DCT Industrial Trust Q3 2009 Earning Call Transcript

Oct.30.09 | About: DCT Industrial (DCT)

DCT Industrial Trust Inc. (NYSE:DCT)

Q3 2009 Earning Call

October 30, 2009 11:00 AM ET

Executives

Sara Knapp - Corporate Communications and Investor Relations

Philip L. Hawkins - Chief Executive Officer

Stuart B. Brown - Chief Financial Officer

Daryl H. Mechem - Managing Director, West Region

Michael J. Ruen - Managing Director, East Region

Paul Adornato - BMO Capital Markets

Matthew T. Murphy - Treasurer and Senior Vice President of Finance

Analysts

Jamie Feldman - Bank of America-Merrill Lynch

Brendan Maiorana - Wells Fargo Securities, Llc

Cedrik LaChance - Green Street Advisors

Operator

Hello and welcome to the DCT Industrial Third Quarter 2009 Earnings Conference Call. All participants will be listen-only mode for this event. (Operator Instructions). After today's presentation there will be an opportunity for you to ask question. (Operator Instructions). Please note that today's event is being recorded.

At this time I would like to turn the conference over to Ms. Knapp. Please go ahead.

Sara Knapp

Thank you, Jamie. Hello everyone. Thank you for joining DCT Industrial's third quarter 2009 conference call.

Before I turn the call over to Phil Hawkins, our CEO, I would like to mention that managements' remark on today call may include statements that are non-historical facts and are considered forward-looking within the meaning of applicable securities laws, including statements regarding projection, plans or future expectations. These forward-looking statements reflect current views and expectations, which are based on currently available information and management assumptions.

We assume no obligation to update these forward-looking statement and we can give no assurance that the expectations will be attained. Actual results may differ materially from those subscribed in the forward-looking statements and will be effected by a variety of risks, including those set forth in our earnings release and in our Form 10-K files with the SEC as updated by our quarterly reports on Form 10-Q.

Additionally on this conference call we have refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures are available on our supplemental package which can be found in the Investor Relations section of our website at dctindustrial.com. And now I'll turn the call over to Phil.

Philip L. Hawkins

Thanks, Sara and welcome everyone. Good morning. I will provide some general comments on the third quarter results, markets and the company and then Stuart Brown will provide more detail on the quarter as well as outline our 2010 guidance and related assumptions. Also participating and available to answer any questions directed their way are Daryl Mechem, Mike Ruen and Matt Murphy.

We had another decent quarter where operating results were consistent with our expectations and guidance. I look forward to the day when the operating environment will produce some positive unexpected surprises but for now I will take the lack of any big negatives.

We were very pleased with leasing results in the quarter. Leasing activity totaled 2.9 million square feet, up from last quarter's 1.9 million square feet. And our retention rate was 88.2% reflecting the completion of several large and important renewals, which we were happy to have gotten over the goal line.

Occupancy in the operating portfolio increased from 87.4% last quarter to 88.3% this quarter. Tenant credit has been among our biggest challenges in 2009. Our defaults and bankruptcies from earlier in the year continue to impact results, the pace of new tenant issues appear to be slowing quite significantly. Companies that have survived this long in these brutal economic conditions are more likely to make it longer term, given that the economy is starting to show signs of stabilization and eventual recovery.

I can tell you that the feedback we're hearing from our customers regarding their businesses has markedly improved over nine or 12 months ago. In terms of operating fundamentals we are encouraged by early signs of stabilization. Yesterday's report that GDP grew 3.5% was welcome news and while there is a debate about what normalized GDP growth will be in the absence of government stimulus, at least the economy is no longer in free fall.

Consumer and business sentiment is decidedly more positive today. Leasing proposal and lease documentation activity is up and tenants are more capable of making longer term decision about their businesses. The decline in effective rents also appears to be slowing. However, make no mistake about how competitive the leasing markets remain. At such a quick and brutal downturn a slowdown of the descent feels better. But market occupancies will likely continue to fall somewhat although at a slower rate than in the past. And for the next six months or so that will happen. I think market rents will also remain low for sometime and may even decline a bit further from here.

I am happy that stabilization appears to be underway, but I also reflect back on prior downturns where the recovery seems to take longer and proceed at slower pace than the optimists that first might hope. I believe that is likely to be the case this time and that is how we are planning our business. While the recovery could be slower and longer than some may hope, the long term prospects are very encouraging.

Rents are at least 30% below those needed to justify new construction. At the same time our industry's ability to develop new supply has been severely impaired given the weakened balance sheet of many merchant builders drastically reduced development organizations and lower risk charts of both lenders and equity sources. The lessons of this downturn will not be quickly forgotten which leads me to believe that new supply will be slow in coming online, which is very positive long-term for owners of existing distribution assets.

In terms of the investment markets, activity remains slow, although we are currently looking at a few individual assets in smaller portfolios, in which we have a potential interest. We are active in pursuing both off market and marketed deals and are optimistic that we will be successful in acquiring high quality well located assets that will be accretive to earnings and NAV.

I can tell you that while we are very focused on pursuing such opportunities we will remain highly disciplined regarding our assets, location and return criteria.

