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DCT Industrial Trust (NYSE:DCT)

Q4 2009 Earnings Call

February 12, 2010 11:00 am ET

Executives

Briana Ochiltree – Unidentified Executive

Philip L. Hawkins – President and Chief Executive Officer

Daryl H. Mechem - Managing Director, West Region

Michael J. Ruen - Managing Director, East Region

Matthew T. Murphy - Treasurer

Stuart B. Brown - Chief Financial Officer

Analysts

Ki Kim - Macquarie Research Equities

Steven Frankel – Greenstreet Advisors

James Feldman – Bank of America Merrill Lynch

Brendan Maiorana - Wells Fargo Securities

Michael W. Mueller - J.P. Morgan

Mitchell Germain - JMP Securities

Paul Adornato - BMO Capital Markets

Ross Nussbaum - UBS

Mark Lutenski - BMO Capital Markets

Operator

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

At this time I would like to turn the conference over to Briana Ochiltree.

Briana Ochiltree

Thank you, Amy. Hello everyone and thank you for joining DCT Industrial's fourth quarter 2009 conference call.

Before I turn the call over to Phil Hawkins, our President and CEO, I would like to mention that our remarks on today call may include statements that are not historical facts and are considered forward-looking within the meaning of relevant 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 these 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 filed with the SEC as updated by our quarterly reports on Form 10-Q.

Additionally on this conference call we may 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

Thank you Briana and good morning everybody. I will provide some general comments on fourth quarter results, the markets, and the company and then Stuart Brown will provide more detail on the quarter as well as our guidance for 2010. Also participating and available to answer any questions directed their way are Daryl Mechem, who runs our west region, Mike Ruen, who runs our east region, and Matt Murphy, our Treasurer.

There are clear signs that both the economy and the industrial leasing markets are beginning to stabilize. Fourth quarter GDP growth of 5.7% may not be sustainable but two consecutive quarters of growth sure beats the alternative, even if driven in large part by government spending. Unemployment dropping below 10% is also good to see.

All of the metrics that serve as good indicators of future industrial demand are also trending positive. [Port] activity, freight volumes, inventory levels relative to sales, capacity utilization, and the purchasing manager’s index all have improved over the past several months which is encouraging.

Nationally, net absorption was decidedly less negative in the fourth quarter. Negative 13 million square feet compared to negative 55 million square feet according to CoStar. Rental rates are no longer in free fall. We expect that both rate and market vacancies will bottom by mid-year if not a little sooner.

Lack of new supply remains a bright spot and since rental rates today are well below levels needed to justify new construction, it should be quite some time before we see a meaningful increase in new building starts. This also bodes well for rental rate growth as rates need to grow 30% to 40% before new construction makes sense.

In terms of DCT’s results, we had another good quarter with operating performance consistent with our expectations and guidance. As I said last quarter, I look forward to the day when the operating environment will produce some positive unexpected surprises but for now I’ll take the lack of any big negatives.

We were especially pleased with leasing results in the quarter The operating portfolio of leasing activity totaled 3 million square feet and our tenant retention rate was 76.3%. Average occupancy in the operating portfolio increased slightly from 87,8% last quarter to 87.9% this quarter.

As expected and reflecting current market conditions, rental rates on signed leases declined 9.0% on a cash basis and 5.3% on a GAAP basis. We made some progress leasing our development portfolio as well. We signed 100,000 square feet of lease in the fourth quarter, another 100,000 square feet so far this quarter, and have an additional 670,000 square feet in advanced lease negotiations in our development pipeline.

As with our operating portfolio, leasing activity has ticked up and we have more quality prospects than just a few months ago. Our goal now is to get them over the goal line as fast as possible.

Tenant credit losses from defaults and bankruptcies, which was our biggest challenge in 2009, improved significantly in the fourth quarter. Bad debt expense totaled $314,000 in the fourth quarter compared to $2.2 million for the first nine months of the year.

In terms of capital deployment, market activity levels remained relatively low but are starting to pick up a little. We are actively pursuing acquisitions in select markets including several off market transactions and are optimistic that we will be able to get some attractive deals done this year that meet our asset location and return criteria.

Continuing to strengthen our operating platform remains a key focus and we made significant progress in the fourth quarter. We have now internalized property management in eight markets and are in the process of opening market offices in Orlando, Houston, and Southern California, putting us even closer to our customers and assets.

As I mentioned before, we are accomplishing the property management internalization and platform expansion with no material increase in cost as the cost of new offices are offset by lower third party management fees and a reduction in staffing and related costs elsewhere.

