditions listed below under Conditions are not satisfied, to terminate the exchange offer, |
in each case by written notice of the delay, extension or termination to the exchange agent and by press release or other public announcement.
We will follow any delay in acceptance, extension or termination as promptly as practicable by written notice to the registered holders by a press release or other public announcement. If we amend the exchange offer in a manner we determine constitutes a material change, we will promptly disclose the amendment in a prospectus supplement that we will distribute to the registered holders. We will also extend the exchange offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure, if the exchange offer would otherwise expire during the five to ten business day period.
Interest on the Exchange notes
The exchange notes will bear interest at the same rate and on the same terms as the private notes. Consequently, the exchange notes will bear interest at a rate equal to 4.500% per year (calculated using a 360-day year). Interest will be payable on the exchange notes semi-annually on each April 15 and October 15.
Interest on the exchange notes will accrue from the last interest payment date on which interest was paid on the private notes or, if no interest has been paid on the private notes, from the date of initial issuance of the private notes. We will deem the right to receive any interest accrued but unpaid on the private notes waived by you if we accept your private notes for exchange.
Procedures for Tendering
Valid Tender
Except as described below, a tendering holder must, prior to the expiration date, transmit to the exchange agent, at the address listed under the heading Exchange Agent:
| a properly completed and duly executed letter of transmittal, including all other documents required by the letter of transmittal; or |
| if the private notes are tendered in accordance with the book-entry procedures listed below, an agents message. |
In addition, a tendering holder must:
| deliver certificates, if any, for the private notes to the exchange agent at or before the expiration date; or |
| deliver a timely confirmation of book-entry transfer of the private notes into the exchange agents account at DTC, the book-entry transfer facility, along with the letter of transmittal or an agents message; or |
| comply with the guaranteed delivery procedures described below. |
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The term agents message means a message, transmitted by DTC to and received by the exchange agent and forming a part of a book-entry confirmation, that states that DTC has received an express acknowledgment that the tendering holder agrees to be bound by the letter of transmittal and that we may enforce the letter of transmittal against this holder.
If the letter of transmittal is signed by a person other than the registered holder of private notes, the letter of transmittal must be accompanied by a written instrument of transfer or exchange in satisfactory form duly executed by the registered holder with the signature guaranteed by an eligible institution. The private notes must be endorsed or accompanied by appropriate powers of attorney. In either case, the private notes must be signed exactly as the name of any registered holder appears on the private notes.
If the letter of transmittal or any private notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, these persons should so indicate when signing. Unless waived by us, proper evidence satisfactory to us of their authority to so act must be submitted.
By tendering private notes pursuant to the exchange offer, each holder will represent to us that the holder (1) owns the private notes tendered and is entitled to tender such notes, and (2) has full power and authority to tender, sell, exchange, assign and transfer the private notes and to acquire exchange notes issuable upon the exchange of such tendered private notes, and that, when the same are accepted for exchange, DCTOP will acquire good, marketable and unencumbered title to the tendered private notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim or right or restriction or proxy of any kind. Each holder will warrant that it will, upon request, execute and deliver any additional documents deemed by the exchange agent or DCTOP to be necessary or desirable to complete the sale, exchange, assignment and transfer of tendered private notes or to transfer ownership of such notes on the account books maintained by DTC.
In addition, unless a box under the heading Special Issuance Instructions in the letter of transmittal is checked by a holder, by tendering private notes and executing the letter of transmittal, each holder will represent and warrant that:
(1) the holder or any beneficial owner of the private notes is acquiring the exchange notes in the ordinary course of business of the holder (or such other beneficial owner);
(2) neither the holder nor any beneficial owner is engaging in or intends to engage in a distribution of the exchange notes within the meaning of the federal securities laws;
(3) neither the holder nor any beneficial owner has an arrangement or understanding with any person or entity to participate in a distribution of the exchange notes;
(4) neither the holder nor any beneficial owner is an affiliate, as such term is defined under Rule 405 promulgated under the Securities Act, of DCTOP or of DCT. Upon request by DCTOP, the holder or such beneficial owner will deliver to DCTOP a legal opinion confirming it is not such an affiliate;
(5) the holder and each beneficial owner acknowledges and agrees that any person who is a broker-dealer registered under the Exchange Act, or is participating in the exchange offer for the purpose of distributing the exchange notes, must comply with the registration and delivery requirements of the Securities Act in connection with a secondary resale transaction of the exchange notes or interests therein acquired by such person and cannot rely on the position of the staff of the SEC set forth in certain no-action letters;
(6) a secondary resale transaction described in clause (5) above and any resales of exchange notes or interests therein obtained by such holder in exchange for private notes or interests therein originally acquired by such holder directly from DCTOP should be covered by an effective registration statement containing the selling security holder information required by Item 507 or Item 508, as applicable, of Regulation S-K or the SEC; and
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(7) the holder is not acting on behalf of any person or entity who could not truthfully make the foregoing representations.
If the holder is a broker-dealer that will receive exchange notes for its own account in exchange for private notes, it will represent that the private notes to be exchanged for the exchange notes were acquired by it for its own account as a result of market-making activities or other trading activities and acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such exchange notes; however, by so acknowledging and delivering a prospectus, the holder will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. If the holder is a broker-dealer and private notes held for its own account were not acquired as a result of market-making or other trading activities, such private notes cannot be exchanged pursuant to the exchange offer.
The method of delivery of private notes, letters of transmittal and all other required documents is at your election and risk. If the delivery is by mail, we recommend that you use registered mail, properly insured, with return receipt requested. In all cases, you should allow sufficient time to assure timely delivery. You should not send letters of transmittal or private notes to us.
If you are a beneficial owner whose private notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and wish to tender, you should promptly instruct the registered holder to tender on your behalf. Any registered holder that is a participant in DTCs book-entry transfer facility system may make book-entry delivery of the private notes by causing DTC to transfer the private notes into the exchange agents account, including by means of DTCs Automated Tender Offer Program.
Signature Guarantees
Signatures on a letter of transmittal or a notice of withdrawal must be guaranteed, unless the private notes surrendered for exchange are tendered:
| by a registered holder of the private notes who has not completed the box entitled Special Issuance Instructions or Special Delivery Instructions on the letter of transmittal; or |
| for the account of an eligible institution. |
If signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, the guarantees must be by an eligible institution. An eligible institution is an eligible guarantor institution meeting the requirements of the registrar for the notes, which requirements include membership or participation in the Security Transfer Agent Medallion Program, or STAMP, or such other signature guarantee program as may be determined by the registrar for the notes in addition to, or in substitution for, STAMP, all in accordance with the Exchange Act.
Book-Entry Transfer
The exchange agent will make a request to establish an account for the private notes at DTC for purposes of the exchange offer within two business days after the date of this prospectus. Any financial institution that is a participant in DTCs systems must make book-entry delivery of private notes by causing DTC to transfer those private notes into the exchange agents account at DTC in accordance with DTCs procedure for transfer. The participant should transmit its acceptance to DTC at or prior to the expiration date or comply with the guaranteed delivery procedures described below. DTC will verify this acceptance, execute a book-entry transfer of the tendered private notes into the exchange agents account at DTC and then send to the exchange agent confirmation of this book-entry transfer. The confirmation of this book-entry transfer will include an agents message confirming that DTC has received an express acknowledgment from this participant that this participant has received and agrees to be bound by the letter of transmittal and that we may enforce the letter of transmittal against this participant.
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Delivery of exchange notes issued in the exchange offer may be effected through book-entry transfer at DTC. However, the letter of transmittal or facsimile of it or an agents message, with any required signature guarantees and any other required documents, must:
| be transmitted to and received by the exchange agent at the address listed under Exchange Agent at or prior to the expiration date; or |
| comply with the guaranteed delivery procedures described below. |
Delivery of documents to DTC in accordance with DTCs procedures does not constitute delivery to the exchange agent.
Guaranteed Delivery
If a registered holder of private notes desires to tender the private notes, and the private notes are not immediately available, or time will not permit the holders private notes or other required documents to reach the exchange agent before the expiration date, or the procedure for book-entry transfer described above cannot be completed on a timely basis, a tender may nonetheless be made if:
| the tender is made through an eligible institution; |
| prior to the expiration date, the exchange agent received from an eligible institution a properly completed and duly executed notice of guaranteed delivery, substantially in the form provided by us, by facsimile transmission, mail or hand delivery: |
1. | stating the name and address of the holder of private notes and the amount of private notes tendered; |
2. | stating that the tender is being made; and |
3. | guaranteeing that within three New York Stock Exchange trading days after the expiration date, the certificates for all physically tendered private notes, in proper form for transfer, or a book-entry confirmation, as the case may be, and a properly completed and duly executed letter of transmittal, or an agents message, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and |
| the certificates for all physically tendered private notes, in proper form for transfer, or a book-entry confirmation, as the case may be, and a properly completed and duly executed letter of transmittal, or any agents message, and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the expiration date. |
Determination of Validity
We will determine in our sole discretion all questions as to the validity, form and eligibility of private notes tendered for exchange. This discretion extends to the determination of all questions concerning the time of receipt, acceptance and withdrawal of tendered private notes. These determinations will be final and binding. We reserve the absolute right to reject any and all private notes not properly tendered or any private notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to any particular private note either before or after the expiration date, including the right to waive the ineligibility of any tendering holder. Our interpretation of the terms and conditions of the exchange offer as to any particular private note either before or after the expiration date, including the letter of transmittal and the instructions to the letter of transmittal, shall be final and binding on all parties. Unless waived, you must cure any defects or irregularities with respect to tenders of private notes within the time we determine. Although we intend to notify you of defects or irregularities with respect to tenders of private notes, neither we, the exchange agent nor any other person will incur any liability for failure to give you that notification. Unless waived, we will not deem tenders of private notes to have been made until you cure the defects or irregularities.
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Other Rights
While we have no present plan to acquire any private notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any private notes that are not tendered in the exchange offer, we reserve the right in our sole discretion to purchase or make offers for any private notes that remain outstanding after the expiration date.
Acceptance of Private Notes for Exchange; Issuance of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer, we will accept, promptly after the expiration date, all private notes properly tendered. We will issue the exchange notes promptly after acceptance of the private notes. For purposes of the exchange offer, we will be deemed to have accepted properly tendered private notes for exchange when, as and if we have given oral or written notice to the exchange agent, with prompt written confirmation of any oral notice.
In all cases, issuance of exchange notes for private notes will be made only after timely receipt by the exchange agent of:
| certificates for the private notes, or a timely book-entry confirmation of the private notes, into the exchange agents account at the book-entry transfer facility; |
| a properly completed and duly executed letter of transmittal or an agents message; and |
| all other required documents. |
For each private note accepted for exchange, the holder of the private note will receive an exchange note having a principal amount equal to that of the surrendered private note.
Return of Notes
Unaccepted or non-exchanged private notes will be returned without expense to the tendering holder of the private notes. In the case of private notes tendered by book-entry transfer in accordance with the book-entry procedures described above, the non-exchanged private notes will be credited to an account maintained with DTC as promptly as practicable after the expiration or termination of the exchange offer.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw tenders of private notes at any time before 5:00 p.m., New York City time, on the expiration date.
For a withdrawal to be effective, the exchange agent must receive a written notice of withdrawal at the address or, in the case of eligible institutions, at the facsimile number, indicated under Exchange Agent before the expiration date. Any notice of withdrawal must:
| specify the name of the person, referred to as the depositor, having tendered the private notes to be withdrawn; |
| identify the private notes to be withdrawn, including the certificate number or numbers and principal amount of the private notes; |
| contain a statement that the holder is withdrawing its election to have the private notes exchanged; |
| be signed by the holder in the same manner as the original signature on the letter of transmittal by which the private notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer to have the trustee with respect to the private notes register the transfer of the private notes in the name of the person withdrawing the tender; and |
| specify the name in which the private notes are registered, if different from that of the depositor. |
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If certificates for private notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of these certificates the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and signed notice of withdrawal with signatures guaranteed by an eligible institution, unless this holder is an eligible institution. If private notes have been tendered in accordance with the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility to be credited with the withdrawn private notes.
We will determine in our sole discretion all questions as to the validity, form and eligibility of the notices, and our determination will be final and binding on all parties. We will not deem any properly withdrawn private notes to have been validly tendered for purposes of the exchange offer, and we will not issue exchange notes with respect to those private notes, unless you validly retender the withdrawn private notes. You may retender properly withdrawn private notes by following the procedures described above under Procedures for Tendering at any time before 5:00 p.m., New York City time, on the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or exchange the exchange notes for, any private notes, and may terminate the exchange offer as provided in this prospectus before the expiration of the exchange offer, if the exchange offer violates applicable law or an applicable interpretation of the staff of the SEC.
Termination of Rights
All of your rights under the registration rights agreement will terminate upon consummation of the exchange offer, except with respect to our continuing obligations:
| to indemnify you and parties related to you against liabilities, including liabilities under the Securities Act; and |
| to provide, upon your request, the information required by Rule 144A(d)(4) under the Securities Act to permit resales of the notes pursuant to Rule 144A. |
Shelf Registration
If: |
(1) DCTOP and DCT:
(a) do not cause the exchange offer registration statement to become effective on or prior to 270 days after the closing of the offering of private notes; or
(b) determine that the consummation of the exchange offer is not permitted because the exchange offer is not permitted by applicable law or SEC policy or applicable interpretations of the staff of the SEC; or
(c) receive a written request from any initial purchasers representing that it holds registrable securities that are or were ineligible to be exchange in the exchange offer;
then DCTOP and DCT will use commercially reasonable efforts to cause to be filed with the SEC as soon as reasonably practicable after such determination, date, or request, a shelf registration statement, and will use commercially reasonable efforts to have the shelf registration statement declared effective by the SEC after such determination, date, or request.
If:
(1) any registration statement as required by the registration rights agreement is not declared effective by the SEC on or prior to the date specified for such effectiveness; or
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(2) the exchange offer is not completed within 270 days of the closing of the offering of private notes; or
(3) the shelf registration statement is declared effective but thereafter ceases to be effective (other than under circumstances described below) during the periods specified in the registration rights agreement, or if DCTOP and DCT through their omission fail to name as a selling security holder any holder that had complied timely with its obligations under the registration rights agreement in a manner to entitle such holder to be named in the shelf registration statement or any prospectus (each such event referred to in clauses (1) through (3) above, a registration default),
then DCTOP will pay additional interest to each holder of registrable securities from and including the date on which any such registration default shall occur to but excluding the date on which all registration defaults have been cured or cease to exist.
With respect to the first 90-day period during which a registration default is continuing, additional interest will be paid at a rate equal to 0.25% per annum of the principal amount of entitled securities outstanding. If all registration defaults are not cured or cease to exist prior to the end of such 90-day period, then, from and including the first day after such 90-day period, the rate at which additional interest is payable will increase by an additional 0.25% per annum. However, the maximum rate of additional interest will in no event exceed 0.50% per annum. Additional interest will accrue and be payable to but excluding the date on which all registration defaults have been cured or cease to exist.
Additional interest will be computed on the basis of a 360-day year comprised of twelve 30-day months and will be paid to the holders of the registrable securities in the same manner and times as interest is otherwise payable on the registrable securities. From and including the date on which all registration defaults have been cured or otherwise ceased to exist, additional interest will cease to accrue unless and until a subsequent registration default occurs. Additional interest will not be payable on any private notes or exchange notes other than registrable securities.
Holders of the notes will be required to make certain representations to DCTOP (as described in the registration rights agreement) in order to participate in the exchange offer. In order to include registrable securities in the shelf registration statement, if filed, and receive additional interest relating to a registration default with respect to the shelf registration statement, a holder will be required to provide certain information to DCTOP and to be named as a selling security holder in the shelf registration statement and the related prospectus, and will be subject to certain civil liability provisions under the Securities Act in connection with sales under the shelf registration statement. By including registrable securities in the shelf registration statement, if any, a holder will be deemed to have agreed to indemnify us against certain losses arising out of information furnished by such holder in writing for inclusion in any shelf registration statement.
If a shelf registration statement becomes effective under the Securities Act then, during any 365-day period thereafter DCTOP may, by notice to holders of entitled securities registered pursuant to the shelf registration statement, suspend the availability of the shelf registration statement and the use of the related prospectus for up to two periods not to exceed a total of 60 days during any such 365-day period if:
| such action is required by applicable law; or |
| the happening of any event or the discovery of any fact makes any statement made in the shelf registration statement or the related prospectus untrue in any material respect or constitutes an omission to state a material fact in the shelf registration statement or related prospectus. |
Each holder of registrable securities will be required to discontinue disposition of those registrable securities pursuant to the shelf registration statement upon receipt from us of notice of any events described in the preceding sentence but will not be entitled to receive additional interest unless such suspension exceeds the
32
number of days or periods specified above. If we effect the exchange offer, we will also be permitted to require any broker-dealers to discontinue disposition of exchange notes pursuant to this prospectus on the same terms and conditions described in this paragraph. If we suspend the use of the shelf registration statement or this prospectus during the period we are otherwise required to keep such registration statement effective, then the period that DCTOP and DCT are required to keep the shelf registration statement effective or during which the exchange offer registration statement must remain effective and participating broker-dealers are entitled to use such prospectus, as the case may be, will be extended by a number of days equal to the period of any such suspension.
Exchange Agent
We have appointed U.S. Bank National Association as exchange agent for the exchange offer of notes. All executed letters of transmittal and any other required documents should be directed to the exchange agent at the address or facsimile number set forth below. You should direct questions and requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal and requests for notices of guaranteed delivery to the exchange agent addressed as follows:
U.S. Bank National Association
Global Corporate Trust Services
950 17th Street, 12th Floor
Denver, CO 80202
Attention: Sandra Richelmy, Corporate Trust Department
Reference: DCT Industrial Trust Inc.
4.500% Senior Notes due 2023
Fees and Expenses
We will bear the expenses of soliciting tenders. We have not retained any dealer manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange offer. These expenses include registration fees, fees and expenses of the exchange agent and the trustee, accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of notes pursuant to the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the private notes pursuant to the exchange offer, then you must pay the amount of the transfer taxes. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to you.
Consequence of Failures to Exchange
Participation in the exchange offer is voluntary. We urge you to consult your financial and tax advisors in making your decisions on what action to take. Private notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities. Accordingly, those private notes may be resold only:
| to a person whom the seller reasonably believes is a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; |
| in a transaction meeting the requirements of Rule 144 under the Securities Act; |
| outside the United States to a foreign person in a transaction meeting the requirements of Rule 903 or 904 of Regulation S under the Securities Act; |
33
| in accordance with another exemption from the registration requirements of the Securities Act and based upon an opinion of counsel if we so request; |
| to us; or |
| pursuant to an effective registration statement. |
In each case, the private notes may be resold only in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the original notes, as reflected in our accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized.
34
The exchange offer satisfies an obligation under the registration rights agreement. We will not receive any cash proceeds from the exchange offer.
The net proceeds from the sale of the private notes after deducting discounts and offering expenses, were approximately $269.6 million. We used the net proceeds from the sale of the private notes to repay borrowing under a $175.0 million senior unsecured term loan, $50.0 million of senior unsecured notes, borrowings under our revolving credit facility and for general corporate purposes.