In summary, I'm pleased with our results and the progress we continue to make in implementing our business plan. We are also encouraged by the early signs of stabilization. While there will undoubtedly be some additional bumps along the road we are excited about the opportunities in front of us to continue growing and strengthening our company.

Let me now turn the call over Stuart, who will discuss our quarterly results as well as offer more details on our guidance for 2010. Stuart?

Stuart B. Brown

Thanks, Phil and good morning everyone. As Phil mentioned I will briefly touch on third quarter results and guidance for 2009, provide some color on our 2010 guidance and finally provide an update on our balance sheet and capital position.

Our third quarter funds from operations was in line with previous guidance, at 26.6 million or $0.11 per share. This excludes severance charges as well as a small impairment which totaled $3.4 million or $0.01 per share. As Phil discussed our leasing accomplishments and other and somewhat higher bad debts expense this quarter, the operating results were inline with our expectations. A few tenants that have been on our watch list continued to struggle answer and since we have not restructured their leases to reduce or defer their rent, our bad debt reserves have increased.

On the positive side, our tenant watch list did not change much in the quarter and requests for rent relief have declined. Our cash same-store net operating income declined 8.4% in the third quarter when compared to the prior year, of which about 200 basis points is due to the higher bad debt expense and the remainder due mainly down to occupancy, which declined to 87.3% from 92.1% on our same-store portfolio.

Our general and administrative expenses are up in the third quarter due mainly to the $2.7 million of severance costs. Otherwise expenses are inline with previous quarters and guidance. We also had a few notable transactions this quarter. As listed on page nine of our supplemental reporting package, we acquire out partner's interest in three unconsolidated development buildings and one land parcel which we owned 90 to 95% of previously.

Upon consolidation we required under new accounting rules to record them at today's fair market value which resulted in a loss on consolidation of $10.2 million. Gains or losses on business combinations are not included in FFO. Further in Monterrey, Mexico we completed the purchase of three bulk distribution buildings totaling 390,000 square feet which we were under forward commitment to purchase and one building expansion for a total of $14.9 million.

Finally, in October we closed on the sales of an 850 square feet bulk distribution building in Indianapolis for $22.4 million. As of September 30th this fully leased building is reported as held for sale and we recorded an impairment of $630,000 in the third quarter equal to the difference between the sales price and our carrying value.

Now turning to guidance; excluding severance and impairment charges, we expect FFO to range from 49 to $0.51 per share in 2009. While we expect a decline in occupancy in the fourth quarter, business fundamentals should be generally unchanged from the third quarter.

For 2010 our FFO guidance ranges from $0.36 to $0.44 per share, a somewhat wide range reflecting the continued uncertainty with regards to the economy and pace of improvement. I think that the easiest way to explain our 2010 guidance is to compare it to the current run rate. In the third quarter, our annualized FFO before severance, impairments and gains is almost $0.44 per share. The decline of $0.04 per share to the midpoint of our 2010 guidance is due mainly to expected early debt financings.

We expect to undertake several steps in addressing our 2011 and 2012 maturities, well before their due date which are dilutive in the short term but we believe prudent to maintaining a strong capital position. Steps include re-financing our $300 million term loan, which wouldn't mature until 2011 with extensions; replacing our $300 million credit facility which is currently undrawn; and extending the refinancing about half of our 2011 and 2012 mortgage maturities.

In total, we expect to refinance over $500 million of our $1.1 billion of debt in 2010. As far as this plan for example, we have lender commitments today on $70 million of our 2012 mortgage maturities to extend them to 2019 at a fixed rate of 6.11%, which is very favorable on today's market, but an increase when compared to the current interest rate of just over 5%. The $0.04 per share increase in net interest expanse also includes about 1 to $0.02 per share to the less interest in capitalized on developments. Outside of interest expense we expect lower same-store net operating income to reduce FFO approximately $0.01 per share which is offset by higher earnings from our development buildings.

Same-store net operating income is expected to decline between 6 and 8% as we cycle against higher occupancies from the first half of 2009 and rents on new leases are expected to decline approximately 10%. Our guidance allows for 2010 average occupancy to range from 84 to 89% in our operating portfolio, which compares with 88.3% occupancy at September 30.

Based on the timing of lease explorations and the normal impact of month-to-month leases rolling off, we expect occupancy to dip in the first quarter. Otherwise the components of our guidance are pretty straight forward. Fees from our capital management business as well as general and administrative expenses are expected to be inline with the current normalized run rates. Also we have essentially no impact from future acquisitions or dispositions and had no development gains on our guidance.

The average diluted share account for FFO should be about 238 million shares assuming common stock equivalents remains constant.

Finally, let me give a brief overview our balance sheet and capital position. The $112 million of proceeds in the June equity offering were utilized to retire debt this quarter. In total we've paid down $116.2 million of secured debt in September consisting of the prepayment of our $52 million January 2010 maturity and paid off $64 million of construction financing and construction with the consolidation of the development joint ventures.