35
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth summary historical consolidated financial and operating data for DCT Industrial Operating Partnership LP and DCT Industrial Trust Inc. and their respective subsidiaries. You should read the following summary historical financial data in conjunction with the consolidated historical financial statements and notes thereto of DCT Industrial Operating Partnership LP and its subsidiaries, included elsewhere in this prospectus, and DCT Industrial Trust Inc. and its subsidiaries, incorporated by reference into this prospectus, and Managements Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this prospectus.
DCT Industrial Operating Partnership LP
The consolidated balance sheet data as of December 31, 2013 and 2012 and the consolidated statement of operations data for the years ended December 31, 2013, 2012 and 2011 have been derived from the historical consolidated financial statements of DCT Industrial Operating Partnership LP and subsidiaries audited by Ernst & Young LLP, an independent registered public accounting firm, whose report with respect thereto is included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2011, 2010 and 2009 and the consolidated statement of operations data for each of the years ended December 31, 2010 and 2009 have been derived from the unaudited historical consolidated financial statements of DCT Industrial Operating Partnership LP and subsidiaries, not included in this prospectus.
36
For the Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(amounts in thousands, except per share data and building count) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Rental revenues |
$ | 286,218 | $ | 236,839 | $ | 211,536 | $ | 190,404 | $ | 192,669 | ||||||||||
Total revenues |
$ | 289,005 | $ | 240,898 | $ | 215,827 | $ | 194,537 | $ | 195,370 | ||||||||||
Rental expenses and real estate taxes |
$ | 80,025 | $ | 66,390 | $ | 61,367 | $ | 58,437 | $ | 55,826 | ||||||||||
Property net operating income(5) |
$ | 206,193 | $ | 170,449 | $ | 150,169 | $ | 131,967 | $ | 136,843 | ||||||||||
Total operating expenses |
$ | 237,741 | $ | 200,972 | $ | 189,951 | $ | 178,400 | $ | 170,204 | ||||||||||
Loss from continuing operations |
$ | (9,251 | ) | $ | (28,540 | ) | $ | (42,503 | ) | $ | (44,618 | ) | $ | (34,624 | ) | |||||
Income from discontinued operations |
$ | 26,723 | $ | 11,800 | $ | 13,660 | $ | 1,551 | $ | 12,911 | ||||||||||
Gain on dispositions of real estate interests |
$ | 31 | $ | | $ | | $ | 13 | $ | 5 | ||||||||||
Net income (loss) attributable to OP Unitholders |
$ | 16,883 | $ | (16,468 | ) | $ | (27,885 | ) | $ | (42,524 | ) | $ | (21,539 | ) | ||||||
Earnings per OP UnitBasic and Diluted: |
||||||||||||||||||||
Loss from continuing operations |
$ | (0.03 | ) | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.19 | ) | $ | (0.16 | ) | |||||
Income from discontinued operations |
0.08 | 0.04 | 0.05 | 0.01 | 0.06 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to OP Unitholders |
$ | 0.05 | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.18 | ) | $ | (0.10 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average OP Units outstanding, basic and diluted |
317,848 | 278,189 | 267,901 | 238,763 | 223,560 | |||||||||||||||
Amounts Attributable to OP Unitholders: |
||||||||||||||||||||
Loss from continuing operations |
$ | (9,840 | ) | $ | (28,268 | ) | $ | (41,545 | ) | $ | (44,075 | ) | $ | (34,450 | ) | |||||
Income from discontinued operations (1) |
26,723 | 11,800 | 13,660 | 1,551 | 12,911 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to OP Unitholders |
16,883 | (16,468 | ) | (27,885 | ) | (42,524 | ) | (21,539 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Distributed and undistributed earnings allocated to participating securities |
(692 | ) | (524 | ) | (443 | ) | (480 | ) | (436 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted net income (loss) attributable to OP Unitholders |
$ | 16,191 | $ | (16,992 | ) | $ | (28,328 | ) | $ | (43,004 | ) | $ | (21,975 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
OP Unit Distributions: |
||||||||||||||||||||
OP Unit cash distributions, declared |
$ | 90,352 | $ | 79,459 | $ | 75,849 | $ | 67,380 | $ | 68,428 | ||||||||||
OP Unit cash distributions, declared per unit |
$ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.30 | ||||||||||
Other Data: |
||||||||||||||||||||
Consolidated operating square feet |
61,896 | 58,132 | 58,099 | 56,652 | 52,910 | |||||||||||||||
Consolidated operating buildings |
395 | 399 | 408 | 390 | 375 | |||||||||||||||
Total consolidated buildings square feet |
63,172 | 61,410 | 58,255 | 57,777 | 56,847 | |||||||||||||||
Total consolidated buildings |
400 | 409 | 409 | 398 | 394 |
37
For the Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(amounts in thousands, except per share data and building count) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Net investment in real estate |
$ | 3,141,877 | $ | 2,910,613 | $ | 2,711,027 | $ | 2,647,186 | $ | 2,576,410 | ||||||||||
Total assets |
$ | 3,265,963 | $ | 3,057,199 | $ | 2,793,298 | $ | 2,719,889 | $ | 2,644,292 | ||||||||||
Senior unsecured notes |
$ | 1,122,407 | $ | 1,025,000 | $ | 935,000 | $ | 786,000 | $ | 625,000 | ||||||||||
Mortgage notes |
$ | 290,960 | $ | 317,314 | $ | 317,783 | $ | 425,359 | $ | 511,715 | ||||||||||
Total liabilities |
$ | 1,598,771 | $ | 1,583,640 | $ | 1,389,183 | $ | 1,319,051 | $ | 1,220,659 | ||||||||||
Cash Flow Data: |
||||||||||||||||||||
Net cash provided by operating activities |
$ | 152,893 | $ | 118,956 | $ | 106,482 | $ | 91,002 | $ | 109,749 | ||||||||||
Net cash used in investing activities |
$ | (301,058 | ) | $ | (299,138 | ) | $ | (177,,823 | ) | $ | (138,334 | ) | $ | (17,673 | ) | |||||
Net cash provided by (used in) financing activities |
$ | 167,695 | $ | 180,044 | $ | 66,845 | $ | 45,542 | $ | (92,637 | ) | |||||||||
Funds From Operations:(2) |
||||||||||||||||||||
Net income (loss) attributable to OP Unitholders |
$ | 16,883 | $ | (16,468 | ) | $ | (27,885 | ) | $ | (42,524 | ) | $ | (21,539 | ) | ||||||
Adjustments: |
||||||||||||||||||||
Real estate related depreciation and amortization |
137,120 | 126,687 | 128,989 | 115,904 | 111,250 | |||||||||||||||
Equity in (earnings) loss of unconsolidated joint ventures, net |
(2,405 | ) | (1,087 | ) | 2,556 | 2,986 | (2,698 | ) | ||||||||||||
Equity in FFO of unconsolidated joint ventures |
10,152 | 10,312 | 4,732 | 4,001 | 11,807 | |||||||||||||||
Loss on business combinations |
| | | 395 | 10,325 | |||||||||||||||
Impairment losses on depreciable real estate (4) |
13,279 | 11,422 | 10,160 | 8,012 | 681 | |||||||||||||||
Gain on dispositions of real estate interests |
(33,650 | ) | (13,383 | ) | (12,030 | ) | (2,091 | ) | (1,354 | ) | ||||||||||
Gain on dispositions of non-depreciable real estate |
31 | | | 13 | 783 | |||||||||||||||
Noncontrolling interest in above adjustments |
(787 | ) | (1,397 | ) | (1,716 | ) | (54 | ) | (72 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO attributable to OP Unitholdersbasic and diluted |
140,623 | 116,086 | 104,806 | 86,642 | 109,183 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjustments: |
||||||||||||||||||||
Impairment losses on non-depreciable real estate(3) |
| | | 3,992 | 300 | |||||||||||||||
Debt modification costs |
| | | 1,136 | | |||||||||||||||
Acquisition costs(3) |
3,578 | 1,975 | 1,902 | 1,228 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO, as adjusted, attributable to OP Unitholders, basic and diluted(2)(4): |
$ | 144,201 | $ | 118,061 | $ | 106,708 | $ | 92,998 | $ | 109,483 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO per OP Unitbasic and diluted |
$ | 0.44 | $ | 0.41 | $ | 0.39 | $ | 0.36 | $ | 0.48 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO as adjusted, per OP Unitbasic and diluted(2)(4): |
$ | 0.45 | $ | 0.42 | $ | 0.40 | $ | 0.39 | $ | 0.49 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO weighted average OP Units outstanding: |
||||||||||||||||||||
OP Units |
317,848 | 278,189 | 267,901 | 238,763 | 223,560 | |||||||||||||||
Participating securities |
2,462 | 1,896 | 1,601 | 1,689 | 1,535 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO weighted average OP Units and participating securities |
320,310 | 280,085 | 269,502 | 240,452 | 225,095 | |||||||||||||||
Dilutive unit equivalents |
893 | 623 | 449 | 357 | 189 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO weighted average OP Units outstandingdiluted: |
321,203 | 280,708 | 269,951 | 240,809 | 225,284 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
38
DCT Industrial Trust Inc.
The consolidated balance sheet data as of December 31, 2013 and 2012 and the consolidated statement of operations data for the years ended December 31, 2013, 2012 and 2011 have been derived from the historical consolidated financial statements of DCT Industrial Trust Inc. audited by Ernst & Young LLP, an independent registered public accounting firm, whose report with respect thereto is incorporated by reference in this prospectus. The consolidated balance sheet data as of December 31, 2011, 2010 and 2009 and the consolidated statement of operations data for each of the years ended December 31, 2010 and 2009 have been derived from the historical consolidated financial statements of DCT Industrial Trust Inc., not included in or incorporated by reference in this prospectus.
For the Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(amounts in thousands, except per share data and building count) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Rental revenues |
$ | 286,218 | $ | 236,839 | $ | 211,536 | $ | 190,404 | $ | 192,669 | ||||||||||
Total revenues |
$ | 289,005 | $ | 240,898 | $ | 215,827 | $ | 194,537 | $ | 195,370 | ||||||||||
Rental expenses and real estate taxes |
$ | 80,025 | $ | 66,390 | $ | 61,367 | $ | 58,437 | $ | 55,826 | ||||||||||
Property net operating income(5) |
$ | 206,193 | $ | 170,449 | $ | 150,169 | $ | 131,967 | $ | 136,843 | ||||||||||
Total operating expenses |
$ | 237,741 | $ | 200,972 | $ | 189,951 | $ | 178,400 | $ | 170,204 | ||||||||||
Loss from continuing operations |
$ | (9,251 | ) | $ | (28,540 | ) | $ | (42,503 | ) | $ | (44,618 | ) | $ | (34,624 | ) | |||||
Income from discontinued operations |
$ | 26,723 | $ | 11,800 | $ | 13,660 | $ | 1,551 | $ | 12,911 | ||||||||||
Gain on dispositions of real estate interests |
$ | 31 | $ | | $ | | $ | 13 | $ | 5 | ||||||||||
Net income (loss) attributable to common stockholders |
$ | 15,870 | $ | (15,086 | ) | $ | (25,250 | ) | $ | (37,830 | ) | $ | (18,585 | ) | ||||||
Earnings per Common ShareBasic and Diluted: |
||||||||||||||||||||
Loss from continuing operations |
$ | (0.03 | ) | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.18 | ) | $ | (0.16 | ) | |||||
Income from discontinued operations |
0.08 | 0.04 | 0.05 | 0.00 | 0.06 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to common stockholders |
$ | 0.05 | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.18 | ) | $ | (0.10 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average common shares outstanding, basic and diluted |
298,769 | 254,831 | 242,591 | 212,412 | 192,900 | |||||||||||||||
Amounts Attributable to Common Stockholders: |
||||||||||||||||||||
Loss from continuing operations |
$ | (9,250 | ) | $ | (25,896 | ) | $ | (37,621 | ) | $ | (39,212 | ) | $ | (29,725 | ) | |||||
Income from discontinued operations (1) |
25,120 | 10,810 | 12,371 | 1,382 | 11,140 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to common stockholders |
15,870 | (15,086 | ) | (25,250 | ) | (37,830 | ) | (18,585 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Distributed and undistributed earnings allocated to participating securities |
(692 | ) | (524 | ) | (443 | ) | (480 | ) | (436 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted net income (loss) attributable to common stockholders |
$ | 15,178 | $ | (15,610 | ) | $ | (25,693 | ) | $ | (38,310 | ) | $ | (19,021 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Common Share Distributions: |
||||||||||||||||||||
Common share cash distributions, declared |
$ | 85,079 | $ | 73,200 | $ | 68,789 | $ | 60,110 | $ | 59,364 | ||||||||||
Common share cash distributions, declared per share |
$ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.30 | ||||||||||
Other Data: |
||||||||||||||||||||
Consolidated operating square feet |
61,896 | 58,132 | 58,099 | 56,652 | 52,910 | |||||||||||||||
Consolidated operating buildings |
395 | 399 | 408 | 390 | 375 | |||||||||||||||
Total consolidated buildings square feet |
63,172 | 61,410 | 58,255 | 57,777 | 56,847 | |||||||||||||||
Total consolidated buildings |
400 | 409 | 409 | 398 | 394 |
39
For the Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(amounts in thousands, except per share data and building count) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Net investment in real estate |
$ | 3,141,877 | $ | 2,910,613 | $ | 2,711,027 | $ | 2,647,186 | $ | 2,576,410 | ||||||||||
Total assets |
$ | 3,265,963 | $ | 3,057,199 | $ | 2,793,298 | $ | 2,719,889 | $ | 2,644,292 | ||||||||||
Senior unsecured notes |
$ | 1,122,407 | $ | 1,025,000 | $ | 935,000 | $ | 786,000 | $ | 625,000 | ||||||||||
Mortgage notes |
$ | 290,960 | $ | 317,314 | $ | 317,783 | $ | 425,359 | $ | 511,715 | ||||||||||
Total liabilities |
$ | 1,598,771 | $ | 1,583,640 | $ | 1,389,183 | $ | 1,319,051 | $ | 1,220,659 | ||||||||||
Cash Flow Data: |
||||||||||||||||||||
Net cash provided by operating activities |
$ | 152,893 | $ | 118,956 | $ | 106,482 | $ | 91,002 | $ | 109,749 | ||||||||||
Net cash used in investing activities |
$ | (301,058 | ) | $ | (299,138 | ) | $ | (177,823 | ) | $ | (138,334 | ) | $ | (17,673 | ) | |||||
Net cash provided by (used in) financing activities |
$ | 167,695 | $ | 180,044 | $ | 66,845 | $ | 45,542 | $ | (92,637 | ) | |||||||||
Funds From Operations:(2) |
||||||||||||||||||||
Net income (loss) attributable to common stockholders |
$ | 15,870 | $ | (15,086 | ) | $ | (25,250 | ) | $ | (37,830 | ) | $ | (18,585 | ) | ||||||
Adjustments: |
||||||||||||||||||||
Real estate related depreciation and amortization |
137,120 | 126,687 | 128,989 | 115,904 | 111,250 | |||||||||||||||
Equity in (earnings) loss of unconsolidated joint ventures, net |
(2,405 | ) | (1,087 | ) | 2,556 | 2,986 | (2,698 | ) | ||||||||||||
Equity in FFO of unconsolidated joint ventures |
10,152 | 10,312 | 4,732 | 4,001 | 11,807 | |||||||||||||||
Loss on business combinations |
| | | 395 | 10,325 | |||||||||||||||
Impairment losses on depreciable real estate(4) |
13,279 | 11,422 | 10,160 | 8,012 | 681 | |||||||||||||||
Gain on dispositions of real estate interests |
(33,650 | ) | (13,383 | ) | (12,030 | ) | (2,091 | ) | (1,354 | ) | ||||||||||
Gain on dispositions of non-depreciable real estate |
31 | | | 13 | 783 | |||||||||||||||
Noncontrolling interest in the operating partnerships share of the above adjustments |
(8,211 | ) | (12,522 | ) | (14,252 | ) | (13,426 | ) | (17,907 | ) | ||||||||||
FFO attributable to OP Unitholders |
8,437 | 9,743 | 9,901 | 8,678 | 14,881 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO attributable to OP Unitholdersbasic and diluted |
140,623 | 116,086 | 104,806 | 86,642 | 109,183 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
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Adjustments: |
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Impairment losses on non-depreciable real estate(3) |
| | | 3,992 | 300 | |||||||||||||||
Debt modification costs |
| | | 1,136 | | |||||||||||||||
Acquisition costs(3) |
3,578 | 1,975 | 1,902 | 1,228 | | |||||||||||||||
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FFO, as adjusted, attributable to OP Unitholders, basic and diluted(2): |
$ | 144,201 | $ | 118,061 | $ | 106,708 | $ | 92,998 | $ | 109,483 | ||||||||||
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FFO per common share and unitbasic and diluted |
$ | 0.44 | $ | 0.41 | $ | 0.39 | $ | 0.36 | $ | 0.48 | ||||||||||
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FFO as adjusted, per common share and unitbasic and diluted(2)(4): |
$ | 0.45 | $ | 0.42 | $ | 0.40 | $ | 0.39 | $ | 0.49 | ||||||||||
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FFO weighted average common shares and units outstanding: |
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Common shares |
298,769 | 254,831 | 242,591 | 212,412 | 192,900 | |||||||||||||||
Participating securities |
2,462 | 1,896 | 1,601 | 1,689 | 1,535 | |||||||||||||||
Units |
19,079 | 23,358 | 25,310 | 26,351 | 30,660 | |||||||||||||||
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FFO weighted average common shares, participating securities and units outstandingbasic: |
320,310 | 280,085 | 269,502 | 240,452 | 225,095 | |||||||||||||||
Dilutive common stock equivalents |
893 | 623 | 449 | 357 | 189 | |||||||||||||||
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FFO weighted average common shares and units outstandingdiluted: |
321,203 | 280,708 | 269,951 | 240,809 | 225,284 | |||||||||||||||
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40
(1) | Includes gain on dispositions of real estate interests. |
(2) | We believe that net income attributable to unitholders, as defined by GAAP, is the most appropriate earnings measure. However, we consider funds from operations (FFO), as defined by the National Association of Real Estate Investment Trusts (NAREIT), to be a useful supplemental non-GAAP measure of DCT Industrials operating performance. NAREIT developed FFO as a relative measure of performance of an equity REIT in order to recognize that the value of income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is generally defined as net income attributable to unitholders, calculated in accordance with GAAP, plus real estate-related depreciation and amortization, less gains from dispositions of operating real estate held for investment purposes, plus impairment losses on depreciable real estate and impairments of in substance real estate investments in investees that are driven by measureable decreases in the fair value of the depreciable real estate held by the unconsolidated joint ventures and adjustments to derive our pro rata share of FFO of unconsolidated joint ventures. We exclude gains and losses on business combinations and include the gains or losses from dispositions of properties which were acquired or developed with the intention to sell or contribute to an investment fund in our definition of FFO. Although the NAREIT definition of FFO predates the guidance for accounting for gains and losses on business combinations, we believe that excluding such gains and losses is consistent with the key objective of FFO as a performance measure. We also present FFO excluding acquisition costs, debt modification costs and impairment losses on properties which are not depreciable. We believe that FFO excluding acquisition costs, debt modification costs and impairment losses on non-depreciable real estate is useful supplemental information regarding our operating performance as it provides a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our operating results. Readers should note that FFO captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. NAREITs definition of FFO is subject to interpretation, and modifications to the NAREIT definition of FFO are common. Accordingly, our FFO may not be comparable to other REITs FFO and FFO should be considered only as a supplement to net income as a measure of our performance. |
(3) | Excluding amounts attributable to noncontrolling interests. |
(4) | Under NAREITs definition of FFO, impairment write-downs of depreciable real estate should be excluded in calculating NAREIT FFO. In addition, impairments of in substance real estate investments in investees that are driven by measureable decreases in the fair value of the depreciable real estate held by the unconsolidated joint ventures should be excluded in determining NAREIT FFO. |
(5) | Property net operating income, or property NOI, is defined as rental revenues, including reimbursements, less rental expenses and real estate taxes, which excludes depreciation, amortization, impairment, casualty gains, general and administrative expenses, loss on business combinations and interest expense. 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, interest income 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 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. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance. |
41
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
DCTOP is an entity through which DCT, a fully-integrated and self-managed REIT, and our sole general partner, conducts all of its operations and owns all of its assets. We are engaged in the business of owning, operating, acquiring and developing high-quality bulk distribution and light industrial properties in high volume distribution markets in the United States (U.S.). As of December 31, 2013 DCT owned an approximate 94.8% ownership interest in DCTOP.