Our balance sheet is stronger and our fixed charge coverage ratio is a solid 2.6 times in the third quarter. And this includes much of the benefit of the debt we paid down in September. We have no debt maturities remaining in 2009 or in 2010 considering extension options. And our unconsolidated joint ventures or pro rata shares total debt is $94.7 million, of which only $27 million matured before the end of 2010.

Regarding anticipated early debt refinancings, we are in preliminary discussions with bank group regarding refinancing of our term loan and credit facility and in active discussions with our security lenders for about half of our 2011 and 2012 mortgage maturities. Based on these discussions we are very confident in our ability to refinance.

While our average interest rate will rise about 40 to 50 basis points in 2010 from 2009, we believe getting ahead of the rising tide of commercial real estate maturities in 2011-2012 as prudent and well positioned as well. We are happy with our flexibility and capacity of our balance sheet to fund attractive and accreted acquisitions as we look forward to 2010.

With that I'll turn the call back over to Jamie to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jamie Feldman from the Bank of America. Please go ahead with your question.

Jamie Feldman - Bank of America-Merrill Lynch

Thank you. Stuart just a question on the guidance. Just in terms of the math. So you're saying if you take the third quarter run rate and annualize that and then take off for the interest expense, I guess what I'm trying to figure out is does that mean like same-store should be flat from this quarter? Is that how you guys are thinking about it.

Stuart Brown

Yeah. Our same-store probably declined a bit from this quarter's run-rate but you remember, this same-store NOI, net operating income in then third quarter has already declined then from first and second quarter. So we're certainly cycling. In 2010 we will be cycling a stronger first half. So we'll probably trend down a little bit. Mostly some what relative to that rollover. And some of that will be offset by probably a little bit lower bad debt expense.

Jamie Feldman - Bank of America-Merrill Lynch

Okay. And then bigger picture just in terms of the activity that you saw this quarter. Can you characterize it a little bit more, provide a little bit more color and I mean, the GDP numbers we saw, there is a lot talk about it being driven by government stimulus and orders. And just do you think this is a short term pop or what gives you conviction that these businesses that are looking now are going to stay in the market for a while?

Philip Hawkins

Let me it's Phil. I'll answer that and ask Daryl or Mike to give you some color. The GDP numbers are really what drives my belief that were positive stabilization. Your comment that GDP may be fleeting, does drive my concern that the recovery may not be happening as quickly as some optimists might be predicting or hoping.

So we are showing that activity levels until the leasing proposals, leased documentation and then sign leases, that continues based on the current environment. Not some ramping up in the economy. Clearly as we talk to tenants they give us hope is that if we talk to tenants, we are getting much more positive feedback or more positive feedback from more tenants, than we certainly were six to twelve months ago.

Not that that's a high bar to jump over. But that is -- so it's really more that and the fact that tenants are now, I think more confident in their businesses, more confident in where are market rents are certainly stabilized. And so those who can make decisions are now no longer as worried about are they getting the timing wrong. And as a result, I think we are going to start seeing more deals coming down the road.

Daryl, do you want to add few things.

Daryl Mechem

Sure as relates to the first part of the question, Jamie the activity in the third quarter to Phil point, customers are willing to make longer term decisions and two large deals we signed in that quarter reflect that.

The land at Atlanta (ph) 2 million square feet they came to the table and renew their releases and the transaction time for those deals is much shorter. People are moving faster to make decisions now.

I think a secondary comment on the demand question. We track lease document negotiation. And as a reminder that is the -- any deal we have negotiated the economic and business points are moved to lease documents, a high decree of ability to close on those deals. Our number at the end of this are right now is 3.3 million square feet. It is the highest number we've had since the second quarter of 2008.

The complexion of those deals at the lease document stage is 1.3 million square feet of new transactions and the rest are the remainder of 2009 renewals and 2010 renewals. So is it indicator for long term, we don't know. But it certainly reflects what we experienced in the second quarter with the pick up to proposal activity moving forward to lease documents. So the slight momentum pickup in second quarter is being reflected in some of this document increase.

Jamie Feldman - Bank of America-Merrill Lynch

So, the 1.3 million square feet of new transactions, what type of tenants are those?

Philip Hawkins

I would say the largest piece of that would be a 4000 square foot, three PL foot of vacancies in Chicago, and I know Mike's got a couple of large deals as well on the East. Mike, would you like to comment on those.

Michael Ruen

Sure we have one in Lugo that we're working on, that's about 5000 square feet. That we'll have done by year-end as well as the couple others in 250 range. I would echo Daryl's comments but I would also say to just back to full process from the tenants perspective, I think we're finally beginning to see tenants looking forward as oppose to just focusing on survival.

Jamie Feldman - Bank of America-Merrill Lynch

Okay. All right. Thank you all very much.

Operator

Our next question comes from Paul Adornato from BMO Capital Markets.

Paul Adornato

Thanks. Good morning. Just to continue the discussion on leasing, what's the renewal ratio do you think is good to assume for 2010?

Stuart Brown

Paul this is Stuart I mean it's even though the run rate right now is higher than that I think just given looking to specific turnover to next year, we're using somewhere sort of a low 60% range.