Our primary business objectives are to maximize long-term growth in Funds From Operations, or FFO, as defined in Selected Consolidated Financial Data, net asset value of our portfolio and total shareholder returns. In our pursuit of these long-term objectives, we seek to:
| maximize cash flows from existing properties; |
| deploy capital into high 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 the proceeds into higher growth opportunities. |
Outlook
We seek to maximize long-term earnings growth and value within the context of overall economic conditions, primarily through increasing occupancy, rents and operating income at existing properties and acquiring and developing high-quality properties with attractive operating income and value growth prospects. Fundamentals for industrial real estate continue to improve in response to general improvement in the economy as well as trends that particularly favor industrial assets, including the growth of e-commerce and United States based manufacturing. We expect moderate economic growth to continue throughout 2014, which should result in continued positive demand for warehouse space as companies expand and upgrade their distribution and production platforms.
In response to positive net absorption and lower market vacancy levels, rental rates are increasing in most of our markets, although they generally remain below peak levels. Rental concessions, such as free rent, have also declined in all markets. Consistent with recent experience and based on current market conditions, we expect average net effective rental rates on new leases signed in 2014 to be 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.
New development has begun to increase in certain markets where fundamentals have improved, however construction is below current levels of net absorption in most markets and well below peak levels. We expect that the operating environment will continue to be favorable for landlords with meaningful improvement of rental and occupancy rates.
We expect same store net operating income to be higher in 2014 than it was in 2013, primarily as a result of higher occupancy in 2014 and the impact of increasing rental rates on leases signed in 2014 compared to expiring leases.
In terms of capital investment, we will continue to pursue the acquisition of well-located distribution facilities at prices where we can apply our leasing experience and market knowledge to generate attractive returns. 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.
42
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 common 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 experienced a slight decrease in 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 customers 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.
Summary of Significant Transactions During 2013
Significant transactions for the year ended December 31, 2013
| Acquisitions |
| During the year ended December 31, 2013, we acquired 38 buildings totaling approximately 7.1 million square feet. These properties were acquired for a total purchase price of $359.5 million, excluding our existing ownership of 3.6% in the seven properties previously held by TRT-DCT Venture I (see Notes to the Consolidated Financial Statements, Note 4Investment in and Advances to Unconsolidated Joint Ventures for further detail). |
| During the year ended December 31, 2013, we acquired five land parcels for future development which total approximately 128.6 acres located in the Southern California, Seattle, Miami, and Houston markets for a total purchase price of $40.5 million. |
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| Development Activities |
During 2013, we continued to expand our development activities. The table below represents a summary of our consolidated development activity as of December 31, 2013:
Project |
Market | Acres | Number of Buildings |
Square Feet | Percent Owned |
Cumulative Costs at 12/31/2013 |
Projected Investment |
Completion Date(1) |
Percent Leased |
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(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||
Development Activities |
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Projects in Lease Up |
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DCT Airtex Industrial Center |
Houston | 13 | 1 | 267 | 100 | % | $ | 12,161 | $ | 14,983 | Q4-2013 | 100 | % | |||||||||||||||||||||||
DCT 55 |
Chicago | 33 | 1 | 604 | 100 | % | 26,218 | 28,318 | Q4-2012 | 66 | % | |||||||||||||||||||||||||
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Total |
46 | 2 | 871 | 100 | % | $ | 38,379 | $ | 43,301 | 77 | % | |||||||||||||||||||||||||
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Under Construction |
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DCT Beltway Tanner Business Center |
Houston | 11 | 1 | 133 | 100 | % | $ | 10,201 | $ | 15,153 | Q1-2014 | 0 | % | |||||||||||||||||||||||
8th & Vineyard B |
So. California | 4 | 1 | 99 | 91 | % | 5,243 | 6,197 | Q1-2014 | 0 | % | |||||||||||||||||||||||||
DCT Summer South Distribution Center |
Seattle | 9 | 1 | 188 | 100 | % | 9,194 | 13,060 | Q1-2014 | 0 | % | |||||||||||||||||||||||||
DCT White River Corporate Center Phase I |
Seattle | 30 | 1 | 649 | 100 | % | 23,051 | 42,433 | Q2-2014 | 0 | % | |||||||||||||||||||||||||
Slover Logistics Center II |
So. California | 28 | 1 | 610 | 100 | % | 24,241 | 37,496 | Q1-2014 | 100 | % | |||||||||||||||||||||||||
DCT Auburn 44 |
Seattle | 3 | 1 | 49 | 100 | % | 3,341 | 4,547 | Q1-2014 | 100 | % | |||||||||||||||||||||||||
DCT Rialto Logistics Center |
So. California | 42 | 1 | 928 | 100 | % | 21,480 | 59,523 | Q3-2014 | 0 | % | |||||||||||||||||||||||||
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Total |
127 | 7 | 2,656 | 100 | % | $ | 96,751 | $ | 178,409 | 25 | % | |||||||||||||||||||||||||
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Build-to-Suit for Sale |
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8th & Vineyard A |
So. California | 6 | 1 | 130 | 91 | % | $ | 7,773 | $ | 8,703 | Q1-2014 | N/A | ||||||||||||||||||||||||
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Total |
6 | 1 | 130 | 91 | % | $ | 7,773 | $ | 8,703 | |||||||||||||||||||||||||||
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Total Development Activities |
179 | 10 | 3,657 | 99 | % | $ | 142,903 | $ | 230,413 | 38 | % | |||||||||||||||||||||||||
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(1) | The completion date represents the date of building shell completion or estimated date of shell completion. |
Construction was completed during the second quarter of 2013 on the Dulles Summit build-to-suit project. We recognized development profits, net of tax of approximately $0.3 million for the year ended December 31, 2013 related to the development of the Dulles Summit build-to-suit project. As of December 31, 2013, we had one build-to-suit for sale project, 8th and Vineyard A, under contract. Due to the terms of the contract, timing of payments and the sale recognition criteria of GAAP, no profit was recognized in 2013. The construction and sale were completed in January 2014, at which time the development profit was recognized.
| Dispositions |
| During the year ended December 31, 2013, we sold 51 operating properties, totaling approximately 6.8 million square feet, to third-parties for combined gross proceeds of approximately $265.8 million. This included the disposition of our entire portfolio of Mexico assets consisting of 15 buildings totaling 1.7 million square feet, for gross proceeds of approximately $82.7 million. |
| We recognized gains of approximately $33.6 million on the disposition of 36 operating properties and recognized an impairment loss of approximately $13.3 million on the disposition of a portfolio in Dallas. |
44
| Significant Activity with Joint Ventures |
| During May 2013, we purchased the remaining 96.4% interest in seven properties from TRT-DCT JV I for additional consideration of $82.8 million. Additionally, we sold one of the properties during 2013 and the remaining six properties were consolidated as of December 31, 2013. |
| Debt Activity |
| During February 2013, we entered into an amendment with our syndicated bank group whereby we extended and increased our existing $175.0 million senior unsecured term loan to $225.0 million for a period of five years, extended our existing $300.0 million senior unsecured line of credit for a period of four years and received a commitment for an additional $175.0 million senior unsecured term loan with a term of two years. We closed on the additional $175.0 million in March 2013, which was used to refinance a scheduled June 2013 maturity of $175.0 million of other senior unsecured debt. |
| During October 2013, we issued $275.0 million aggregate principal amount of 4.50% senior notes due 2023 at 99.038% of face value in a private placement for net proceeds of approximately $269.6 million after offering costs. We primarily used the net proceeds to repay a $15.9 million mortgage note that was scheduled to mature in October 2013, a $50.0 million senior unsecured note that was scheduled to mature in January of 2014 and our $175.0 million senior unsecured term loan that was scheduled to mature in February 2015, which were pre-payable without prepayment penalties. |
| Equity activity |
| On May 29, 2013, DCT registered a third continuous equity offering program, to replace its continuous equity offering program previously registered on November 20, 2012. Pursuant to this offering, DCT may sell up to 20 million shares of common stock from time-to-time through May 29, 2016 in at-the-market offerings or certain other transactions. During the year ended December 31, 2013, approximately 13.8 million were issued shares through the second and third continuous equity offering programs at an average price of $7.37 per share for proceeds of $100.4 million, net of offering expenses. The proceeds from the sale of shares were contributed to DCTOP in exchange for an equal number of OP Units in the DCTOP and were used for general corporate purposes, including funding acquisitions and repaying debt. As of December 31, 2013, 16.6 million shares remain available to be issued under the current offering. |
| On August 13, 2013, DCT issued 23.0 million shares of common stock in a public offering at a price of $7.20 per share for proceeds of $158.2 million, net of offering expenses, used for acquisitions, development activities, repayment of amounts under our senior unsecured revolving credit facility and other general purposes. The proceeds from the sale of shares were contributed to DCTOP in exchange for an equal number of OP Units in DCTOP. |
Critical Accounting Policies and Estimates
General
Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements which have been prepared in accordance with United States generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following
45
discussion pertains to accounting policies management believes are most critical to the portrayal of our financial condition and results of operations that require managements most difficult, subjective or complex estimates.
Revenue Recognition
We record rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for customer occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, we record receivables from customers that we expect to collect over the remaining lease term, which are recorded as a straight-line rent receivable. When we acquire a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation.
Tenant recovery income includes payments and amounts due from customers pursuant to their leases for real estate taxes, insurance and other recoverable property operating expenses and is recognized as Rental revenues during the same period the related expenses are incurred.
We maintain an allowance for estimated losses that may result from the inability of our customers to make required payments. This estimate requires significant judgment related to the lessees ability to fulfill their obligations under the leases. If a customer is insolvent or files for bankruptcy protection and fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances, which include amounts recognized as straight-line revenue not realizable until future periods.
In connection with property acquisitions qualifying as business combinations, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an intangible lease asset or liability and amortized to Rental revenues over the reasonably assured term of the related leases. The unamortized balances of these assets and liabilities associated with the early termination of leases are fully amortized to their respective revenue line items in our Consolidated Statements of Operations over the shorter of the expected life of such assets and liabilities or the remaining lease term.
Capitalization of Costs
We capitalize costs directly related to the development, pre-development, redevelopment or improvement of our investment in real estate, referred to as capital projects and other activities included within this paragraph. Costs associated with our capital projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and insurance, if appropriate. We capitalize indirect costs such as personnel, office, and administrative expenses that are directly related to our development projects based on an estimate of the time spent on the construction and development activities. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. We determine when the capitalization period begins and ends through communication with project and other managers responsible for the tracking and oversight of individual projects. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. In addition, we capitalize initial direct costs incurred for successful origination of new leases. Costs incurred for maintaining and repairing our properties, which do not extend their useful lives, are expensed as incurred.
Interest is capitalized based on actual capital expenditures from the period when development or redevelopment commences until the asset is ready for its intended use, at the weighted average borrowing rates in effect during the period. We also capitalize interest on our qualifying investments in unconsolidated joint ventures based on the average capital invested in a venture during the period when the venture has activities in progress necessary to commence its planned principal operations, at our weighted average borrowing rate during
46
the period. A qualifying investment is an investment in an unconsolidated joint venture provided that our investees activities include the use of funds to acquire qualifying assets, such as development or predevelopment activities, and planned principal operations have not commenced.
Investment in Properties
We record the assets, liabilities and noncontrolling interests associated with property acquisitions which qualify as business combinations at their respective acquisition date fair values which are derived using a market, income or replacement cost approach, or a combination thereof. Acquisition related costs associated with business combinations are expensed as incurred. As defined by GAAP, a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. We generally do not consider acquisitions of land or unoccupied buildings to be business combinations. Rather, these transactions are treated as asset acquisitions and recorded at cost.
The fair value of identifiable tangible assets such as land, building, building and land improvements and tenant improvements is determined on an as-if-vacant basis which requires significant judgment by management. Management considers estimates such as the replacement cost of such assets, appraisals, property condition reports, comparable market rental data and other related information in determining the fair value of the tangible assets. The recorded fair value of intangible lease assets or liabilities includes the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property and lease commencement. An intangible asset or liability resulting from in-place leases that are above or below the market rental rates are valued based upon managements estimates of prevailing market rates for similar leases. Intangible lease assets or liabilities are amortized over the reasonably assured lease term of the remaining in-place leases as an adjustment to Rental revenues or Real estate related depreciation and amortization depending on the nature of the intangible. The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to Interest expense over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
We have certain properties which we have acquired or removed from service with the intention to redevelop the property. Buildings under redevelopment require significant construction activities prior to being placed back into service. We generally do not depreciate properties classified as redevelopment until the date that the redevelopment properties are ready for their intended use.
Real estate, including land, building, building and land improvements, and tenant improvements, leasing costs and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate a change in the useful life, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.
Impairment of Properties
Investments in properties classified as held for use are carried at cost and evaluated for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. As we selectively dispose of non-strategic assets and redeploy the proceeds into higher growth assets, our intended hold period may change due to our intention to sell or otherwise dispose of an asset. As a result, we would assess whether that asset is impaired. Depending on the carrying value of the property at that time and the amount that we estimate we would receive on disposal, we may record an impairment loss. Other indicators include the point at which we deem a building to be held for sale or when a building remains vacant significantly longer than expected.
47
For investments in properties that we intend to hold long-term, the recoverability is based on estimated future undiscounted cash flows. If the asset carrying value is not recoverable on an undiscounted cash flow basis, the amount of impairment is measured as the difference between the carrying value and the fair value of the asset and is reflected in Impairment losses on the Consolidated Statements of Operations. The determination of fair value of real estate assets to be held for use is derived using the discounted cash flow method and involves a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Such assumptions are managements estimates and include, but are not limited to, projected vacancy rates, rental rates, property operating expenses and capital expenditures. The capitalization rate is also a significant driving factor in determining the property valuation and requires managements judgment of factors such as market knowledge, market supply and demand factors, historical experience, lease terms, customers financial strength, economy, demographics, environment, property location, visibility, age, physical condition and expected return requirements, among other things. The aforementioned factors are taken as a whole by management in determining the valuation of investment property. The valuation is sensitive to the actual results of many of these uncertain factors, either individually or taken as a whole. Should the actual results differ from managements estimates, the valuation could be negatively affected and may result in additional impairments recorded in the Consolidated Financial Statements.
Investments in properties classified as held for sale are recorded at the lower of their carrying amount or fair value (typically estimated based on the contracted sales price) less costs to sell. Impairment of assets held for sale is a component of Income from discontinued operations in the Consolidated Statements of Operations and is further detailed in Notes to Consolidated Financial Statements Note 15 Discontinued Operations and Assets Held for Sale.
Impairment of Investments in and Advances to Unconsolidated Joint Ventures
We evaluate investments in and advances to unconsolidated joint ventures for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. To do so, we calculate the estimated fair value of the investment using a market, income or replacement cost approach, or combination thereof. The amount of impairment recognized, if any, would be the excess of the investments carrying amount over its estimated fair value. We consider various factors to determine if a decline in the value of the investment is other-than-temporary, which include but are not limited to, the age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, expected term of the investment and the relationships with the other joint venture partners and its lenders. If we believe that the decline in the fair value is temporary, no impairment is recorded. The aforementioned factors are taken as a whole by management in determining the valuation of our investment. Should the actual results differ from managements estimates, the valuation could be negatively affected and may result in additional impairments in the Consolidated Financial Statements.
Results of Operations
Summary of the year ended December 31, 2013 compared to the year ended December 31, 2012
As of December 31, 2013, we owned interests in, managed or had under development approximately 75.5 million square feet of properties leased to approximately 900 customers, including 12.3 million square feet of unconsolidated properties on behalf of four institutional capital management joint venture partners and we consolidated 395 operating properties, two redevelopment properties, two development properties and one property which was held for sale. As of December 31, 2012, we consolidated 399 operating properties, four redevelopment properties, three development properties and three properties which were held for sale.
Comparison of the year ended December 31, 2013 to the year ended December 31, 2012
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 year ended December 31, 2013 compared to the year ended December 31, 2012. Our same store portfolio includes all
48
operating properties that we owned for the entirety of both the current and prior year reporting periods for which the operations had been stabilized. We generally consider buildings stabilized when occupancy reaches 90%. Non-same store operating properties include properties not meeting the same-store criteria and exclude development and redevelopment properties. The same store portfolio for the periods presented totaled 321 operating properties and was comprised of 48.6 million square feet. A discussion of these changes follows the table (in thousands):
Year Ended December 31, |
Percent Change |
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2013 | 2012 | $ Change | ||||||||||||||
Rental Revenues |
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Same store, excluding revenues related to early lease terminations |
$ | 233,191 | $ | 226,927 | $ | 6,264 | 2.8 | % | ||||||||
Non-same store operating properties |
51,073 | 9,175 | 41,898 | 456.7 | % | |||||||||||
Development and redevelopment |
652 | 185 | 467 | 252.4 | % | |||||||||||
Revenues related to early lease terminations |
1,302 | 552 | 750 | 135.9 | % | |||||||||||
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Total rental revenues |
286,218 | 236,839 | 49,379 | 20.8 | % | |||||||||||
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Rental Expenses and Real Estate Taxes |
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Same store |
67,010 | 63,908 | 3,102 | 4.9 | % | |||||||||||
Non-same store operating properties |
12,784 | 2,249 | 10,535 | 468.4 | % | |||||||||||
Development and redevelopment |
231 | 233 | (2 | ) | -0.9 | % | ||||||||||
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|
|||||||||
Total rental expenses and real estate taxes |
80,025 | 66,390 | 13,635 | 20.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Property Net Operating Income(1) |
||||||||||||||||
Same store, excluding revenues related to early lease terminations |
166,181 | 163,019 | 3,162 | 1.9 | % | |||||||||||
Non-same store operating properties |
38,289 | 6,926 | 31,363 | 452.8 | % | |||||||||||
Development and redevelopment |
421 | (48 | ) | 469 | 977.1 | % | ||||||||||
Revenues related to early lease terminations |
1,302 | 552 | 750 | 135.9 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total property net operating income |
206,193 | 170,449 | 35,744 | 21.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Revenue and Other Income (Loss) |
||||||||||||||||
Development profit |
268 | 307 | (39 | ) | -12.7 | % | ||||||||||
Institutional capital management and other fees |
2,787 | 4,059 | (1,272 | ) | -31.3 | % | ||||||||||
Equity in earnings of unconsolidated joint ventures, net |
2,405 | 1,087 | 1,318 | 121.3 | % | |||||||||||
Interest and other income |
274 | 85 | 189 | 222.4 | % | |||||||||||
Casualty and involuntary conversion gain |
296 | 1,174 | (878 | ) | -74.8 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other revenue and other income |
6,030 | 6,712 | (682 | ) | -10.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Expenses |
||||||||||||||||
Real estate related depreciation and amortization |
130,002 | 109,993 | 20,009 | 18.2 | % | |||||||||||
Interest expense |
63,394 | 69,274 | (5,880 | ) | -8.5 | % | ||||||||||
General and administrative |
28,010 | 25,763 | 2,247 | 8.7 | % | |||||||||||
Income tax expense and other taxes |
68 | 671 | (603 | ) | -89.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
221,474 | 205,701 | 15,773 | 7.7 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations |
26,723 | 11,800 | 14,923 | 126.5 | % | |||||||||||
Net (income) loss attributable to noncontrolling interests |
(589 | ) | 272 | (861 | ) | -316.5 | % | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to OP Unitholders |
$ | 16,883 | $ | (16,468 | ) | $ | 33,351 | 202.5 | % | |||||||
|
|
|
|
|
|
|
|
(1) | For a discussion as to why we view property net operating income to be an appropriate supplemental performance measure and a reconciliation of our property net operating income to our reported Loss from Continuing Operations, see Selected Consolidated Financial Data. |
49
Rental Revenues and Leasing Activity
Rental revenues, which are comprised of base rent, straight-line rent, amortization of above and below market rent intangibles, tenant recovery income, other rental revenues and early lease termination fees, increased $49.4 million for the year ended December 31, 2013 compared to the same period in 2012, primarily due to the following changes:
| $43.1 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 year over year. Since December 31, 2012, we acquired 38 operating properties, six properties for development and completed development of five properties. |
| $6.3 million increase in total revenue in our same store portfolio due primarily to the following: |
| $6.7 million increase in base rent primarily resulting from increased rental rates and a 100 basis point increase in average occupancy year over year; |
| $3.2 million increase in operating expense recoveries related to a higher average occupancy; and |
| $1.3 million increase in other rental revenues primarily related to increases in amortization of below market rent and other rents; which was partially offset by |
| $5.0 million decrease in straight-line rental revenue as a result of fewer rent concessions. |
The following table illustrates the components of our consolidated rental revenues for the years ended December 31, 2013 and 2012 (in thousands):
Year Ended December 31, |
||||||||||||
2013 | 2012 | $ Change | ||||||||||
Base rent |
$ | 212,045 | $ | 176,798 | $ | 35,247 | ||||||
Straight-line rent |
5,335 | 6,254 | (919 | ) | ||||||||
Amortization of above and below market rent intangibles |
1,581 | 826 | 755 | |||||||||
Tenant recovery income |
63,829 | 51,695 | 12,134 | |||||||||
Other rental income |
2,126 | 714 | 1,412 | |||||||||
Revenues related to early lease terminations |
1,302 | 552 | 750 | |||||||||
|
|
|
|
|
|
|||||||
Total rental revenues |
$ | 286,218 | $ | 236,839 | $ | 49,379 | ||||||
|
|
|
|
|
|
The following table provides a summary of our leasing activity for the year ended December 31, 2013:
Number of Leases Signed |
Square Feet Signed(1) |
Net Effective Rent Per Square Foot(2) |
GAAP Basis Rent Growth(3) |
Weighted Average Lease Term(4) |
Turnover Costs Per Square Foot(5) |
Weighted Average Retention(6) |
||||||||||||||||||||||
(in thousands) | (in months) | |||||||||||||||||||||||||||
Year to date 2013 |
299 | 13,836 | $ | 4.37 | 6.60 | % | 53 | $ | 1.77 | 72.0 | % |
(1) | Excludes 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 an annual ratio of the change in net effective rent (including straight-line rent adjustments as required by GAAP) compared to the net effective rent of the comparable lease. Leases where there were no prior comparable leases, due to extended downtime, or materially different lease structures and short-term lease of less than 12 months, are excluded. |
(4) | The lease term is in months. Assumes no exercise of lease renewal options, if any. |
50
(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 percentage of customers renewing their respective leases weighted by average square feet. |
During the year ended December 31, 2013, we signed 102 leases with free rent, which were for 5.8 million square feet of property with total concessions of $6.6 million.
Rental Expenses and Real Estate Taxes
Rental expenses and real estate taxes increased $13.6 million for the year ended December 31, 2013 compared to the same period in 2012, primarily due to:
| $10.5 million increase in rental expenses and real estate taxes related to the properties acquired and development and redevelopment properties placed into operation during the period ended December 31, 2013; and |
| $3.1 million increase in rental expenses and real estate taxes year over year in our same store portfolio, which was primarily due to increases in property taxes, snow removal, management fees and bad debt expense. |
Other Revenue and Other Income (Loss)
Total other revenue and other income (loss) decreased $0.7 million for the year ended December 31, 2013 as compared to the same period in 2012, primarily due to:
| $1.3 million decrease in institutional capital management fees as a result of a decrease in assets under management due to the sale of properties from our unconsolidated joint ventures; and |
| $0.9 million decrease in casualty gains related to amounts received from insurance companies during 2012 for casualty events at certain properties; partially offset by |
| $1.3 million increase in equity in earnings of unconsolidated joint ventures primarily as a result of an increase in occupancy in three of our joint ventures. |
Other Expenses
Other expenses increased $15.8 million for the year ended December 31, 2013 as compared to the same period in 2012, primarily as a result of:
| $20.0 million increase in depreciation and amortization expense, resulting from real estate acquisitions and capital additions; and |
| $2.2 million increase in general and administrative expenses primarily related to higher acquisition costs and personnel costs, partially offset by an increase in capitalized overhead as a result of increased development, leasing and other capital activities; partially offset by |
| $5.9 million decrease in interest expense as a result of the $175.0 million term loan paid down in March 2013, lower borrowings on our revolving line of credit, hedging ineffectiveness of $0.7 million during 2012 and an increase in capitalized interest in 2013 related to increased development activities. |
Income from Discontinued Operations
Income from discontinued operations increased $14.9 million for the year ended December 31, 2013 as compared to the same period in 2012. This increase is primarily related to the gain on dispositions totaling $33.6 million partially offset by impairment charges of $13.3 million recorded on sales of properties during 2013, as
51
compared to gain on dispositions totaling $13.4 million partially offset by impairment charges of $11.4 million recorded on sales of properties during 2012. Additionally, the increase was offset by lower operating and other income from properties sold or held for sale in 2013 compared to 2012.
Summary of the year ended December 31, 2012 compared to the year ended December 31, 2011
As of December 31, 2012, we consolidated 399 operating properties, four redevelopment properties, three development properties and three properties which were held for sale. As of December 31, 2011, we consolidated 408 operating properties and one redevelopment property.
52
Comparison of the year ended December 31, 2012 to the year ended December 31, 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 year ended December 31, 2012 compared to the year ended December 31, 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 operations had been stabilized. We generally consider buildings stabilized when occupancy reaches 90%. The same store portfolio for the periods presented totaled 288 buildings comprised of approximately 44.6 million square feet. A discussion of these changes follows the table (in thousands):
Year Ended December 31, |
$ Change | Percent Change |
||||||||||||||
2012 | 2011 | |||||||||||||||
Rental Revenues |
||||||||||||||||
Same store, excluding revenues related to early lease terminations |
$ | 203,850 | $ | 199,023 | $ | 4,827 | 2.4 | % | ||||||||
Non-same store operating properties |
32,252 | 11,899 | 20,353 | 171.0 | % | |||||||||||
Development and redevelopment |
185 | | 185 | 100.0 | % | |||||||||||
Revenues related to early lease terminations |
552 | 614 | (62 | ) | -10.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total rental revenues |
236,839 | 211,536 | 25,303 | 12.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Rental Expenses and Real Estate Taxes |
||||||||||||||||
Same store |
57,486 | 57,344 | 142 | 0.2 | % | |||||||||||
Non-same store operating properties |
8,672 | 3,882 | 4,790 | 123.4 | % | |||||||||||
Development and redevelopment |
232 | 141 | 91 | 64.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total rental expenses and real estate taxes |
66,390 | 61,367 | 5,023 | 8.2 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Property Net Operating Income(1) |
||||||||||||||||
Same store, excluding revenues related to early lease terminations |
146,364 | 141,679 | 4,685 | 3.3 | % | |||||||||||
Non-same store operating properties |
23,580 | 8,017 | 15,563 | 194.1 | % | |||||||||||
Development and redevelopment |
(47 | ) | (141 | ) | 94 | 66.7 | % | |||||||||
Revenues related to early lease terminations |
552 | 614 | (62 | ) | -10.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total property net operating income |
170,449 | 150,169 | 20,280 | 13.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Revenue and Other Income (Loss) |
||||||||||||||||
Development profit |
307 | | 307 | 100.0 | % | |||||||||||
Institutional capital management and other fees |
4,059 | 4,291 | (232 | ) | -5.4 | % | ||||||||||
Equity in earnings (loss) of unconsolidated joint ventures, net |
1,087 | (2,556 | ) | 3,643 | 142.5 | % | ||||||||||
Interest and other income (expense) |
85 | (93 | ) | 178 | 191.4 | % | ||||||||||
Casualty and involuntary conversion gain |
1,174 | | 1,174 | 100.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other revenue and other income |
6,712 | 1,642 | 5,070 | 308.8 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Expenses |
||||||||||||||||
Real estate related depreciation and amortization |
109,993 | 103,333 | 6,660 | 6.4 | % | |||||||||||
Interest expense |
69,274 | 63,645 | 5,629 | 8.8 | % | |||||||||||
General and administrative |
25,763 | 25,251 | 512 | 2.0 | % | |||||||||||
Impairment losses on investments in unconsolidated joint ventures |
| 1,953 | (1,953 | ) | -100.0 | % | ||||||||||
Income tax expense and other taxes |
671 | 132 | 539 | 408.3 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
205,701 | 194,314 | 11,387 | 5.9 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations |
11,800 | 13,660 | (1,860 | ) | -13.6 | % | ||||||||||
Net loss attributable to noncontrolling interests |
272 | 958 | (686 | ) | -71.6 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to OP Unitholders |
$ | (16,468 | ) | $ | (27,885 | ) | $ | 11,417 | 40.9 | % | ||||||
|
|
|
|
|
|
|
|
(1) | For a discussion as to why we view property net operating income to be an appropriate supplemental performance measure and a reconciliation of our property net operating income to our reported Loss from Continuing Operations, see Selected Consolidated Financial Data |
53
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 $25.3 million for the year ended December 31, 2012 compared to the same period in 2011, primarily due to the following changes:
| $20.5 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 year over year. Since December 31, 2011, we acquired 29 operating properties, four redevelopment properties and completed development or redevelopment of three properties. |
| $4.8 million increase in total revenue in our same store portfolio due primarily to the following: |
| $4.8 million increase in base rent primarily resulting from increased rental rates and a 140 basis point increase in average occupancy year over year; and |
| $3.5 million increase in operating expense recoveries related to a higher average occupancy; which was partially offset by |
| $3.2 million decrease in straight-line rental revenue as a result of fewer rent concessions; and |
| $0.2 million decrease in early lease termination fees. |
The following table illustrates the components of our consolidated rental revenues for the years ended December 31, 2012 and 2011 (in thousands):
Year Ended December 31, |
||||||||||||
2012 | 2011 | $ Change | ||||||||||
Base rent |
$ | 176,798 | $ | 157,885 | $ | 18,913 | ||||||
Straight-line rent |
6,254 | 8,301 | (2,047 | ) | ||||||||
Amortization of above and below market rent intangibles |
826 | 387 | 439 | |||||||||
Tenant recovery income |
51,695 | 43,579 | 8,116 | |||||||||
Other rental income |
714 | 770 | (56 | ) | ||||||||
Revenues related to early lease terminations |
552 | 614 | (62 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total rental revenues |
$ | 236,839 | $ | 211,536 | $ | 25,303 | ||||||
|
|
|
|
|
|
The following table provides a summary of our leasing activity for the year ended December 31, 2012:
Number of Leases Signed |
Square Feet Signed(1) |
Net Effective Rent Per Square Foot(2) |
GAAP Basis Rent Growth(3) |
Weighted Average Lease Term(4) |
Turnover Costs Per Square Foot(5) |
Weighted Average Retention(6) |
||||||||||||||||||||||
(in thousands) | (in months) | |||||||||||||||||||||||||||
Year to date 2012 |
305 | 15,492 | $ | 3.81 | 4.60 | % | 56 | $ | 1.83 | 73.4 | % |
(1) | Excludes 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 an annual ratio of the change in net effective rent (including straight-line rent adjustments as required by GAAP) compared to the net effective rent of the comparable lease. Leases where there were no prior comparable leases, due to extended downtime, or materially different lease structures and short-term lease of less than 12 months, are excluded. |
(4) | The lease term is in months. Assumes no exercise of lease renewal options, if any. |
54
(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 percentage of customers renewing their respective leases weighted by average square feet. |
Rental Expenses and Real Estate Taxes
Rental expenses and real estate taxes increased $5.0 million for the year ended December 31, 2012 compared to the same period in 2011, primarily due to a $4.9 million increase in rental expenses and real estate taxes related to the properties acquired and development and redevelopment properties placed into operation during the period.
Other Revenue and Other Income (Loss)
Total other revenue and other income (loss) increased $5.1 million for the year ended December 31, 2012 as compared to the same period in 2011, primarily due to:
| $3.6 million increase in equity in earnings (loss) of unconsolidated joint ventures primarily as a result of an increase in occupancy in two of our joint ventures, as well as gains recognized on the sale of two properties in our joint ventures; and |
| $1.2 million increase in casualty gains related to amounts received from insurance companies subsequent to December 31, 2012 for casualty events at certain properties. |
Other Expenses
Other expenses increased $11.4 million for the year ended December 31, 2012 as compared to the same period in 2011, primarily as a result of:
| $6.7 million increase in real estate depreciation and amortization expense resulting from real estate acquisitions and capital additions; |
| $5.6 million increase in interest expense primarily related to higher average borrowings and $0.7 million related to hedge ineffectiveness recognized during the year ended December 31, 2012 related to our settled hedge liability (see Notes to the Consolidated Financial Statements Note 6Financial Instruments and Hedging Activities for further detail related to the hedge activity); and |
| $0.5 million increase in general and administrative expenses, primarily related to an increase in acquisition costs for the increased number of properties acquired during 2012; which were partially offset by |
| $2.0 million decrease in impairment losses on unconsolidated joint ventures related to an impairment recorded in 2011 on a property sold in an unconsolidated joint venture. |
Income from Discontinued Operations
Income from discontinued operations decreased $1.9 million for the year ended December 31, 2012 as compared the same period in 2011. This change is primarily the result of a casualty gain recorded in 2011 on a property subsequently sold as well as higher net gains on properties sold in 2011.
Segment Summary for the years ended December 31, 2013, 2012 and 2011
Our segments are based on our internal reporting of operating results used to assess performance based on our properties geographical markets. Our markets are aggregated into three reportable regions or segments, East, Central and West, which are based on the geographical locations of our properties (see Business and Properties for a listing of our properties by market broken into our reportable segments). We consider rental
55
revenues and property net operating income aggregated by segment to be the appropriate way to analyze performance. Certain reclassifications have been made to prior year results to conform to the current presentation related to discontinued operations. The following segment disclosures exclude the results from discontinued operations (see Notes to the Consolidated Financial Statements, Note 15 Discontinued Operations and Assets Held for Sale for additional information):
Year Ended December 31, |
||||||||||||||||||||||||
As of December 31, | ||||||||||||||||||||||||
Number of buildings |
Square feet |
Occupancy at period end |
Segment assets(1) |
Rental revenues(2) |
Property net operating income (3) |
|||||||||||||||||||
EAST: |
||||||||||||||||||||||||
2013 |
132 | 23,163 | 90.3 | % | $ | 1,026,416 | $ | 95,682 | $ | 69,853 | ||||||||||||||
2012 |
117 | 19,651 | 86.0 | % | $ | 875,845 | $ | 82,909 | $ | 60,666 | ||||||||||||||
2011 |
110 | 18,970 | 89.0 | % | $ | 936,305 | $ | 79,920 | $ | 58,212 | ||||||||||||||
CENTRAL: |
||||||||||||||||||||||||
2013 |
166 | 26,699 | 92.2 | % | $ | 1,034,814 | $ | 111,017 | $ | 76,327 | ||||||||||||||
2012 |
151 | 23,663 | 90.8 | % | $ | 1,107,561 | $ | 90,037 | $ | 61,800 | ||||||||||||||
2011 |
137 | 20,367 | 90.7 | % | $ | 1,021,956 | $ | 76,376 | $ | 50,660 | ||||||||||||||
WEST: |
||||||||||||||||||||||||
2013 |
101 | 13,088 | 93.6 | % | $ | 1,018,246 | $ | 79,519 | $ | 60,013 | ||||||||||||||
2012 |
90 | 11,456 | 97.2 | % | $ | 863,003 | $ | 63,893 | $ | 47,983 | ||||||||||||||
2011 |
78 | 10,042 | 91.3 | % | $ | 669,591 | $ | 55,240 | $ | 41,297 |
(1) | Segment assets include all assets comprising operating properties included in a segment, less non-segment cash and cash equivalents, other non-segment assets, and assets held for sale. The prior year segment assets are not restated for current year discontinued operations. |
(2) | Segment rental revenues include operating properties and development properties. Revenues from properties which were held for sale or sold are included in discontinued operations and are not included in these results. |
(3) | For a discussion as to why we view property net operating income to be an appropriate supplemental performance measure and a reconciliation of our property net operating income to our reported Loss from Continuing Operations, see Selected Consolidated Financial Data. |
The following table reflects our total assets, net of accumulated depreciation and amortization, by segment (in thousands):
December 31, | December 31, | December 31, | ||||||||||
2013 | 2012 | 2011 | ||||||||||
Segments: |
||||||||||||
East assets |
$ | 1,026,416 | $ | 875,845 | $ | 936,305 | ||||||
Central assets |
1,034,814 | 1,107,561 | 1,021,956 | |||||||||
West assets |
1,018,246 | 863,003 | 669,591 | |||||||||
|
|
|
|
|
|
|||||||
Total segment net assets |
3,079,476 | 2,846,409 | 2,627,852 | |||||||||
Non-segment assets: |
||||||||||||
Non-segment cash and cash equivalents |
25,671 | 8,653 | 11,624 | |||||||||
Other non-segment assets(1) |
152,620 | 149,285 | 153,822 | |||||||||
Assets held for sale |
8,196 | 52,852 | | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 3,265,963 | $ | 3,057,199 | $ | 2,793,298 | ||||||
|
|
|
|
|
|
(1) | Other non-segment assets primarily consists of investments in and advances to unconsolidated joint ventures, deferred loan costs, other receivables and other assets. |
56
East Segment
| East Segment assets increased by approximately $150.6 million in 2013 due to the acquisition of 13 properties and completion of development of two operating properties since December 31, 2012. |
| East Segment assets decreased by approximately $60.5 million in 2012 due to the disposition of 20 properties, partially offset by the acquisition of seven properties and the completion of the development of two properties since December 31, 2011. |
| East Segment property NOI, after reclassification for discontinued operations, increased approximately $9.2 million, for the year ended December 31, 2013 as compared to the same period in 2012 primarily as a result of: |
| $12.8 million increase in rental revenues, of which $6.7 million is attributed to property acquisitions and $6.1 million is attributed to increased occupancy and higher rental revenues at existing properties; which was partially offset by |
| $3.6 million increase in operating expenses primarily comprised of increased property taxes, property insurance and maintenance. |
| East Segment property NOI, after reclassification for discontinued operations, increased approximately $2.5 million, for the year ended December 31, 2012 as compared to the same period in 2011 primarily as a result of: |
| $3.0 million increase in rental revenues, of which $0.9 million is attributed to property acquisitions and $2.1 million is attributed to increased occupancy and higher rental revenues at existing properties; which was partially offset by |
| $0.5 million increase in operating expenses primarily comprised of increased property taxes, property insurance and maintenance primarily due to property acquisitions. |
Central Segment
| Central Segment assets decreased by approximately $72.7 million in 2013 due to the disposition of 47 properties, including the disposition of our entire portfolio in Mexico consisting of 15 properties, partially offset by the acquisition of 14 properties and completion of development of one property since December 31, 2012. |
| Central Segment assets increased by approximately $85.6 million in 2012 due to the acquisition of 12 properties and completion of development of one property, partially offset by the disposition of 16 properties since December 31, 2011. |
| Central Segment property NOI, after reclassification for discontinued operations, increased approximately $14.5 million, for the year ended December 31, 2013 as compared to the same period in 2012 primarily as a result of: |
| $21.0 million increase in rental revenues, of which $3.7 million is attributed to property acquisitions and $17.3 million is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $6.5 million increase in operating expenses primarily comprised of increased property taxes, property insurance primarily due to property acquisitions and an increase in bad debt related to a tenant default. |
57
| Central Segment property NOI, after reclassification for discontinued operations, increased approximately $11.1 million, for the year ended December 31, 2012 as compared to the same period in 2011 primarily as a result of: |
| $13.7 million increase in rental revenues, of which $3.7 million is attributed to property acquisitions and $10.0 million is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $2.6 million increase in operating expenses primarily comprised of increased property taxes and property insurance primarily due to property acquisitions. |
West Segment
| West Segment assets increased by approximately $155.2 million in 2013 due to the acquisition of 11 properties and completion of development of one property, partially offset by the disposition of one property since December 31, 2012. |
| West Segment assets increased by approximately $193.4 million in 2012 due to the acquisition of 12 properties since December 31, 2011. |
| West Segment property NOI, after reclassification for discontinued operations, increased approximately $12.0 million, for the year ended December 31, 2013 as compared to the same period in 2012 primarily as a result of: |
| $15.6 million increase in rental revenues, of which $2.9 million is attributed to property acquisitions and $12.7 million which is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $3.6 million increase in operating expenses primarily comprised of increased property taxes and property insurance. |
| West Segment property NOI, after reclassification for discontinued operations, increased approximately $6.7 million, for the year ended December 31, 2012 as compared to the same period in 2011 primarily as a result of: |
| $8.7 million increase in rental revenues, of which $2.2 million is attributed to property acquisitions and $6.5 million is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $2.0 million increase in operating expenses primarily comprised of increased property taxes and property insurance. |
Liquidity and Capital Resources
Overview
We currently expect that our principal sources of working capital and funding for potential capital requirements for expansions and renovation of properties, developments, acquisitions, and debt service and distributions to shareholders will include:
| Cash flows from operations; |
| Proceeds from dispositions; |
| Borrowings under our senior unsecured revolving credit facility; |
| Other forms of secured or unsecured financings; |
| Offerings of common stock or other securities; |
| Current cash balances; and |
| Distributions from institutional capital management and other joint ventures. |
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Our sources of capital will be used to meet our liquidity requirements and capital commitments, including operating activities, debt service obligations, equityholder distributions, capital expenditures at our properties, development funding requirements and future acquisitions. We expect to utilize the same sources of capital to meet our short-term and long-term liquidity requirements.