Paul Adornato

And what about the timing of our 2010 discussions how far along you mentioned some of them but would you say that the renewal discussions are on pace or they are happening slower or tenants coming in sooner or later or what's the what's their urgency?

Daryl Mechem

Sure, Paul, it's Daryl. We are actually seeing a positive uptick in the speed which are customers are prepared to start renewing or discussing their renewals. Some one made an earlier comment, I think our customers are starting to see a revenue baseline in their business. They are prepared to move forward with a plan. So it is moving the renewals along a little faster.

Paul Adornato

And finally, just with respect to activity levels, do you -- what's your philosophy on kind of managing to occupancy? Do you think it's important to maintain certain levels and I guess related to that is, are there any deals that are proposed that you guys just reject because the economics are no good.

Philip Hawkins

This is Phil. I wish we could manage the occupancy level because I have higher occupancy in the portfolio if that was possible. We would it's safe to say that we remain much more focused on occupancy then rate and I think that'll be true for at least next several quarters. And my guess is honestly through 2010 but I don't need to predict that far ahead yet.

And the second part of your question, Paul was...

Kind of walk some of those economics. I'll say, yes. And to use the market but I think in a coastal market where we'll end up losing a tenant because the economics of I would describe as fairly desperate private privately owned developer with a leverage produced economics that we believe even though there will be down time for some period of time, we were better served to hold out. And that was the decision made very carefully and very thoughtfully between in this case, Daryl Mechem, our internal leasing people and our listing brokers where we feel despite what could be 12 month of downtime we're still better off.

The economics that were offered is a free expansion space which we couldn't counter any way, TI specialized TIs and the lack of amortization of that. We just said, you know what, we'll cross the line and even I will have to say I agree with past. But that's very -- there aren't many of those I will tell you that.

Daryl Mechem

Hey Paul, it's Daryl. I think a bigger driver that kills deals in this environment is the credit. Those who come to the table, you engage a transaction, you fight for the financials and frankly that is the number one killer on the fields.

Paul Adornato

Okay. That's make sense, thanks.

Operator

Our next question comes from Brendan Maiorana from Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, Llc

Hi. Good morning.

Philip Hawkins

Good morning Brendan.

Brendan Maiorana - Wells Fargo Securities, Llc

Scaling back to the guidance, question on the occupancy and there was 84 to 89%. So am I to compare that to your operating property portfolio right now, which is the 88.3% or are the redevelopment and development properties going to be well up to the operating pool. So really I should compare that 84 to 89 to your current 83.5.

Philip Hawkins

Well, as you compare do you get the right percentage to the operating pool, sort of same-store operating pool will decline about $0.01 per share next year in terms of NOI from the third quarter run rate. And on the development leasing if you include redevelopment we get 7.5 million square feet in the pool of development redevelopment together. That's about 13.5% occupied today. Overall sort of our guidance probably assumes -- has got about average occupancy. Next we will grow to 30 to 35%. So that equates about 1.4 million on average feet leasing up.

Brendan Maiorana - Wells Fargo Securities, Llc

Okay. And in terms of capitalized interest the 1 to 2%, $0.01 to $0.02 rather. Is that a number that is an annual year-over-year change or is that just -- what's in Q3? Is it $0.01 to $0.02 annualized in Q3 or is that less in Q3.

Stuart Brown

It's probably about the same. You tell them specific projects, most of the capitalized interest will be a burning off. The only property I believe that still be capitalized interest and even that's only for the mostly for the first part of the year is SCOA (ph) on the million square footer and also the 2 billion to Port Union that will their order this year. And then the -- they also want goal of longer really be the buildings in Monterrey, Mexico which we just acquired.

Brendan Maiorana - Wells Fargo Securities, Llc

Okay, okay that's helpful. And then what we see on an original basis in the assets that, in the assets that you consolidated and than affectively merged down to 10 million?

Philip Hawkins

Brendan we never disclose the specific invested balance in their to a -- really though you could feel back to supplemental and say here is your project investment if you added up the two buildings, second more A and Point and logistics way, the total projected investment would see us maybe then be close $80 million. And so then you had about a $10 million write-down on that. Remember two of those buildings Logistics and Nashville and one in Sigma Canyon buildings was fully leased and one of them was vacant. So...

Brendan Maiorana - Wells Fargo Securities, Llc

Okay. And then the cap rate on the Indianapolis there?

Philip Hawkins

When I disclose the Field cap rate I would say that in that kind of market for it's a fairly stabilized assets there are couple of years left on the lease, kind of low 90 utilized cap rate is I would say as a market.

Brendan Maiorana - Wells Fargo Securities, Llc

Okay. And still at a low 9 how does that kind of compare to -- you said acquisition activity is starting to pick up a little bit. You think there are a lot of investors are certainly interested in industrial product. I think cap rate had maybe narrow at a little bit since three to six months ago. So where do you guys sort of stand in terms of your underwriting criteria relative to may be where you were towards the beginning of this year? Has that come in a little bit or you still kind of holding out for double-digits?