Cash Flows
Year ended December 31, 2013 compared to year ended December 31, 2012
Cash and cash equivalents were $32.2 million and $12.7 million as of December 31, 2013 and December 31, 2012, respectively.
The table below summarizes our cash flow activity for the years ended December 31, 2013 and 2012 (in thousands):
Year Ended December 31, |
||||||||||||
2013 | 2012 | Change | ||||||||||
Net cash provided by operating activities |
$ | 152,893 | $ | 118,956 | $ | 33,937 | ||||||
Net cash used in investing activities |
$ | (301,058 | ) | $ | (299,138 | ) | $ | (1,920 | ) | |||
Net cash provided by financing activities |
$ | 167,695 | $ | 180,044 | $ | (12,349 | ) |
Net cash provided by operating activities increased $33.9 million primarily due to an increase in property net operating income, as a result of an increase in occupancy and rental rates (see Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsRental Revenues and Leasing Activity for further details), and an increase in accounts payable, accrued expenses and other liabilities, and a decrease in straight-line rent due to fewer rent concessions.
Net cash used in investing activities increased $1.9 million primarily due to an increase in real estate acquisitions of $42.7 million, a $20.7 million decrease in distributions of investments in unconsolidated joint ventures resulting from the sale of three properties in our unconsolidated joint ventures in 2012 and an increase of cash outflows related to capital expenditures of $56.8 million as reflected in the table below. These activities were partially offset by an increase in dispositions of $104.5 million and a decrease in investments in unconsolidated joint ventures of $16.7 million.
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Going forward, we will pursue the acquisition of buildings and land and consider selective development of new buildings in markets where we perceive that demand and market rental rates will provide attractive financial returns. The amount of cash used related to acquisitions and development and redevelopment investments will vary from period to period based on a number of factors, including, among others, current and anticipated future market conditions impacting the desirability of investments, leasing results with respect to our existing development and redevelopment projects and our ability to locate attractive opportunities. See Managements Discussion and Analysis of Financial Condition and Results of OperationsSummary of Significant Transactions During 2013Development Activities for further details regarding projected investment of our current development activities as well as cumulative costs incurred during the year ended December 31, 2013. Our total capital expenditures for the years ended December 31, 2013 and 2012 were comprised of the following (in thousands):
Year Ended December 31, |
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2013 | 2012 | $ Change | ||||||||||
Development |
$ | 107,950 | $ | 46,701 | $ | 61,249 | ||||||
Redevelopment |
5,948 | 3,319 | 2,629 | |||||||||
Due diligence and other |
9,209 | 4,782 | 4,427 | |||||||||
Other capital improvements |
4,024 | 5,710 | (1,686 | ) | ||||||||
Building and land improvements |
12,394 | 12,619 | (225 | ) | ||||||||
Tenant improvements and leasing costs |
26,219 | 31,388 | (5,169 | ) | ||||||||
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Total capital expenditures and development activities |
165,744 | 104,519 | 61,225 | |||||||||
Accruals and other adjustments |
(12,822 | ) | (8,424 | ) | (4,398 | ) | ||||||
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Total cash paid for capital expenditures and development activities |
$ | 152,922 | $ | 96,095 | $ | 56,827 | ||||||
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We capitalize costs directly related to the development, predevelopment, redevelopment or improvement of our investments in real estate. Building and land improvements comprise capital expenditures related to maintaining our consolidated operating activities. Due diligence capital improvements relate to acquired operating properties and are generally incurred within 12 months of the acquisition date.
We capitalize indirect costs such as personnel, office and administrative expenses that are directly related to our development, redevelopment projects and successful origination of new leases based on an estimate of the time spent on the development and leasing activities. These capitalized costs for the years ended December 31, 2013, 2012 and 2011 were $7.8 million, $6.3 million and $5.0 million, respectively. During the year ended December 31, 2013, 2012 and 2011 total interest expense capitalized was $8.3 million, $4.3 million and $2.7 million, respectively.
Net cash provided by financing activities decreased $12.3 million primarily due to a decrease of $125.2 million in net proceeds from debt activity. During 2013, our senior unsecured revolving credit facilitys repayments exceeded our proceeds from borrowings by $71.0 million while in 2012 our proceeds from borrowings exceeded our repayments by $110.0 million. Proceeds from senior unsecured notes exceeded repayments of senior unsecured notes by $97.4 million and $90.0 million, respectively, during 2013 and 2012. Principal payments on mortgage notes exceeded proceeds from mortgage notes by $24.2 million and $72.7 million, respectively, during 2013 and 2012.
Additionally, net cash provided by financing activities decreased due to an increase of $11.4 million in our distributions paid to OP Unitholders and noncontrolling interests. These changes were partially offset by an increase of $87.3 million for the issuance of OP Units in exchange for contributions from the REIT, a $33.6 million payment made to settle our cash flow hedge in 2012 and a $1.8 million decrease in cash outflow relating to redemptions of OP Units.
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Year ended December 31, 2012 compared to year ended December 31, 2011
Cash and cash equivalents were $12.7 million and $12.8 million as of December 31, 2012 and December 31, 2011, respectively.
The table below summarizes our cash flow activity for the years ended December 31, 2012 and 2011 (in thousands):
Year Ended December 31, |
||||||||||||
2012 | 2011 | Change | ||||||||||
Net cash provided by operating activities |
$ | 118,956 | $ | 106,482 | $ | 12,474 | ||||||
Net cash used in investing activities |
$ | (299,138 | ) | $ | (177,823 | ) | $ | (121,315 | ) | |||
Net cash provided by financing activities |
$ | 180,044 | $ | 66,845 | $ | 113,199 |
Net cash provided by operating activities increased $12.5 million primarily due to an increase in property net operating income, partially offset by an increase in net cash payments related to changes in operating assets and liabilities compared to the year ended December 31, 2011.
Net cash used in investing activities increased $121.3 million due to an increase in cash flows related to acquisitions of $159.1 million and an increase of cash outflows related to capital expenditures, as reflected in the table below, of $20.5 million, partially offset by a $47.3 million increase in proceeds from dispositions and a $9.9 million increase in distributions of our investments in unconsolidated joint ventures.
Our total capital expenditures for the years ended December 31, 2012 and 2011 were comprised of the following (in thousands):
Year Ended December 31, |
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2012 | 2011 | $ Change | ||||||||||
Development |
$ | 46,701 | $ | 11,676 | $ | 35,025 | ||||||
Redevelopment |
3,319 | 6,430 | (3,111 | ) | ||||||||
Due diligence and other |
4,782 | 1,264 | 3,518 | |||||||||
Other capital improvements |
5,710 | | 5,710 | |||||||||
Building and land improvements |
12,619 | 11,601 | 1,018 | |||||||||
Tenant improvements and leasing costs |
31,388 | 39,256 | (7,868 | ) | ||||||||
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Total capital expenditures and development activities |
104,519 | 70,227 | 34,292 | |||||||||
Accruals and other adjustments |
(8,424 | ) | 5,324 | (13,748 | ) | |||||||
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Total cash paid for capital expenditures and development activities |
$ | 96,095 | $ | 75,551 | $ | 20,544 | ||||||
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Net cash provided by financing activities increased $113.2 million primarily due to an increase of $92.2 million in net proceeds from debt activity. During 2012, our senior unsecured revolving credit facilitys proceeds from borrowings exceeded our repayments by $110.0 million while in 2011 our repayments exceeded our proceeds from borrowings by $51.0 million. Proceeds from senior unsecured notes exceeded repayments of senior unsecured notes by $90.0 million and $200.0 million, respectively, during 2012 and 2011. Principal payments on mortgage notes exceeded proceeds from mortgage notes by $72.7 million and $113.9 million, respectively, during 2012 and 2011.
Additionally, net cash provided by financing activities increased due to an increase of $59.7 million for the issuance of OP Units in exchange for contributions from the REIT, partially offset by a $33.6 million payment made to settle our cash flow hedge in 2012, an increase of $3.3 million in our distributions paid to OP Unitholders and noncontrolling interests, and a $2.9 million increase in cash outflow relating to redemptions of OP Units.
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OP Units
Limited partners have the right to require DCTOP to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in DCTOPs partnership agreement), provided that such OP Units have been outstanding for at least one year. DCT may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Shares Amount (generally one share of DCTs common stock for each OP Unit), as defined in DCTOPs partnership agreement.
During the year ended December 31, 2013 and 2012, 3.1 million and 6.2 million OP Units were redeemed for approximately $1.5 million and $3.3 million in cash and approximately 2.9 million and 5.7 million shares of DCT common stock, respectively. As of December 31, 2013 and 2012 the aggregate redemption value of the then-outstanding OP Units held by limited partners was approximately $125.9 million and $129.6 million, respectively, based on the $7.13 and $6.49 per share closing price of DCTs common stock on December 31, 2013 and 2012, respectively.
On May 29, 2013, DCT registered a third continuous equity offering program, to replace its continuous equity offering program previously registered on November 20, 2012. Pursuant to this offering, DCT may sell up to 20 million shares of common stock from time-to-time through May 29, 2016 in at-the-market offerings or certain other transactions. During the year ended December 31, 2013, approximately 13.8 million shares were issued through the second and third continuous equity offering programs at an average price of $7.37 per share for proceeds of $100.4 million, net of offering expenses. As of December 31, 2013, 16.6 million shares remain available to be issued under the current offering.
On August 13, 2013, DCT issued 23.0 million shares of common stock in a public offering at a price of $7.20 per share for proceeds of $158.2 million, net of offering expenses, used for acquisitions, development activities, repayment of amounts under our senior unsecured revolving credit facility and other general purposes. The proceeds from the sale of shares were contributed to DCTOP in exchange for an equal number of OP Units in DCTOP.
Distributions
During the years ended December 31, 2013 and 2012, the general partner declared distributions to OP Unit holders totaling approximately $92.1 million and $80.2 million, respectively, including distributions to noncontrolling interest holders. Existing cash balances, cash provided from operations and borrowings under our credit facility were used for distributions paid during 2013 and 2012.
The payment of quarterly distributions is determined by DCTs board of directors and may be adjusted at its discretion at any time. During February 2014, DCTs board of directors declared a quarterly cash distribution of $0.07 per OP Unit, payable on April 16, 2014 to OP Unitholders of record as of April 4, 2014.
Outstanding Indebtedness
As of December 31, 2013, our outstanding indebtedness of approximately $1.5 billion consisted of mortgage notes, senior unsecured notes and a senior unsecured revolving credit facility, excluding $44.4 million representing our proportionate share of debt associated with unconsolidated joint ventures. As of December 31, 2012, our outstanding indebtedness consisted of mortgage notes and senior unsecured notes and totaled approximately $1.5 billion, excluding $45.0 million representing our proportionate share of debt associated with unconsolidated joint ventures.
As of December 31, 2013, the gross book value of our consolidated properties was approximately $3.7 billion and the gross book value of all properties securing our mortgage debt was approximately $0.7 billion. As
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of December 31, 2012, the total gross book value of our consolidated properties was approximately $3.4 billion and the gross book value of all properties securing our mortgage debt was approximately $0.7 billion. Our debt has various covenants with which we were in compliance as of December 31, 2013 and 2012.
Our debt instruments require monthly, quarterly or semiannual payments of interest and many require monthly or quarterly repayments of principal. Currently, cash flows from our operations are sufficient to satisfy these debt service requirements and we anticipate that cash flows from operations will continue to be sufficient to satisfy our debt service excluding principal maturities, which we plan to fund from refinancing and/or new debt.
All of our senior unsecured notes contain certain cross-default provisions which may be triggered in the event that any material indebtedness is in default. These cross-default provisions may require us to repay such senior unsecured debt. We are not in default and do not have any unsecured debt maturities through December 31, 2014.
We have certain non-recourse, secured loans which are cross-collateralized by multiple properties. In the event of a default, we may then be required to repay such indebtedness, together with applicable prepayment charges, to avoid foreclosure on all cross-collateralized properties within the applicable pool. We generally have broad substitution rights that afford an operating property the opportunity to replace encumbered properties with replacement properties. We are not in default and do not have any cross-collateralized debt maturing through December 31, 2014.
In the event of default or foreclosure, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.
Financing Strategy
Our charter and our bylaws do not limit the amount of debt we incur, however, we intend to operate so that our financial metrics are generally consistent with our publicly held investment grade REIT peers. The metrics we consider most significant include leverage, fixed charge coverage and net debt to earnings before interest, taxes, depreciation and amortization. We are also subject to certain covenants which may limit our outstanding indebtedness.
Debt Issuances
During June of 2013, we issued two secured mortgage notes with principal balances of $1.0 million and $6.2 million which mature in June 2023. The notes bear interest at a variable rate, however we have fixed the rate at 4.72% using two variable for floating rate swaps (See Note 6 Financial Instruments and Hedging Activities for further detail). The notes require monthly payments of principal and interest.
During October 2013, we issued $275.0 million aggregate principal amount of 4.50% senior notes due 2023 at 99.038% of face value in a private placement for net proceeds of approximately $269.6 million after offering costs.
Debt Retirement
During March and April 2013, we retired mortgage notes totaling $11.0 million previously scheduled to mature in April and June of 2013, using proceeds from the Companys senior unsecured revolving credit facility and proceeds from our equity offerings.
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During October 2013, in connection with the issuance of $275.0 million in aggregate principal amount of 10-year senior unsecured notes at 99.038% of face value, we primarily used the net proceeds to repay a $15.9 million mortgage note that was scheduled to mature in October 2013, a $50.0 million senior unsecured note that was scheduled to mature in January of 2014 and our $175.0 million senior unsecured term note that was scheduled to mature in February 2015.
Line of Credit
As of December 31, 2013, we had $39.0 million outstanding and $261.0 million available under our senior unsecured revolving credit facility. As of December 31, 2012 we had $110.0 million outstanding and $190.0 million available under the senior unsecured revolving credit facility.
2013 Debt Refinancing
During February 2013, we entered into an amendment with our syndicated bank group whereby we extended and increased our existing $175.0 million senior unsecured term loan to $225.0 million for a period of five years, extended our existing $300.0 million senior unsecured line of credit for a period of four years and received a commitment for an additional $175.0 million senior unsecured term loan with a term of two years. We closed on the additional $175.0 million in March 2013, which was used to refinance a scheduled June 2013 maturity of $175.0 million of other senior unsecured debt.
Interest rate swap
During June 2013 certain of our consolidated investments entered into two pay-fixed, receive-floating interest rate swaps to hedge the variability of future cash flows attributable to changes in the 1 month LIBOR rates. The first pay-fixed, receive-floating swap has a notional amount of $6.2 million, an effective date of June 2013 and a maturity date of June 2023. The second pay-fixed, receive-floating swap has a notional amount of $1.0 million, an effective date of June 2013 and a maturity date of June 2023. These interest rates swaps effectively fix the interest rate on the related debt instruments at 4.72%. As of December 31, 2012, we did not have any hedges in place.
Debt Maturities
The following table sets forth the scheduled maturities of our debt and regularly scheduled principal amortization, excluding unamortized premiums, as of December 31, 2013 (in thousands):
Year |
Senior Unsecured Notes |
Mortgage Notes |
Senior Unsecured Revolving Credit Facility |
Total | ||||||||||||
2014 |
$ | | $ | 10,927 | $ | | $ | 10,927 | ||||||||
2015 |
40,000 | 49,982 | | 89,982 | ||||||||||||
2016 |
99,000 | 61,184 | | 160,184 | ||||||||||||
2017 |
51,000 | 11,768 | 39,000 | 101,768 | ||||||||||||
2018 |
306,500 | 6,412 | | 312,912 | ||||||||||||
Thereafter |
628,500 | 145,448 | | 773,948 | ||||||||||||
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Total |
$ | 1,125,000 | $ | 285,721 | $ | 39,000 | $ | 1,449,721 | ||||||||
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Contractual Obligations
The following table reflects our contractual obligations as of December 31, 2013, specifically our obligations under long-term debt agreements and operating and ground lease agreements (in thousands):
Payments due by Period | ||||||||||||||||||||
Contractual Obligations (1) |
Total |
2014 |
2015-2016 |
2017-2018 |
Thereafter |
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Scheduled long-term debt maturities, including interest(2) |
$ | 1,850,893 | $ | 77,355 | $ | 638,252 | $ | 240,373 | $ | 894,913 | ||||||||||
Operating lease commitments |
2,713 | 941 | 1,608 | 164 | | |||||||||||||||
Ground lease commitments(3) |
12,968 | 509 | 1,123 | 1,102 | 10,234 | |||||||||||||||
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Total |
$ | 1,866,574 | $ | 78,805 | $ | 640,983 | $ | 241,639 | $ | 905,147 | ||||||||||
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(1) | From time-to-time in the normal course of our business, we enter into various contracts with third-parties that may obligate us to make payments, such as maintenance agreements at our properties. Such contracts, in the aggregate, do not represent material obligations, are typically short-term and cancellable within 90 days and are not included in the table above. Excluded from the total are our estimated construction costs to complete development projects of approximately $87.5 million, none of which is legally committed until work is completed |
(2) | Variable interest rate payments are estimated based on the LIBOR rate at December 31, 2013. |
(3) | Three of our buildings comprising 0.7 million square feet reside on 38 acres of land which is leased from an airport authority. |
Off-Balance Sheet Arrangements
As of December 31, 2013 and 2012, we had no off-balance sheet arrangements, other than those disclosed under contractual obligations, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, other than items discussed herein.
As of December 31, 2013, there are no lines of credit or side agreements related to, or between, our unconsolidated joint ventures and us, and there are no other derivative financial instruments between our unconsolidated joint ventures and us. In addition, we believe we have no material exposure to financial guarantees.
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As of December 31, 2013, our proportionate share of the total construction loans of our unconsolidated development joint ventures, including undrawn amounts, was $36.8 million all of which is scheduled to mature by the end of 2017. Our proportionate share of the total construction loans of our unconsolidated development joint ventures includes 50% of the construction loans associated with the SCLA joint venture which are non-recourse to the venture partners. We may elect to fund additional capital to a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such fundings are not required contractually or otherwise. As of December 31, 2013, our proportionate share of non-recourse debt associated with unconsolidated joint ventures is $44.4 million. The maturities of our proportionate share of the non-recourse debt are summarized in the table below (in thousands):
Year |
DCTs Proportionate Share of Secured Non-Recourse Debt in Unconsolidated Joint Ventures |
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2014 |
$ | 4,513 | ||
2015 |
2,223 | |||
2016 |
830 | |||
2017 |
36,805 | |||
2018 |
| |||
Thereafter |
| |||
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Total |
$ | 44,371 | ||
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to losses resulting from changes in market prices such as interest rates, foreign currency exchange rates and rental rates. Our future earnings and cash flows are dependent upon prevailing market rates. Accordingly, we manage our market risk by matching projected cash inflows from operating, investing and financing activities with projected cash outflows for debt service, acquisitions, capital expenditures, distributions to stockholders and OP unitholders, and other cash requirements. The majority of our outstanding debt has fixed interest rates, which minimizes the risk of fluctuating interest rates.
Interest Rate Risk
Our exposure to market risk includes interest rate fluctuations in connection with our senior unsecured revolving credit facility and other variable rate borrowings and forecasted fixed rate debt issuances, including refinancing of existing fixed rate debt. Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. To manage interest rate risk for variable rate debt and issuances of fixed rate debt, in the past we have primarily used treasury locks and forward-starting swaps as part of our cash flow hedging strategy. These derivatives are designed to mitigate the risk of future interest rate increases by providing a fixed interest rate for a limited, pre-determined period of time. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors.
During June 2013 certain of our consolidated investments entered into two pay-fixed, receive-floating interest rate swaps to hedge the variability of future cash flows attributable to changes in the 1 month LIBOR rates. The first pay-fixed, receive-floating swap has a notional amount of $6.2 million, an effective date of June 2013 and a maturity date of June 2023. The second pay-fixed, receive-floating swap has a notional amount of $1.0 million, an effective date of June 2013 and a maturity date of June 2023. These interest rates swaps effectively fix the interest rate on the related debt instruments at 4.72%. As of December 31, 2012, we did not have any hedges in place.
Our variable rate debt is subject to risk based upon prevailing market interest rates. As of December 31, 2013, we had approximately $264.0 million of variable rate debt outstanding indexed to LIBOR rates. If the LIBOR rates relevant to our variable rate debt were to increase 10%, we estimate that our interest expense during the year ended December 31, 2013 would increase by approximately $0.1 million based on our average outstanding floating-rate debt during the year ended December 31, 2013. Additionally, if weighted average interest rates on our fixed rate debt were to have increased by 100 basis points due to refinancing, interest expense would have increased by approximately $11.1 million during the year ended December 31, 2013.
As of December 31, 2013, the estimated fair value of our debt was approximately $1.5 billion based on our estimate of the then-current market interest rates.
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BUSINESS AND PROPERTIES
Business Overview
Our portfolio primarily consists of high-quality, bulk distribution warehouses and light industrial properties. The properties we target for acquisition or development are generally characterized by convenient access to major transportation arteries, proximity to densely populated markets and quality design standards that allow our customers efficient and flexible use of the buildings. In the future, we intend to continue focusing on properties that exhibit these characteristics in select U.S. markets where we believe we can achieve favorable returns and leverage our local expertise. We seek to maximize growth in earnings and shareholder 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. In addition, we will recycle our capital by disposing of non-strategic, lower growth assets and reinvesting the proceeds into newly acquired or developed assets where we believe the returns will be more favorable over time.
As of December 31, 2013, we owned interests in approximately 75.5 million square feet of properties leased to approximately 900 customers, including:
| 62.1 million square feet comprising 396 consolidated operating properties, including 0.2 million square feet comprising one consolidated building classified as held for sale, which were 93.3% occupied; |
| 12.3 million square feet comprising 38 unconsolidated properties which were 94.1% occupied and operated on behalf of four institutional capital management partners; |
| 0.2 million square feet comprising two consolidated properties under redevelopment; and |
| 0.9 million square feet comprising two consolidated buildings which are shell-complete and in lease-up and eight land sites under construction. |
As of December 31, 2013, our total consolidated portfolio consisted of 400 properties with an average size of 158,000 square feet and an average age of 21 years.
During the year ended December 31, 2013, we acquired 38 buildings. These properties were acquired for a total purchase price of $359.5 million.
During the year ended December 31, 2013, we sold 51 operating properties to third-parties for gross proceeds of approximately $265.8 million. We recognized gains of approximately $33.6 million on the disposition of 36 operating properties and recognized an impairment loss of approximately $13.3 million on the disposition of a portfolio of 15 properties in Dallas.
We have a broadly diversified customer base. As of December 31, 2013, our consolidated properties had leases with approximately 900 customers with no single customer accounting for more than 2.3% of the total annualized base rent of our properties. Our ten largest customers occupy approximately 10.0% of our consolidated properties based on square footage and account for approximately 12.1% of the annualized base rent of these properties. We believe that our broad national presence in the top U.S. distribution markets provides geographic diversity and is attractive to users of distribution space which allows us to build strong relationships with our customers. Furthermore, we are actively engaged in meeting our customers expansion and relocation requirements.
The principal executive offices of DCT Industrial Operating Partnership LP, DCT Industrial Trust Inc., and the subsidiary guarantors are located at 518 Seventeenth Street, Suite 800, Denver, Colorado 80202; our telephone number is (303) 597-2400. We also maintain regional offices in Atlanta, Georgia; Baltimore, Maryland; Chicago, Illinois; Cincinnati, Ohio; Dallas, Texas; Houston, Texas; Paramus, New Jersey; Newport Beach, California; Emeryville, California; Orlando, Florida; and Seattle, Washington. Our website address is www.dctindustrial.com.
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Business Strategy
Our primary business objectives are to maximize long-term growth in Funds From Operations, or FFO per unit (see definition in Selected Consolidated Financial Data), the net asset value of our portfolio and total unitholder return. The strategies we intend to execute to achieve these objectives include:
| Maximizing Cash Flows From Existing Properties. We intend to maximize the cash flows from our existing properties by active leasing and management, maintaining strong customer relationships, controlling operating expenses and physically maintaining the quality of our properties. Renewing tenants, leasing space and effectively managing expenses are critical to achieving our objectives and are a primary focus of our local real estate teams. |
| Profitably Acquiring Properties. We seek to acquire properties that meet our asset, location and financial criteria at prices and potential returns which we believe are attractive. We have selected certain markets and sub-markets where we focus our efforts on identifying buildings to acquire. |
| Selectively Pursuing New Development. To meet current tenant demand, we continue to develop new assets in select markets where rents and vacancy levels demonstrate the need for new construction. During 2013, we acquired five land parcels for future development totaling approximately 128.6 acres. Also during 2013, we stabilized six development buildings totaling 1.6 million square feet and have seven buildings under construction, which are partially leased, totaling approximately 2.7 million square feet. As of December 31, 2013, we also had one build-to-suit for sale building under contract. The buildings under construction, as well as the build-to-suit for sale building, are all projected to be completed in 2014. |
| Recycling Capital. We intend to selectively dispose of non-strategic assets and redeploy the proceeds into higher growth acquisition and development opportunities. In 2013, we sold $265.8 million of non-strategic assets for deployment into higher growth assets. This includes the divestiture of the entire portfolio located in Mexico. |
| Conservatively Managing Our Balance Sheet. We plan to maintain financial metrics, including leverage and coverage ratios on a basis consistent with our investment grade ratings. In addition, we believe that a conservatively managed balance sheet provides for a competitive long-term cost of capital. |
Our Competitive Strengths
We believe that we distinguish ourselves from other owners, operators, acquirers and developers of industrial properties through the following competitive strengths:
| High-Quality Industrial Property Portfolio. Our portfolio of industrial properties primarily consists of high-quality bulk distribution facilities in high volume leasing markets specifically designed to meet the warehousing needs of local, regional and national companies. The majority of our properties are specifically designed for use by major distribution users and are readily divisible to take advantage of re-tenanting opportunities. We believe that our concentration of high-quality bulk distribution properties provides us with a competitive advantage in attracting and retaining distribution users across the markets in which we operate. |
| Experienced and Committed Management Team. Our executive management team collectively has an average of nearly 28 years commercial real estate experience and 17 years of industrial real estate experience. Additionally, our executive management team has extensive public company operating experience. |
| Strong Operating Platform. We have a team of 86 experienced transaction and property management professionals working in 12 regional offices to maximize market opportunities through local expertise, presence and relationships. We believe successfully meeting the needs of our customers and anticipating and responding to market opportunities will result in achieving superior returns from our properties as well as through the sourcing of new acquisitions and development opportunities. |
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| Proven Acquisition and Disposition Capabilities. We have extensive experience in acquiring industrial real estate, including both smaller transactions as well as larger portfolio acquisitions. Our local market teams are an important advantage in sourcing potential marketed as well as off-market transactions. The average size of our acquisitions since 2010 was $14.0 million, demonstrating our ability to access a significant pipeline of smaller acquisitions. Further, consistent with our capital recycling strategy, we have disposed of a cumulative $1.4 billion of real estate investments since inception. |
| Extensive Development and Redevelopment Expertise. Our local market teams have significant experience in all facets of value-add activities including development and redevelopment capabilities. We believe our local teams knowledge of our focus markets and their relationships with key market participants, including land owners, users and brokers, combined with the technical expertise required to successfully execute on complex transactions, provides us with an excellent platform to create value while appropriately managing risk. |
| Strong Industry Relationships. We believe that our extensive network of industry relationships with the brokerage and investor communities will allow us to execute successfully our acquisition, development and capital recycling strategies. These relationships augment our ability to source acquisitions in off-market transactions outside of competitive marketing processes, capitalize on development opportunities and capture repeat business and transaction activity. Our strong relationships with local and nationally focused brokers aids in attracting and retaining customers. |
| Capital Structure. Our capital structure provides us with sufficient financial flexibility and capacity to fund future growth. In addition to successfully raising $258.6 million in net proceeds from equity offerings in 2013, the Company received investment grade ratings from Moodys Investors Service and Standard & Poors Rating Services and issued $275.0 million (aggregate principal amount) of 10-year senior unsecured notes at 99.038% of face value for net proceeds of approximately $269.6 million after expenses. The notes have a fixed interest rate of 4.5%. As of December 31, 2013 we had $261.0 million available under our senior unsecured revolving credit facility and 334 of our consolidated operating properties with a gross book value of $2.8 billion were unencumbered. |
Operating Segments
Our operating results used to assess performance are aggregated into three reportable segments, East, Central and West, which are based on the geographical locations organized into markets by where our management and operating teams conduct and monitor business. We consider rental revenues and property net operating income aggregated by segment to be the appropriate way to analyze performance. See additional information in Properties and Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, Note 14Segment Information.
Competition
The market for the leasing of industrial real estate is highly competitive. We experience competition for customers from other existing assets in proximity to our buildings as well as from proposed new developments. Institutional investors, other REITs and local real estate operators generally own such properties; however no single competitor or small group of competitors is dominant in our current markets. However, as a result of competition, we may have to provide free rental periods, incur charges for tenant improvements or offer other inducements, all of which may have an adverse impact on our results of operations.
The market for the acquisition of industrial real estate is also very competitive. We compete for real property investments with other REITs and institutional investors such as pension funds and their advisors, private real estate investment funds, insurance company investment accounts, private investment companies, individuals and other entities engaged in real estate investment activities, some of which have greater financial resources than we do.
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Environmental Matters
We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we subjected a majority of the properties we have acquired, including land, to environmental reviews. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See further additional information in Risk Factors.
Employees
As of December 31, 2013, we had 136 full-time employees.
Properties
Geographic Distribution
The following table describes the geographic diversification of our consolidated properties as of December 31, 2013:
Markets |
Number of Buildings |
Percent Owned(1) |
Square Feet | Occupancy Percentage(2) |
Annualized Base Rent(3)(6) |
Percent of Total Annualized Base Rent |
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(in thousands) | (in thousands) | |||||||||||||||||||||||
CONSOLIDATED OPERATING: |
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Atlanta |
41 | 100.0 | % | 6,592 | 92.0 | % | $ | 19,496 | 8.4 | % | ||||||||||||||
Baltimore/Washington D.C. |
19 | 100.0 | % | 2,236 | 88.9 | % | 11,607 | 5.0 | % | |||||||||||||||
Charlotte |
1 | 100.0 | % | 472 | 100.0 | % | 1,604 | 0.7 | % | |||||||||||||||
Memphis |
8 | 100.0 | % | 3,712 | 83.4 | % | 8,006 | 3.5 | % | |||||||||||||||
Miami |
10 | 100.0 | % | 1,362 | 99.0 | % | 9,393 | 4.1 | % | |||||||||||||||
Nashville |
4 | 100.0 | % | 2,064 | 96.5 | % | 5,304 | 2.3 | % | |||||||||||||||
New Jersey |
14 | 100.0 | % | 1,926 | 94.4 | % | 9,718 | 4.2 | % | |||||||||||||||
Orlando |
20 | 100.0 | % | 1,864 | 83.1 | % | 6,169 | 2.7 | % | |||||||||||||||
Pennsylvania |
14 | 100.0 | % | 2,828 | 91.0 | % | 8,929 | 3.9 | % | |||||||||||||||
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East Segment Subtotal |
131 | 100.0 | % | 23,056 | 90.7 | % | 80,226 | 34.8 | % | |||||||||||||||
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Chicago |
34 | 100.0 | % | 6,742 | 95.4 | % | 22,005 | 9.5 | % | |||||||||||||||
Cincinnati |
31 | 100.0 | % | 3,782 | 93.8 | % | 12,040 | 5.2 | % | |||||||||||||||
Columbus |
12 | 100.0 | % | 3,480 | 87.0 | % | 7,590 | 3.3 | % | |||||||||||||||
Dallas |
34 | 100.0 | % | 5,160 | 97.9 | % | 16,670 | 7.2 | % | |||||||||||||||
Houston |
43 | 100.0 | % | 3,256 | 99.1 | % | 18,969 | 8.2 | % | |||||||||||||||
Indianapolis |
7 | 100.0 | % | 2,299 | 96.4 | % | 7,499 | 3.2 | % | |||||||||||||||
Louisville |
3 | 100.0 | % | 1,109 | 100.0 | % | 3,595 | 1.6 | % | |||||||||||||||
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Central Segment Subtotal |
164 | 100.0 | % | 25,828 | 95.3 | % | 88,368 | 38.2 | % | |||||||||||||||
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Denver |
2 | 100.0 | % | 278 | 96.5 | % | 1,259 | 0.5 | % | |||||||||||||||
Northern California |
27 | 100.0 | % | 3,171 | 93.1 | % | 16,502 | 7.1 | % | |||||||||||||||
Phoenix |
17 | 100.0 | % | 2,025 | 93.1 | % | 7,727 | 3.3 | % | |||||||||||||||
Seattle |
12 | 100.0 | % | 1,599 | 94.4 | % | 7,827 | 3.4 | % | |||||||||||||||
Southern California |
42 | 92.9 | % | 5,939 | 94.8 | % | 28,352 | 12.2 | % | |||||||||||||||
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West Segment Subtotal |
100 | 96.8 | % | 13,012 | 94.1 | % | 61,667 | 26.5 | % | |||||||||||||||
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Total/weighted average operating properties |
395 | 99.3 | % | 61,896 | 93.3 | % | 230,261 | 99.5 | % | |||||||||||||||
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Markets |
Number of Buildings |
Percent Owned(1) |
Square Feet | Occupancy Percentage(2) |
Annualized Base Rent(3)(6) |
Percent of Total Annualized Base Rent |
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(in thousands) | (in thousands) | |||||||||||||||||||||||
REDEVELOPMENT PROPERTIES: |
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New Jersey |
1 | 100.0 | % | 107 | 0.0 | % | | 0.0 | % | |||||||||||||||
Phoenix |
1 | 100.0 | % | 76 | 0.0 | % | | 0.0 | % | |||||||||||||||
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Total/weighted average redevelopment properties |
2 | 100.0 | % | 183 | 0.0 | % | | 0.0 | % | |||||||||||||||
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DEVELOPMENT PROPERTIES: |
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Chicago |
1 | 100.0 | % | 604 | 0.0 | % | | 0.0 | % | |||||||||||||||
Houston |
1 | 100.0 | % | 267 | 0.0 | % | | 0.0 | % | |||||||||||||||
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Total/weighted average development properties |
2 | 100.0 | % | 871 | 0.0 | % | | 0.0 | % | |||||||||||||||
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HELD FOR SALE PROPERTIES: |
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Chicago |
1 | 100.0 | % | 222 | 100.0 | % | 1,102 | 0.5 | % | |||||||||||||||
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Total/weighted average held for sale |
1 | 100.0 | % | 222 | 100.0 | % | 1,102 | 0.5 | % | |||||||||||||||
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Total/weighted average consolidated properties |
400 | 99.3 | % | 63,172 | 91.8 | % | $ | 231,363 | (4) | 100.0 | % | |||||||||||||
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(See footnote definitions on next page)
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The following table describes the geographic diversification of our investments in unconsolidated properties as of December 31, 2013:
Markets |
Number of Buildings |
Percent Owned(1) |
Square Feet | Occupancy Percentage(2) |
Annualized Base Rent(3) |
Percent of Total Annualized Base Rent |
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(in thousands) | (in thousands) | |||||||||||||||||||||||
UNCONSOLIDATED OPERATING PROPERTIES: |
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IDI (Chicago, Nashville, Savannah) |
3 | 50.0 | % | 1,423 | 53.0 | % | $ | 1,631 | 4.1 | % | ||||||||||||||
Southern California Logistics Airport(5) |
6 | 50.0 | % | 2,160 | 99.6 | % | 7,871 | 20.0 | % | |||||||||||||||
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Total/weighted average unconsolidated operating properties |
9 | 50.0 | % | 3,583 | 81.1 | % | 9,502 | 24.1 | % | |||||||||||||||
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OPERATING PROPERTIES IN CO-INVESTMENT VENTURES: |
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Atlanta |
1 | 3.6 | % | 491 | 100.0 | % | 1,753 | 4.4 | % | |||||||||||||||
Chicago |
2 | 20.0 | % | 1,033 | 100.0 | % | 3,238 | 8.2 | % | |||||||||||||||
Cincinnati |
3 | 13.6 | % | 892 | 100.0 | % | 2,977 | 7.5 | % | |||||||||||||||
Columbus |
2 | 5.7 | % | 451 | 100.0 | % | 1,356 | 3.4 | % | |||||||||||||||
Dallas |
3 | 15.3 | % | 1,186 | 100.0 | % | 3,622 | 9.1 | % | |||||||||||||||
Denver |
5 | 20.0 | % | 772 | 95.9 | % | 3,654 | 9.2 | % | |||||||||||||||
Indianapolis |
1 | 11.4 | % | 475 | 96.2 | % | 1,915 | 4.8 | % | |||||||||||||||
Louisville |
4 | 10.0 | % | 736 | 100.0 | % | 1,411 | 3.6 | % | |||||||||||||||
Minneapolis |
3 | 3.6 | % | 472 | 100.0 | % | 2,187 | 5.5 | % | |||||||||||||||
Nashville |
2 | 20.0 | % | 1,020 | 100.0 | % | 2,750 | 7.0 | % | |||||||||||||||
Orlando |
2 | 20.0 | % | 696 | 100.0 | % | 3,265 | 8.2 | % | |||||||||||||||
Pennsylvania |
1 | 11.4 | % | 502 | 100.0 | % | 1,990 | 5.0 | % | |||||||||||||||
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Total/weighted averageco-investment operating properties |
29 | 14.3 | % | 8,726 | 99.4 | % | 30,118 | 75.9 | % | |||||||||||||||
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Total/weighted average unconsolidated properties |
38 | 24.7 | % | 12,309 | 94.1 | % | $ | 39,620 | 100.0 | % | ||||||||||||||
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(1) | Percent owned is based on ownership weighted by square footage, if applicable. |
(2) | Based on leases commenced as of December 31, 2013. |
(3) | Annualized base rent is calculated as monthly contractual base rent (cash basis) per the terms of the lease in effect, as of December 31, 2013, multiplied by 12. |
(4) | Excludes total annualized base rent associated with tenants currently in free rent periods of $9.2 million based on the first months cash base rent. |
(5) | Although we contributed 100% of the initial cash equity capital required by the venture, after return of certain preferential distributions on capital invested, profits and losses are generally split 50/50. |
(6) | Excludes total annualized base rent of $1.7 million from one non-industrial property acquired for future development. |
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Lease Expirations
Our industrial properties are typically leased to customers for terms ranging from 3 to 10 years with a weighted average remaining term of approximately 3.3 years as of December 31, 2013. Following is a schedule of expiring leases for our consolidated properties by square feet and by annualized minimum base rent as of December 31, 2013, assuming no exercise of lease renewal:
Year |
Number of Leases Expiring |
Square Feet Related to Expiring Leases |
Percentage of Total Square Feet |
Annualized Base Rent of Expiring Leases(1) |
Percentage of Total Annualized Base Rent |
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(in thousands) | (in thousands) | |||||||||||||||||||
2014(2) |
178 | 8,440 | 14.6 | % | $ | 35,217 | 13.4 | % | ||||||||||||
2015 |
162 | 10,199 | 17.6 | % | 42,062 | 16.0 | % | |||||||||||||
2016 |
200 | 10,110 | 17.4 | % | 44,166 | 16.9 | % | |||||||||||||
2017 |
143 | 8,223 | 14.2 | % | 34,223 | 13.1 | % | |||||||||||||
2018 |
107 | 6,621 | 11.4 | % | 30,394 | 11.6 | % | |||||||||||||
Thereafter |
157 | 14,392 | 24.8 | % | 75,932 | 29.0 | % | |||||||||||||
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Total occupied |
947 | 57,985 | 100.0 | % | $ | 261,994 | 100.0 | % | ||||||||||||
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Available or leased but not occupied |
5,187 | |||||||||||||||||||
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Total consolidated properties |
63,172 | |||||||||||||||||||
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(1) | Includes contractual rent changes. |
(2) | Includes leases that are on month-to-month terms. |
Customer Diversification
As of December 31, 2013, there were no customers that occupied more than 2.3% of our properties based on annualized base rent. The following table reflects our ten largest customers, based on annualized base rent as of December 31, 2013. These ten customers occupy a combined 6.3 million square feet or 10.0% of our consolidated properties.