Philip Hawkins

No, it was double-digits. It was certainly what we were thinking about it and back in San Diego this is a non necessary positive memories. There's no doubt that Cap rates are comfortably single-digit. But I have talked to people in this if the growth utilization I think Cap rates for many markets is just kind of 8.5 to 9.5, coast the coast being in all other mid eights, may be in the eight. The Midwest central part of country kind of low 9s, mid-nines and may be even some secondary markets high nines but there is no doubt with a -- the supply has really been slow to come online, capital has come in quicker in industrial then other areas.

And also on the financing markets have stabilized and probably stabilized at interest rates that are lower than you might have been expecting six or nine months ago. That as all that to investment market that well. I think we were now able to predict kind of where cap rates are put by market and building and a little bit and my guess is that sellers are out there, there is a much narrower tighter range around the bulls-eye, which I think hopefully will give comfort to some potential sellers, say I know where it's going to go. I know what to expect my pricing. It's not going to change a lot as interest rates potentially rise, uncomfortable coming on the market now. I think that will help.

We weren't active buyers in the first part of the year. We didn't feel like those were right use if our capital. We're really hunkering down preserving our balance sheet but the every offering along with more confidence in the financing markets has given us to believe that we should be out there looking for assets. We're more focus obviously on the coastal market that we are interior. So the cap rate we may realize on Indianapolis may not be what we replace it with.

Brendan Maiorana - Wells Fargo Securities, Llc

Okay. A negative. Okay I'm sorry, I thought you...

Philip Hawkins

With this line, Brendan, I mean, I'm more focused on long-term growth and also stability. And so we got fairly stringent, fairly well defined criteria internally for markets, sub-markets, asset quality and then by market return targets that we discuss a lot for the last part into and I think we will be quite disciplined in working with.

Brendan Maiorana - Wells Fargo Securities, Llc

Yeah. That's very helpful. I'm sorry, I thought you said in the beginning your comments I think I may have misheard that you were still targeting double-digit where you are sitting today. That not available really?

Philip Hawkins

Double-digits were a figment of our imagination and fear 12 months ago.

Brendan Maiorana - Wells Fargo Securities, Llc

Yeah

Philip Hawkins

Honestly as I said that, then I hope it don't happen because we have all have a more than we we're going be buying.

Brendan Maiorana - Wells Fargo Securities, Llc

Right

Philip Hawkins

And thankfully it didn't. The negative is we're not going to deploying capital what people might have thought were double-digit returns. I still think we can acquire assets that are attractively priced, certainly relative to historic standards in markets that we would like expand in and returns in values that are accretive to earnings and NAV as well as to our all business plan.

Brendan Maiorana - Wells Fargo Securities, Llc

Right, great. Thank you.

Operator

(Operator Instructions). Our next question comes from Michael Mueller from JPMorgan.

Unidentified Analyst

Hi, this is Michael (ph). My first question is about the term loan. Right now it's a mix that's fixed and floating. I was wondering if you intend to fix and do a similar mix on the resize and then also if you could say anything about the blended price now versus potential new pricing?

Matthew Murphy

Hi, Mike. This is Matt Murphy. First part of the question and what we did is the term loan itself is entirely floating rate. We swapped some of it fix in the initial transactions. That's something that given valuation of the markets we made you again depending on the timing of how it works out and we tend to focus on maintaining what's an appropriate balance between fixed and floating rate exposure in total in the debt portfolio. So part of it is dependent on what proceeds it.

And I apologize I forget the second part of the question. In terms of pricing about the term loan I think one of the things you'll see us do, consistent with Stewart's comment is we're going to address, I think in all likelihood the term loan and revolver simultaneously I think we'll give better execution, both in terms of structure and in terms of organization of the bank group. And what they are trying to achieve by doing those simultaneously. Really don't want to negotiate I guess myself on half, because I think some of the pricing that you have seen in recent revolvers that are both -- have been announced recently and are currently in the works, will lead into a conclusion on where spreads are going.

Fees, I think one of the things you will see is fees on the bank facilities are going out significantly and then making all assumptions about where LIBOR is going to go. But clearly there is obviously an increase in the price of bank debt today, whether it's outstanding or revolver capacity. And at least 150 there to maybe 250 increasing credit spreads.

Unidentified Analyst

Great. Thanks.

Stuart Brown

Mike, this is Stuart. I'll add one other thing. One thing, once we've accomplished all this that you will see you'll see us be pushing out our average debt maturity from where it is today, just consistent with what you see sort of going on the market expectations for Treasury rates and some of that may imply a little bit less bank debt versus some longer term fixed rate.

Unidentified Analyst

Okay. Great. Thanks. That's helpful. And my other question is kind of a two part. I wanted to ask about kind of what you see as a run rate for kind an improvement leasing commissions to CapEx and then prior to that, it looks like especially at the low end of your guidance that you may miss the dividend at least for a little while. And I am wondering if you would consider cutting it again and just paying on to the cash?

Stuart Brown

Mike, I will touch on the first part. In terms of over all what we expect for maintenance CapEx and turnover. Maintenance CapEx has historically run on average about $0.20 per square foot. I think that was probably continuous sort of although you get a little bit of ups and downs in term of timing of the roof repairs and things like that but that's probably very good run rate.

In TIs again we've been running less than this, this year but it will probably be about $2 per square feet on signed leases on average.

Philip Hawkins

And this is Phil. I'll comment on the dividend. Never would say never but given if we were to fast sort of coverage we'll find that in a situation that we're 12 months ago we did the divided because A, it's due I think would be a temporary low trough and occupancy which would be quickly recovered from. And second we've got a balance sheet and more confidence the capital markets with that temporary short fall if it is existed could be covered with confidence.

It's been my belief for a long time a dividend should be consistent and also should be credible. And now you have the final item we would be walking in 2010 if that was the case. I believe that given the relative short-term nature of that lack of coverage, that we would incline to leave the dividend unchanged from current levels.

Unidentified Analyst

Thanks.

Operator

Our next question comes from Cedrik LaChance from Green Street Advisors.

Cedrik LaChance - Green Street Advisors

Thank you. I just want to go back to CapEx question little bit. The cost per square foot per year on lease turnovers certainly increased of late. Can you give me a sense of net effective rents as of right now versus 12 months ago in your portfolio?

Philip Hawkins

Can you repeat that?

Cedrik LaChance - Green Street Advisors

Your lease rates are down, let's call at 6%. Your CapEx are up a bunch. If you take the lease rate after CapEx that you're getting now versus what you used to get 12 months ago we're down what, 15 or 20?

Daryl Mechem

10 to 15%, Cedrik, it's Daryl. About 10 to 15%.

Cedrik LaChance - Green Street Advisors

Okay. Where do you see this going over the next 12 to 24 months?

Daryl Mechem

I think that's fairly consistent with -- we have sort of talked about in our guidance for next year, is lease rollover still lease rollover will probably decline next year about 10% and from what we are sort of seeing today, I mean we are not buying leases with high specialized improvements or high TIs or anything. So I don't think the turnover cost per square foot are trending higher than have historically and will certainly, we've always paid commissions, broker commissions on deals to get them that's obviously going to continue and higher TIs in terms of total dollars are just reflecting the amount of leasing activity that will be getting done.

Philip Hawkins

I think Cedrik. Let me try to answer that with may be a different -- might been, maybe the question in a different way. And that growth approximately lease spreads where you're rolling over at least five year old kind of where effective rents gone on last 12 to 24 months and like lease spreads next year I think is going to all be market specifically, it's been dramatic.

Rents in some markets are down by half; almost half in some in the West for example. You've got 20 or 30% easy in many markets and more than that in some of the less supply constrained market. So it's been rather dramatic. We don't, when we think about that difference we don't to cut TI to fairly manageable we aren't don't factor that because that -- in general it came a little bit but it's very remote on the rents side.

What you see our increase in CapEx, cost, TI and lease roll over costs really is more space specific and mix related as it is much of that is a little bit I am sure is related to the market. But much of it is really related to mix in what we're rolling over and when and also next year renewals versus new deals also influences that. As you do more new deals obviously your average TIs are going to go up. Now, that's just that is the fact.

Cedrik LaChance - Green Street Advisors

Okay, that's helpful. And in regards to JVs are there any more partnership where you're going to have to buy your partners up or have we seen all the buyouts for now?

Stuart Brown

No, the last the only must takes we had of we had a --we had were those -- in -- Mexico. We do really if -- indeed there are joint ventures that need to be dissolved. But that's all it will get in the case of the two we dissolved in California and Nashville. But that was related to the clashing of other interest of the post of the buying them out. There was any cash that traded in hands. Well I guess it was a small amount in Nashville.

Philip Hawkins

So Cedrik I mean, so the only development joint ventures you try to come into the only joint development, joint venture that we still have or obviously our SCLA the four building in Idaho, which is 50-50 joint venture and than in with Sea Fleet in Orlando and Dallas they are just smaller interest in that we have get I think 95% of that.

Cedrik LaChance - Green Street Advisors

Okay. So just what I understand, what would you pay cost on that case to dissolve to joint ventures, when the market is somewhere lower then that?

Philip Hawkins

Contractual, we didn't have the contractual obligation but we did. I will tell you in the case of Monterrey we actually negotiated. We had some issues on our side. What we didn't have is the confidence or the desire to go to through five years of litigation to avoid it altogether. But it did result in a haircut honestly on those assets. Still we did rather not bottom. We'd not have liked to written a check. And we did in Nashville. It was a contractual obligation, it goes back a number of years.

Cedrik LaChance - Green Street Advisors

Yeah. Okay, and...

Philip Hawkins

It's all you add that. Then we get some -- would love and I have to have it what we did.

Cedrik LaChance - Green Street Advisors

You plan on investing further in Mexico?

Philip Hawkins

On hold, on hold for a variety of reasons. But we're focused on leasing, and we got a lot to do there in the market were in. And we and then we're focused on deploying capital in swap market in United States. I have not made that long-term decision on Mexico, don't have to, at this point in time, but we are not at this point least the feasible future into suddenly deploying new capital Mexico to address the optimist we currently have on leasing front.