Customer |
Percentage of Annualized Base Rent |
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Schenker, Inc. |
2.3 | % | ||
Deutsche Post World Net (DHL & Excel) |
1.5 | % | ||
The Clorox Company |
1.3 | % | ||
United Stationers Supply Company |
1.1 | % | ||
The Glidden Company |
1.1 | % | ||
YRC, LLC |
1.1 | % | ||
Bridgestone Corporation |
1.0 | % | ||
Ozburn-Hessey Logistics, L.L.C |
0.9 | % | ||
Genco I, Inc. |
0.9 | % | ||
Iron Mountain |
0.9 | % | ||
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Total |
12.1 | % | ||
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Although base rent is supported by long-term lease contracts, customers who file bankruptcy generally have the legal right to reject any or all of their leases. In the event that a customer with a significant number of leases in our properties files bankruptcy and cancels its leases, we could experience a reduction in our revenues and an increase in allowance for doubtful accounts receivable.
We continuously monitor the financial condition of our customers. We communicate often with those customers who have been late on payments or filed bankruptcy. We are not currently aware of any significant financial difficulties of any tenants that would individually cause a material reduction in our revenues, and no customer represents more than 5% of our annual base rent.
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Industry Diversification
The table below illustrates the diversification of our consolidated portfolio by the industry classification of our customers based upon their NAICS code as of December 31, 2013 (dollar amounts in thousands):
Number of Leases |
Annualized Base Rent(1) |
Percentage of Total Annualized Base Rent |
Occupied Square Feet |
Percentage of Total Occupied Square Feet |
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(in thousands) | ||||||||||||||||||||
Manufacturing |
250 | $ | 71,230 | 30.8 | % | 17,138 | 29.6 | % | ||||||||||||
Wholesale Trade |
229 | 48,733 | 21.1 | % | 12,741 | 22.0 | % | |||||||||||||
Transportation and Warehousing |
156 | 45,548 | 19.7 | % | 12,726 | 21.9 | % | |||||||||||||
Retail Trade |
92 | 22,992 | 10.0 | % | 6,667 | 11.5 | % | |||||||||||||
Administrative Support and Waste Management Services |
43 | 9,268 | 4.0 | % | 2,337 | 4.0 | % | |||||||||||||
Professional, Scientific and Technical Services |
55 | 10,754 | 4.6 | % | 1,955 | 3.3 | % | |||||||||||||
Media and Information |
16 | 3,963 | 1.7 | % | 567 | 1.0 | % | |||||||||||||
Rental Companies |
15 | 3,498 | 1.5 | % | 917 | 1.6 | % | |||||||||||||
Health Care and Social Assistance |
11 | 4,168 | 1.8 | % | 629 | 1.1 | % | |||||||||||||
Other |
80 | 11,209 | 4.8 | % | 2,308 | 4.0 | % | |||||||||||||
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Total |
947 | $ | 231,363 | 100.0 | % | 57,985 | 100.0 | % | ||||||||||||
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(1) | Annualized base rent is calculated as monthly contractual base rent (cash basis) per the terms of the lease in effect, as of December 31, 2013, multiplied by 12. |
Indebtedness
As of December 31, 2013, 63 of our 400 consolidated properties, with a combined gross book value of $674.2 million were encumbered by mortgage indebtedness totaling $285.7 million (excluding net premiums). See Notes to Consolidated Financial Statements, Note 5Outstanding Indebtedness and the accompanying Schedule III beginning on page F-45 for additional information.
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DIRECTORS AND EXECUTIVE OFFICERS
This section reflects information with respect to the directors and executive officers of DCT. Because DCTOP is managed by DCT, and DCT conducts substantially all of its operations through DCTOP, DCTOP refers to DCTs executive officers as its executive officers, and although as a partnership DCTOP does not have a board of directors, it refers to DCTs Board of Directors as its Board of Directors.
Board of Directors
Below is information with respect to our Directors.
Thomas G. Wattles. Director since 2003
Mr. Wattles, age 62, is a cofounder of the Company and has been our Executive Chairman since 2003. Mr. Wattles also served as our Chief Investment Officer from March 2003 to September 2005. Mr. Wattles was a principal of both Dividend Capital Group LLC and Black Creek Capital, LLC, each a Denver-based real estate investment firm, from February 2003 until June 2008. From March 1997 to May 1998, Mr. Wattles served as Chairman of ProLogis, and served as Co-Chairman and Chief Investment Officer from November 1993 to March 1997. Mr. Wattles was a Managing Director of Security Capital Group Incorporated and served in various capacities including Chief Investment Officer from January 1991 to December 2002. Mr. Wattles is currently a director of (i) Regency Centers Corporation, chairing its investment committee and serving on its audit committee; and (ii) Columbia Property Trust, serving on its audit and operations committees. Mr. Wattles holds a Bachelors degree and an M.B.A. degree from Stanford University.
Philip L. Hawkins. Director since 2006
Mr. Hawkins, age 58, has been our Chief Executive Officer since October 2006. Mr. Hawkins was the President, Chief Operating Officer and a director of CarrAmerica Realty Corporation, where he had been employed from 1996 until July 2006. CarrAmerica was a public REIT focused on the acquisition, development, ownership and operation of office properties in select markets across the United States and was acquired by a fund managed by The Blackstone Group in July 2006. Prior to joining CarrAmerica, Mr. Hawkins spent approximately 13 years with LaSalle Partners (now Jones Lang LaSalle), a real estate services company where he was a director and held various positions involving real estate investment, development, leasing and management. Mr. Hawkins serves as a director of Corporate Office Properties Trust, a publicly traded office REIT that focuses primarily on serving the specialized requirements of U.S. government agencies and defense contractors. He is a member of the National Association of Real Estate Investment Trusts (NAREIT) and the Urban Land Institute. He is a trustee of Hamilton College and served as a director of SBA Communications Corporation, a publicly traded wireless tower owner and operator, from August 2004 to May 2009. He holds an M.B.A. from the University of Chicago Graduate School of Business and a Bachelor of Arts degree from Hamilton College.
Marilyn A. Alexander. Director since 2011
Ms. Alexander, age 62, has over thirty years of experience in a range of industries, including real estate, hospitality and management consulting. Ms. Alexander has been a consultant since 2003, currently serving as principal of Alexander & Friedman LLC, a management consulting company that she founded. She previously served in executive roles in finance, brand management, marketing and revenue management at The Walt Disney Company and Marriott Corporation. Since 2008, she has served as a director of Tutor Perini Corporation, a publicly traded leading civil and building construction company offering diversified general contracting and design/build services to private clients and public agencies in the U.S. and abroad. She is also currently a director of Torchmark Corporation. From November 2004 until its sale in February 2007, Ms. Alexander served as a trustee of Equity Office Properties Trust. Ms. Alexander also served as a director of New Century Financial
76
Corporation, a formerly publicly traded REIT, from May 2005 to April 2007. She also formerly was a trustee of PIMCO Variable Insurance Trust, PIMCO Commercial Securities Trust, Inc. and PIMCO Strategic Global Government Fund, Inc. from October 2006 to August 2007. Ms. Alexander earned a Bachelors degree at Georgetown University in Philosophy and an MBA at the Wharton Graduate School of the University of Pennsylvania; she is a licensed CPA in the Commonwealth of Virginia.
Thomas F. August. Director since 2006
Mr. August, age 65, has served as President and Chief Executive Officer of Equity Office Properties Trust since July 2010 and served from October 2009 to July 2010 as its Chairman. Equity Office Properties Trust is currently a private company controlled by The Blackstone Group and is one of the largest owners and managers of office properties in the United States. From February 2008 to August 2009 he served as the Executive Vice President and Chief Operating Officer of Behringer Harvard REIT I, Inc., and from May 2009 through August 2009 he also served as Chief Executive Officer of Behringer Harvard REIT I, Inc. He served as a trustee of Brandywine Realty Trust, a publicly traded REIT, from January 2006 through February 2008. From October 1999 to January 2006, Mr. August had served as President, Chief Executive Officer and a trustee of Prentiss Properties Trust. Prior to that time, he was President and Chief Operating Officer of Prentiss since Prentiss initial public offering in October 1996. From 1992 to 1996, Mr. August served as President and Chief Operating Officer of a Prentiss affiliate, Prentiss Properties Limited, Inc. From 1987 to 1992, Mr. August served as Executive Vice President and Chief Financial Officer of Prentiss predecessor company. From 1985 to 1987, Mr. August served in executive capacities with Cadillac Fairview Urban Development, Inc. Prior to joining Cadillac Fairview Urban Development in 1985, Mr. August was Senior Vice President of Finance for Oxford Properties, Inc., in Denver, Colorado, an affiliate of a privately-held Canadian real estate firm. Previously, he was a Vice President of Citibank, responsible for real estate lending activities in the Midwest. Mr. August has more than 40 years of experience as a senior executive in the real estate industry, including prior experience as the chief executive officer of a publicly traded REIT. Mr. August holds a Bachelors degree from Brandeis University and an M.B.A. degree from Boston University.
John S. Gates, Jr. Director since 2006
Mr. Gates, age 60, has served since August 2010 as the Chairman of the Board of the Regional Transportation Authority of Metropolitan Chicago which is responsible for all passenger transit operations in the metropolitan Chicago area. Mr. Gates has also served since January 1, 2005 as the Chairman and Chief Executive Officer of PortaeCo, a private investment and asset management company. In 1984, Mr. Gates co-founded CenterPoint Properties Trust and served as Co-Chairman and Chief Executive Officer for 22 years. During that period, CenterPoint became one of the largest private property owners in the Metropolitan Chicago Region and the nations first publicly traded industrial property REIT. In March 2006, CenterPoint was acquired by the California Public Employees Retirement System and Jones Lang LaSalle for approximately $3.5 billion. In 1979, Mr. Gates joined CB Richard Ellis, and in 1981 co-founded the Chicago office of Jones Lang Wootton (now Jones Lang LaSalle), a global commercial property investment firm. Mr. Gates is a director of The Davis Funds and numerous not-for- profit institutions. Mr. Gates has more than 30 years of experience in the industrial real estate industry. Mr. Gates graduated from Trinity College with a Bachelors degree in Economics.
Raymond B. Greer. Director since 2010
Mr. Greer, age 51, has over thirty years of logistics and transportation experience. Mr. Greer has served since February 2011 as the President of BNSF Logistics, LLC, which is an international third party logistics provider and a wholly-owned subsidiary of Burlington Northern Santa Fe, LLC, a Berkshire Hathaway company. From March 2005 to January 2010, Mr. Greer served as President and Chief Executive Officer of Greatwide Logistics Services, a non-asset based logistics and transportation services company. Greatwide and its senior lenders filed a Chapter 11 bankruptcy filing in October 2008 to restructure Greatwides debt and permit a purchase of the business. From December 2002 to March 2005, Mr. Greer served as President and Chief Executive Officer for
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Newgistics, Inc., a reverse logistics company. Mr. Greer served as President of Global Network Solutions and Services for i2 Technologies, Inc., a supply chain management software and services company, from February 2002 to November 2002. Mr. Greer has also held senior management positions for Ryder and FedEx Corporation. From June 2005 to April 2007, Mr. Greer served as a director of Kitty Hawk, Inc., a publicly traded air cargo company. Mr. Greer received a Bachelor of Science in Mathematics from the University of Utah and an Executive Masters in Information Systems & Telecommunications from Christian Brothers University.
Tripp H. Hardin. Director since 2002
Mr. Hardin, age 52, is Senior Vice President of Investments with CBRE, Inc., which is the worlds largest real estate services firm. Prior to joining CBRE in 2002, Mr. Hardin was a principal of Trammell Crow Krombach Partners and was associated with them or their predecessor company since 1986. He has over 28 years of experience in the commercial real estate industry, focusing primarily on the sale and leasing of industrial and office properties. He also has extensive experience in real estate investment and build-to-suit transactions. Mr. Hardin graduated from Stanford University with a Bachelor of Science degree in Industrial Engineering.
John C. OKeeffe. Director since 2002
Mr. OKeeffe, age 54, has been active in the construction industry since 1983 and has been associated with Wm. Blanchard Co., a construction management firm located in Springfield, NJ, since 1987. He has served in a variety of capacities at the firm, including estimating, contract negotiation and contract management, contractor management, project management and for the past 10 years, in an executive capacity, managing a variety of large scale healthcare projects. Presently, Mr. OKeeffe serves as Vice President, Construction Operations for Wm. Blanchard Co. Mr. OKeeffe graduated from Denison University with a Bachelor of Arts degree.
Bruce L. Warwick. Director since 2005
Mr. Warwick, age 75, is Vice Chairman of Related Companies, a private real estate development firm. Mr. Warwick oversees the development of various real estate development projects, including the development of Hudson Yards, a 12 million square foot mixed-use project on the west side of Manhattan. He joined Related Companies in 1998 as President of Columbus Centre Developer LLC, the division of Related Companies charged with the development and construction of Time Warner Center in New York City. Prior to joining Related Companies in 1998, Mr. Warwick served as Vice Chairman of The Galbreath Company, overseeing development and management in the East Region. He has been in the development and construction business for over 45 years, developing properties in both Puerto Rico and in the Northeast United States. He received a Bachelor of Arts degree from Colgate University.
Executive Officers
Below is information with respect to our executive officers.
Jeffrey F. Phelan, age 53, has been President of our company since January 2013. Mr. Phelan previously served as National President of Development and Managing Director, West Region, from March 2010 until January 2013. Prior to joining our company, from November 2006 through March 2010, Mr. Phelan was a principal of Phelan Development Company, a privately held real estate company that Mr. Phelan founded in November 2006, headquartered in Southern California that developed and managed industrial, office and retail properties. Prior to founding Phelan Development, Mr. Phelan was a partner at Panattoni Development Company from 1994 to 2006 where he founded their operations in Southern California and developed over 20 million square feet of commercial real estate. Panattoni Development Company is a development company specializing in industrial, office and retail projects. Mr. Phelan received a Bachelors degree in Business Administration with a concentration in Real Estate from California State University.
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Teresa L. Corral, age 50, has been our companys Executive Vice President of Investments and Portfolio Management since May 2011. Ms. Corral oversees our companys investment and disposition process as well as portfolio management of our balance sheet and joint venture assets. Prior to this role, Ms. Corral served as our companys Senior Vice President of Institutional Capital Management and Dispositions since 2006. Ms. Corral brings more than 26 years of experience in acquisitions, due diligence, and underwriting institutional and privately-held real estate to our company. Prior to joining our company in 2003, Ms. Corral served in various positions with Clayton, Williams, and Sherwood Inc., a private investment firm. She also worked for various affiliates of Clayton, Williams, and Sherwood Inc., including CWS Communities Trust, a private REIT. Ms. Corral received her Bachelors degree in Business Administration and Economics from St. Marys College of California.
Neil P. Doyle, age 44 has been our companys Managing Director, Central Region, since April 2012. He is responsible for all property operations, investments and development in the Central Region. Prior to joining our company in 2012, Mr. Doyle served in various positions at CenterPoint Properties Trust since 1997. Most recently, from February 2007 through June 2011, he served as Executive Vice President of Infrastructure and Transportation at CenterPoint Properties Trust with responsibility for the sourcing and execution of logistics-based industrial parks in key U.S. intermodal and port markets. Prior to this role, Mr. Doyle served as Senior Vice-President of Development at CenterPoint from July 2005 through January 2007. Mr. Doyle holds a Bachelor of Science degree in Civil Engineering from Marquette University.
Matthew T. Murphy, age 49, has been Chief Financial Officer of our company since September 2011. Mr. Murphy has been with our company or an affiliate since 2003, previously serving as interim Chief Financial Officer, Executive Vice President and Treasurer. Mr. Murphy has served as Treasurer of our company since October 2006 and, from May 2003 through October 2006, served as the Controller of Dividend Capital Advisors LLC, which was our external advisor at the time. From February 1998 until joining our former external advisor in May 2003, Mr. Murphy was a Vice President and Controller of Pritzker Residential, LLC, a privately-owned, fully-integrated multi-family real estate investment company. Prior to joining Pritzker, Mr. Murphy served in various positions with Security Capital Group and its affiliates, including Archstone-Smith Trust and ProLogis. Prior to joining Security Capital Group, in 1992, Mr. Murphy was a staff accountant with Coopers and Lybrand. Mr. Murphy served as a director of Versus Capital Multi-Manager Real Estate Income Fund LLC from July 2012 through August 2013. Mr. Murphy holds a Bachelors degree in Accounting from Colorado State University.
Charla Rios, age 52, has been our companys Executive Vice President of Property Management since June 2011. Ms. Rios is responsible for planning, directing and managing our property management activities and leading our companys property management teams. Ms. Rios brings over 25 years of property management experience to our company. Prior to joining our company in 2011, Ms. Rios served as First Vice President and West Regional Property Manager of Prologis, Inc. for 16 years. Before joining Prologis, Inc., Ms. Rios was a Senior Property Manager with Trammell Crow Company in Phoenix, managing a portfolio for Pension Fund Advisors and institutional owners.
Michael J. Ruen, age 47, has been a Managing Director of our company since early 2007 and prior to that a Senior Vice President of our company since 2005. From February 2004 through October 2006, Mr. Ruen was an employee of Dividend Capital Advisors LLC, which was our external advisor at the time. Since the latter part of 2008, Mr. Ruen has overseen the Eastern Region of our company, responsible for all property operations, investments and development in that region. Prior to that time, Mr. Ruen was responsible for capital deployment in the Eastern United States and development. Prior to joining our former advisor in February 2004, he was employed for nine years in various positions with ProLogis. Before leaving ProLogis, Mr. Ruen had been a First Vice President and Market Officer with responsibility over development, acquisition and portfolio operations for the state of Tennessee. Prior to that, he had similar responsibilities for Denver, Birmingham and Chattanooga after managing the leasing and marketing activities for Atlanta. Prior to joining ProLogis, Mr. Ruen was with CB Richard Ellis-Atlanta and was responsible for various institutional account activities including general brokerage. He received his Bachelor of Sciences degree from the University of Alabama and an M.B.A. from Georgia State University.
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John G. Spiegleman, age 46, has been Executive Vice President and General Counsel of our company since May 2011. Mr. Spiegleman is responsible for all legal, risk management and compliance matters. Mr. Spiegleman brings more than 21 years of experience to our company. Prior to joining our company in 2011, Mr. Spiegleman served as a Senior Vice President and Assistant General Counsel of Aimco from January 2006 to April 2011. While at Aimco, Mr. Spiegleman managed the legal aspects for all its transactions. Prior to joining Aimco, Mr. Spiegleman was Senior Vice President of Miller Global Properties for seven years. While at Miller Global, a privately-held company that owns, develops, and operates office and hotel properties throughout the world, Mr. Spiegleman served in legal and business roles. Mr. Spiegleman received his Juris Doctor from the University of Colorado, School of Law and his Bachelors degree in Economics from Denison University.
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Compensation Discussion and Analysis
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, annual cash incentive bonuses, long-term equity incentive compensation and broad-based benefits programs. This Compensation Discussion and Analysis explains our compensation objectives, policies and practices with respect to our Chief Executive Officer, our Chief Financial Officer and the other three most highly-compensated executive officers as of the end of 2013 as determined in accordance with applicable SEC rules (collectively referred to as our named executive officers or, in this Compensation Discussion and Analysis section, our executives). Our named executive officers are as follows: Philip L. Hawkins, Chief Executive Officer; Thomas G. Wattles, Executive Chairman of the Board; Jeffrey F. Phelan, President; Matthew T. Murphy, Chief Financial Officer and Treasurer; and Michael J. Ruen, Managing Director, East Region.
Objectives of Our Executive Compensation Programs
Our compensation programs for our executives are designed to achieve the following objectives:
| Attract and retain top contributors to ensure that we have high caliber executives; |
| Create and maintain a performance-driven organization, by providing upside compensation opportunity for outstanding performance and downside compensation risk in the event of performance below expectations; |
| Align the interests of our executives and stockholders by motivating executives to increase stockholder value along with the achievement of other key corporate goals and objectives and rewarding executives when stockholder value increases; |
| Encourage teamwork and cooperation while recognizing individual contributions by linking variable compensation to company and individual performance based on position responsibilities and ability to influence financial and organizational results; |
| Provide flexibility and allow for discretion in applying our compensation principles in order to appropriately reflect individual circumstances as well as changing business conditions and priorities; |
| Motivate our executives to manage our business to meet and appropriately balance our short- and long-term objectives, and reward them for meeting these objectives; and |
| Reinforce our entrepreneurial culture. |
Peer Group Data
During 2012 and 2013, the compensation committee assessed and affirmed the independence of Frederic W. Cook & Co., Inc., or F.W. Cook, a nationally recognized consulting firm, and engaged it to be the compensation committees independent executive compensation consultant and to conduct a competitive review of our executive compensation program. As part of F.W. Cooks engagement, the compensation committee directed F.W. Cook to, among other things, compare our executive compensation with competitive market compensation data for two different peer groups: an asset-based peer group consisting of seven public REITs with an industrial asset class focus; and a size-based REIT peer group consisting of 14 public REITs similar in size (as defined by equity market capitalization and enterprise value) to our company, but in varying asset classes. These two peer
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groups, which were developed by F.W. Cook in consultation with our management and subsequently approved by the compensation committee, were comprised of the following companies:
Asset-Based Peers |
Size-Based Peers | |
Duke Realty Corporation | American Campus Communities, Inc. | |
EastGroup Properties, Inc. | Colonial Properties Trust | |
First Industrial Realty Trust, Inc. | Diamondrock Hospitality Company | |
First Potomac Realty Trust | EastGroup Properties, Inc. | |
Liberty Property Trust | Equity One, Inc. | |
PS Business Parks, Inc. | Extra Space Storage Inc. | |
STAG Industrial, Inc. | Healthcare Realty Trust Incorporated | |
LaSalle Hotel Properties | ||
Lexington Realty Trust | ||
Medical Properties Trust, Inc. | ||
Post Properties, Inc. | ||
PS Business Parks, Inc. | ||
Sovran Self Storage, Inc. | ||
Sunstone Hotel Investors, Inc. |
The peer group data presented included information regarding base salary, actual and target bonus amounts, total annual compensation, long-term equity and cash incentives and total compensation. F.W. Cook also presented the same categories of information for all industrial REITs and all REITs with an enterprise value between $1.0 billion and $3.0 billion that were included in the 2011 NAREIT Compensation and Benefits Survey. For each of these categories of information, F.W. Cook presented information comparing our compensation to the compensation paid by the companies in these peer groups at the 25th, 50th and 75th percentiles for comparable positions.
For purposes of 2013 compensation, the compensation committee used this competitive market compensation data to gain a greater understanding of market practices in connection with establishing base salaries, target annual cash incentive bonus amounts and target values for annual grants of long-term equity incentive compensation, all of which were established in early 2013. The compensation committee did not target a single percentile or range of percentiles to be used consistently for all of our executives, but rather used this information in connection with a number of factors, including, among others, the individual experience and skills of, and expected contributions from, our executives, the difficulty that we would have in replacing each of our executives and current economic conditions.
Our Executive Compensation Programs
Our executive compensation primarily consists of base salary, annual cash incentive bonuses, long-term equity incentive compensation and broad-based benefits programs. Additionally, with the exception of Mr. Wattles, we have employment agreements with each of our executives that provide for payments and other benefits in connection with a termination of employment in certain circumstances or a change-in-control. Overall, we designed our executive compensation programs to achieve the objectives described above. In particular, consistent with the emphasis we place on maintaining a performance-driven organization and aligning the interests of our executives and stockholders, long-term equity incentive compensation constitutes a significant portion of our total executive compensation. We also structured our annual cash incentive bonuses and annual grants of long-term equity incentive compensation to be based on our actual performance compared to predetermined performance goals. In determining the mix of the different elements of executive compensation, we considered the mix being offered by comparable companies. We generally structured the mix of base salary, target annual cash incentive bonuses and target long-term equity incentive compensation to approximate the average mix for our peers, except that we placed a greater emphasis on long-term equity incentive compensation.
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For 2013, we generally kept the mix of the different elements of executive compensation consistent with the mix that we have had in prior years recognizing that each year, depending on actual performance during the year, the amount of cash incentive bonuses paid and long-term equity incentive compensation granted relative to base salary will fluctuate.
Each of the primary elements of our executive compensation is discussed in detail below, including a description of the particular element and how it fits into our overall executive compensation and a discussion of the amounts of compensation paid to our executives for 2013 under each of these elements. In the descriptions below, we highlight particular compensation objectives that are addressed by specific elements of our executive compensation program; however, it should be noted that we have designed our compensation programs to complement each other and collectively serve all of our executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation, each element, to a greater or lesser extent, serves each of our objectives.
At our 2013 annual meeting, a non-binding, advisory resolution approving the compensation paid to our named executive officers, as disclosed in our proxy statement for the 2013 annual meeting, including the Compensation Discussion and Analysis, compensation tables and narrative discussions, was approved by our stockholders, with more than 99% of the votes cast having been voted in favor of the proposal to approve such resolution. The compensation committee has considered the results of this vote and, as a result of the high percentage of votes cast in favor of this proposal, the compensation committee viewed these results as an indication of stockholders overall satisfaction with the manner in which we compensated our named executive officers in 2012. Accordingly, based in part on the results of this vote, the compensation committee generally has maintained the structure of our executive compensation programs that had been described in our proxy statement for the 2013 annual meeting.
2013 Total Annual Compensation
The following table sets forth the amounts of base salary, annual cash incentive bonus and annual long-term equity incentive compensation (based on the value approved) awarded by the compensation committee for each of our executives for 2013.
Name |
Base Salary | Annual Bonus | Annual Equity(1) |
Total | ||||||||||||
Philip L. Hawkins |
$ | 600,000 | $ | 768,000 | $ | 1,369,000 | $ | 2,737,000 | ||||||||
Thomas G. Wattles |
260,000 | 162,000 | 364,000 | 786,000 | ||||||||||||
Jeffrey F. Phelan |
400,000 | 412,000 | 557,000 | 1,369,000 | ||||||||||||
Matthew T. Murphy |
300,000 | 325,000 | 450,000 | 1,075,000 | ||||||||||||
Michael J. Ruen |
260,000 | 214,000 | 489,000 | 963,000 |
(1) | Annual equity represents the value of the annual long-term equity incentive compensation approved by the compensation committee. All of the annual equity grants were made in the form of restricted stock or LTIP units, at the election of the executive. We valued the annual grants at $7.36 per share or unit, which was the closing stock price of our common stock on February 4, 2014, the date the awards were approved. With the exception of Mr. Wattles, each of these annual equity awards vests over four years with 25% vesting on each of the first four anniversaries of January 1, 2014, subject to continued employment with us through such date. Mr. Wattles equity award vests over four years with 25% vesting on each of the first four anniversaries of January 1, 2014, however, vesting is not subject to continued employment with us through such date. |
The foregoing table more accurately reflects the decisions of the compensation committee with respect to our executive officers compensation than the Summary Compensation Table below. This primarily results from the fact that, in order to link our annual long-term equity incentive compensation to our annual performance, the compensation committee typically grants our annual long-term equity incentive compensation for a particular
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year in January or February of the following year. Due to the rules governing the presentation of the Summary Compensation Table, we are required to present these grants as compensation for the year in which they were granted (as opposed to the year for which they were granted). As a result, for example, the Stock Awards granted in February 2013 for 2012 performance are required to be reported as 2013 compensation in the Summary Compensation Table. In addition, the foregoing table does not include the equity award granted to Mr. Phelan in connection with his promotion to President effective as of January 1, 2013, as this was a one-time award in connection with his promotion.
A detailed discussion of the base salary, annual cash incentive bonus and annual long-term equity incentive compensation paid or awarded to our executives for 2013 is contained below.
Base Salary
We pay our executives a base salary, which we review and determine annually, subject to the commitments we have made to our executives in their employment agreements. We believe that a competitive base salary is a necessary element of any compensation program that is designed to attract and retain talented and experienced executives. We also believe that attractive base salaries can motivate and reward executives for their overall performance. Although base salaries are established in part based on the individual experience, skills and expected contributions during the coming year of our executives and our executives performance during the prior year, we do not view base salaries as primarily serving our objective of paying for performance.
The following table sets forth the annual base salaries for our executives for 2013 and 2012:
Named Executive Officer |
2013 Base Salary |
2012 Base Salary |
Percentage Change | |||||||||
Philip L. Hawkins |
$ | 600,000 | $ | 600,000 | | |||||||
Thomas G. Wattles |
$ | 260,000 | $ | 260,000 | | |||||||
Jeffrey F. Phelan |
$ | 400,000 | $ | 260,000 | 54 | % | ||||||
Matthew T. Murphy |
$ | 300,000 | $ | 275,000 | 9 | % | ||||||
Michael J. Ruen |
$ | 260,000 | $ | 260,000 | |
During 2013, we maintained base salaries at 2012 levels for Messrs. Hawkins, Wattles and Ruen. Effective January 2013, in connection with Mr. Phelans promotion to President, we increased his base salary to the amount set forth in the table above. The increase in base salary for each of Messrs. Phelan and Murphy was based on a number of factors including the compensation committees most recent review of competitive market compensation data and the base salaries of our other executive officers. Overall, base salaries for 2013 were based on the compensation committees review of competitive market compensation data and its conclusion that, in most cases, the amount of the base salaries for our executives remain competitive.
In setting base salary, we also took into account the commitments that we have made to our executives in their employment agreements. Under the employment agreements that were in effect for 2013, minimum annual base salaries for these executives for 2013 were established based on the annual base salaries at the time the agreements were entered into as follows: Mr. Hawkins minimum base salary was $600,000 per year; Mr. Phelans minimum base salary was $400,000 per year; Mr. Murphys minimum base salary was $275,000 per year; and Mr. Ruens minimum base salary was $260,000 per year. Annual base salary for each of Messrs. Hawkins, Phelan and Ruen for 2013 equaled the minimum base salaries in these employment agreements. We have not entered into an employment agreement with Mr. Wattles.
Annual Cash Incentive Bonuses
Our executives are eligible to receive annual cash incentive bonuses each year primarily based upon their performance. Our annual cash incentive bonuses are intended to reward our executives with currently paid compensation based on annual performance.
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2013 Target Bonuses
Similar to base salary, the employment agreements that we entered into with our executives provide for minimum target annual cash incentive bonuses. These agreements provided for the following minimum target annual cash incentive bonuses for 2013: Mr. Hawkins100% of base salary; Mr. Phelan$300,000; Mr. Murphy$250,000; and Mr. Ruen$200,000. The commitments in these employment agreements related to minimum target annual cash incentive bonuses, and we have discretion to establish the criteria that must be met for the annual cash incentive bonuses to be paid and may grant annual cash incentive bonuses in amounts above or below the target level based on our assessment of performance.
In February 2013, we established target annual cash incentive bonuses for each of our executives. Similar to base salary, except for Mr. Phelan, we maintained the levels of our executives target annual cash incentive bonuses for 2013 at 2012 levels. In connection with Mr. Phelans promotion to President, we increased his minimum target. Mr. Phelans increased target was based on a number of factors including the compensation committees most recent review of competitive market compensation data and the targets established for our other executive officers. For 2013, our decisions regarding the amount of the target annual cash incentive bonuses were also based on the compensation committees analysis of competitive market compensation data and its conclusion that the amount of the target annual cash incentive bonuses for our executives did not need to increase in order to remain competitive.
The following table sets forth the target annual cash incentive bonuses for each of our executives for 2013 and 2012:
Named Executive Officer |
2013 Target Bonus | 2012 Target Bonus | Percentage Change | |||||||||
Philip L. Hawkins |
$ | 600,000 | $ | 600,000 | | |||||||
Thomas G. Wattles |
$ | 200,000 | $ | 200,000 | | |||||||
Jeffrey F. Phelan |
$ | 300,000 | $ | 200,000 | 50 | % | ||||||
Matthew T. Murphy |
$ | 250,000 | $ | 250,000 | | |||||||
Michael J. Ruen |
$ | 200,000 | $ | 200,000 | |
2013 Bonus Objectives
For 2013, consistent with 2012, a substantial majority of each executives target annual cash incentive bonus was linked in a formulaic manner to the achievement of specific, objectively measurable goals, with the remainder based on each executives achievement of more subjective goals, subject, in each case, to the compensation committees ability to exercise negative discretion to award executives annual bonuses that are less than what would have been earned based on the formulaic application of the predetermined objectives.
The table set forth below describes the objectives that we established for each of our executives and the percentage of that executives annual cash incentive bonus that was linked to the achievement of each objective.
Objectives |
Hawkins | Wattles | Phelan | Murphy | Ruen | |||||||||||||||
Total net operating income |
30.0 | % | | 15.0 | % | 30.0 | % | 15.0 | % | |||||||||||
Regional net operating income |
| | 15.0 | % | | 25.0 | % | |||||||||||||
Total capital deployment |
25.0 | % | 30.0 | % | 30.0 | % | 25.0 | % | 20.0 | % | ||||||||||
Regional/national capital deployment |
| 70.0 | % | 20.0 | % | | 20.0 | % | ||||||||||||
Asset sales/equity raises |
25.0 | % | | | 25.0 | % | | |||||||||||||
Individual/Subjective |
20.0 | % | | 20.0 | % | 20.0 | % | 20.0 | % | |||||||||||
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