Cedrik LaChance - Green Street Advisors

Okay, and in the JV’s that you’ve purchased there was a land parcel as well in Indy. By how much the value of the land declined since you had purchased it originally.

Stuart Brown

Cedrik, this is Stuart. I'll do a little bit off the top of my head a little bit. We wrote it down actually we took an impairment on that land as well some land in Reno that will be consolidated basis would be the same thing in the fourth quarter I think this can close. It was also with Penatoni (ph). We wrote that down, got 40 to 50% in the fourth quarter we took an impairment charge for that.

Cedrik LaChance - Green Street Advisors

Okay. And when was the original purchase?

Stuart Brown

It's been about I guess from today it's a little bit two years, little more than two, 2.5 years ago.

Cedrik LaChance - Green Street Advisors

Okay. And maybe a final question. Obviously when we look at development pipeline there is fair amount of leasing to be done three. You're not overly confident about the pace at which you can lease it for next year based on the comments you made earlier and if there is something in your structure in terms of employing primarily third party leasing contractors that prevent the development portfolio from getting the same amount of leasing perhaps with your operating portfolio?

Philip Hawkins

Actually we've got -- we've added help of our partners, Mike you want to comment on that activity because actually it's we've got a fair more activity.

Michael Ruen

Sure, sure -- that's a lead up on your first question I would say no in that. And we are very confident in both Sea Fleet and the RDI and the local partners. I would say I could attribute it to -- the slow lease up to the fact that roughly 6.6 that we've got out there excluding redevelopment, that 5.6 is vacant as primarily Class A. And that's the slowest segment of the market today. So that -- that's why I would attribute it with the slow lease up to is the type of product that's out there, but as far as commenting on activity, I'll also tell you that we've seen more requests for proposal than enquiries in the last, call it 60 days that we have in 12 months.

But I am optimistic about the level of activity and specifically the book activity, I'm excited about primarily because of what we are seeing in the way of space utilization, primarily in the coastal market and that what we believe we start to see more activity on the book side here coming into '10.

Cedrik LaChance - Green Street Advisors

Okay. Thank you.

Philip Hawkins

Thanks Cedrik.

Operator

Our next question comes from Kybin Kim (ph) from Macquarie. Please go ahead with your question.

Unidentified Analyst

Thank you, Phillip if you look at your 2010 lease expirations, if you had to estimate, what percent of those tenants have you already began lease negotiations with and if you could separate the tenants between very likely to renew and somewhat troubled and I guess in the middle how that looks when you pick it out?

Daryl Mechem

Hi, Kybin, this is Daryl. We have got about 35% of our 2010 renewals at some stage of discussion. It's a little challenging to put a percentage on high likelihood, low likelihood, based by each tenant. But we have engaged 35% in some form of discussion.

Philip Hawkins

We're talking everyone of them.

Daryl Mechem

When you mean discussion you mean active lease discussion. Let's say, I want renewal and I want to talk about renewal as opposed to you got a lease coming up, let's talk. Actual proposal?

Unidentified Analyst

And is that difficult. Because I mean I guess we're getting pretty close to that 2010 expirations, how long do you wait to get that 35% to a 100%?

Philip Hawkins

All right, we as Daryl pointed out we've spoken to all of them. The ones that are really actually engaged in the negotiation of renewal talk economics is the number I'm talking about. The activity based on the proposal pipeline we track is now let's say leaning towards a pick-up in the next two months.

Unidentified Analyst

Okay. And net 35% of tenant is hoping for an actively negotiations with --what percent of that or how many tenants do you think are just kind of actually not going to renew next year?

Philip Hawkins

Well about 35% we'll possibly renew because they're in active discussions with us.

Unidentified Analyst

Right, right. Okay.

Philip Hawkins

It's really 65% left over that thinks just to be clear what this 35% means, go ahead Darrell.

Daryl Mechem

You said the...

Philip Hawkins

Of that 65%, do what percentage do you have a sense for kind of the no chance kind of tenants.

Daryl Mechem

Oh, I would have to dig deeper into the details but we're forecasting 65% attention.

Unidentified Analyst

Right.

Daryl Mechem

And here we are talking to our customer. So we're comfortable with that.

Unidentified Analyst

And from the, I guess the tenants that decide not to renew, what is the primary reason for that is that competition or just down pricing?

Philip Hawkins

Most the time Kybin it is, is the latter part of your comment, it's the downsizing or space utilization change, growing and/or shrinking.

Unidentified Analyst

And I guess my final question, we going to see your 900,000 of bad expense this quarter. Could you just provide more color on it, the type of tenants and when you expect that accounting treatment to reverse?

Stuart Brown

Yeah, so this would be the tenants which we talked in the past about some tenants on our watch list from the first half and just a variety, I mean there is a couple of bigger tenants and obviously some smaller ones are on our watch list. Overall our watch list actually hasn't changed much in the third quarter and sort of determinations of bankruptcies were also pretty light in the quarter.

And it's hard to sort of make a generalization about the types of tenants that are in there. But what I can tell you is that we've got one third-party logistics company that has lost some business and is struggling so we've reserved a fairly significant portion of their accounts receivable.

And we got another tenant that is I think we talked earlier as well it's in the process of liquidating their business. They have been liquidating the business since really the beginning of this year. They don't expect to wind things up until sometime in 2010. And they were public company and said, hey upon liquidation we will payout and we've probably said about 90% of all their liabilities. We've reserved fairly healthy amount above 10% that they have indicated that we should reserve. Trying to be sure we got everything covered. And overall our AR reserve is about consumable reserve is about 70% of all accounts receivable over thirty days.

Unidentified Analyst

And when is that liquidation or attempt at that liquidation when does that come to a conclusion?

Philip Hawkins

That's about this part of third quarter next year.

Stuart Brown

Its third quarter of next year, Kybin.

Unidentified Analyst

All right, thank you.

Philip Hawkins

Sure.

Operator

Our next question comes from Mark Retenski (ph) from BMO Capital Markets.

Unidentified Analyst

Hi, how are you doing?

Philip Hawkins

All right.

Unidentified Analyst

How have land values changed recently? And I guess may be a focus on the Inland Empire.

Philip Hawkins

Who knows. I mean as a part of that I can use our a couple of sales, and say that they were -- it was in the last sales -- and say they've helped up pretty well but the honest answer is, didn't we know if they're falling but there is just no market, no sellers and no buyers.

So really I can say they fall in significantly in many markets, every market. The question is, who's the buyer, when you are think you are several years away at least from development.

So I don't know.

Unidentified Analyst

Okay. And is the intention for the properties, I guess to sell the project that you have, is do you plan for all those?

Philip Hawkins

Yes.

Unidentified Analyst

Okay. And what is the -- how's timing for stabilization of those property exchange versus last quarter?

Stuart Brown

This is Stuart, longer. I think just given with the lease up there. Again, if you look at sort of how much lease up we've assume next year and our development pipeline that we will get I don't know 25, 30% of the stabilize I think next year, and the sort of what sort of in the mid point of our guidance.

Unidentified Analyst

Okay. Thank you.

Operator

And our last question comes from Brendan Maiorana from Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, Llc

Hey, I just wanted to follow-up on the occupancy discussion in the guidance for next year. So from relative to the mid-point of the 84 to 89 would imply about a 200 basis point decline from where you guys are at 9:30. And I'm just trying to compare that to what sounds like a little bit more optimistic view of where your markets are now relative to couple of months ago, with the 3.3 million square feet, there in lease talk stage, your customers feeling a little bit more confident and occupancy in the operating portfolio which actually moved up this quarter relative to the second quarter.

So can you just tell me help me understand why it would go down so significantly with, what seems to be a little bit more optimistic view point going forward?

Stuart Brown

Brendan, this is Stuart, I will start off and I am sure somebody else may jump and afterwards. I mean, A, we added some decent occupancy numbers, the increase was actually later in the quarter. So if our average occupancy in the quarter was 87.8%. So you would probably forecasting some decline at the mid point from sort with the run rate was in the third quarter. And that's really just due to 2010 being a relatively high year in terms of overall lease expirations.

It's always been sort of a little bit higher year even looking back than normal due to the timing of specific leases that are in the portfolio. And then also we've got some -- not a significant amount; but you really get some month to month and things like that, that are going in that tenant utilized in the third quarter leading up to a holidays and that sort of a burns off a little bit in the first quarter, sort of early in the first quarter as well. So there is definitely some expected decline in the portfolio and I think this given the uncertainty in the economy. And that's the right thing for us to be guiding towards.

Brendan Maiorana - Wells Fargo Securities, Llc

Okay. It sounds like you're being if I heard the comment earlier you're being aggressive for at least that market when it comes to rate you are not holding out in the thought that rates are going to be significantly better -- of that?

Philip Hawkins

Correct. We don't lose a deal on economics although the one you are few rare exceptions that what I mentioned which far away will be a early first quarter 2010 expiration move out. So we know that's common, rather sizable deal. No, we are very focused on occupancy, like it to be higher. Hope it's higher. I think it's hard than its environment to promise that.

Brendan Maiorana - Wells Fargo Securities, Llc

Okay. That's helpful. And then just I may have missed this earlier but on the same-store the expenses is that just because year-over-year your occupancy levels are down. And so you have got net structures so that you have to absorb more of the expenses or they is something actually, that's causing overall expenses to go up.

Stuart Brown

Brendan that's the pieced of it and the recovery rates are down on the lower occupancy, but really the biggest piece of it is bad debt expense which was I think $61,000 in the third quarter last year. And so that's absolutely difficult. That's in the $929,000 in this quarter so that's actually the main cause of increase.

Unidentified Analyst

Okay. So that runs through the expense line.

Stuart Brown

Runs through the expense line, yeah.

Brendan Maiorana - Wells Fargo Securities, Llc

Got it. Okay, all right. Thank you.

Operator

That's end today's question-and-answer session. I will now like to turn the conference call back over to Mr. Hawkins for any closing remarks.

Philip Hawkins

Thank you everybody for participating. And look forward to seeing all of you and many of you and maybe in a couple of weeks. Take care.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your telephone lines. Thank you.

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