In summary, I’m pleased with the quarter’s results and our progress in implementing our business plan. We’re also encouraged by early signs of stabilization in the real estate markets. While there will undoubtedly be some additional bumps in the road, we are excited about the opportunities in front of us to grow and strengthen our company.

With that let me turn the call over to Stuart.

Stuart B. Brown

Thank you, Phil. We reported funds from operations in the fourth quarter of 2009 of $0.11 per diluted share. This includes a non-cash charge of $1.4 million or almost $0.01 per share related to the termination of our 2006 outperformance plan which I will come back to in a moment.

For the full year 2009, funds from operations totaled $0.48 per share or $0.50 per share excluding impairment losses and severance costs and was in line with our guidance. With regards to our operating performance versus a year ago, the change in same store net operating income reflects the impact of occupancy declines as we cycle strong earnings growth reported in the fourth quarter of 2008.

Cash same store net operating income declined 8.3% in the fourth quarter from a year ago due to lower total base rent and expense recoveries offset somewhat by lower operating expenses. The total base rent of our same store portfolio declined 5.9% versus the fourth quarter of 2008 which is consistent with the 5.1% decline in average occupancy.

Same store net operating income for the year ended 2009 declined 6.4% on a cash basis. We reported a $2.3 million increase in general and administrative costs in the fourth quarter versus a year ago due to higher non-cash stock based amortization expense. Our 2006 outperformance plan would have fully vested in 2011 so the termination in the fourth quarter resulted in an acceleration of amortization expense.

Additionally, we reduced assumed forfeiture rates on other equity grants due to low employee turnover which resulted in $900,000 of higher stock compensation expense. Excluding these two non-cash charges, general and administrative expenses would have been flat compared to a year ago.

Turning to property transactions, as we discussed last quarter, in October we closed on the sale of an 805,000 square feet bulk distribution building in Indianapolis for $24.2 million.

Regarding our outlook for 2010, we have left our guidance unchanged with FFO ranging from $0.36 to $0.44 per diluted share. As discussed last quarter, cash same store net operating income is projected to decline between 6% and 8% for the year.

Factored into our guidance is a dip in first quarter occupancy due to several expected move outs including the seasonal reduction of month to month and short term leases. First quarter same store operating income and our tenant retention rate are therefore expected to be below the average for the year.

Throughout the turmoil of the past 18 months, we have kept DCT in a very favorable financial position. In 2008 leading into the downturn we disposed of $145 million of assets and executed a 3 year $300 million term loan including extensions.

Further strengthening our balance sheet, we completed a secondary equity offering this past June and today are well positioned to finance high quality accretive real estate acquisitions. Our fixed charge coverage ratio of 3 times and net debt to EBITDA of 7,2 are both solid metrics, especially at this point in the economic downturn.

One of our major initiatives for 2010 is the refinancing of a significant portion of our borrowings. While our financing structure is strong, our debt maturity schedule is weighted too near term with an average maturity of 2.7 years. This is primarily due to the $300 million term loan maturing in June 2011 including extensions. As well as from greater mortgage maturities in 2011 and 2012, which were assumed in a 2005 acquisition.

We have held a number of discussions with lenders and are planning to refinance over $500 million of our $1.1 billion total borrowings this year including renewing our credit facility which expires in December.

To that end by the end of next week we will have closed on the refinancing of $215 million of 2011 and 2012 mortgage maturities by extending $123 million at an average term of 9.6 years and repaying $92 million. The repayment was financed with proceeds remaining from our equity offering, proceeds from the building in Minneapolis, and borrowings under our line of credit.

While we will be very busy over the next 6 months refinancing our term loan and credit facility, we are very confident in our ability to execute. With the prospect of increasing interest rates, we have assumed in our guidance that most refinancing takes place midyear and we maintain a strong bias towards unsecured debt.

We have recently held our annual meeting with lenders and believe that we will have more than ample capacity to meet our needs. Most striking though is the feedback from life companies and other non-bank lenders, however. This group of lenders, which was largely on the sidelines in 2009, has been increasingly active in the reach space and reportedly has a large amount of capital to put to work in 2010 for real estate lending.

Our credit profile and their desire for increased lending to industrial real estate we believe should fit well. It has been amazing how quickly [the spicadus] re-opened for well positioned companies after the near total freezes of capital in early 2009.

I’ll now turn the call back over to the operator for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ki Kim - Macquarie Research Equities.

Ki Kim - Macquarie Research Equities

Could you talk about the tenant demand differences between your product types and what type of tenants and specific business sectors are showing more demand than others?

Daryl H. Mechem

Clearly we have seen a pickup in requests for proposals on some of the larger space and I think actually Mike will comment on that as well, but that’s been the bright spot frankly in the fourth quarter and going into the first quarter is a larger space. I can’t really put up a number or a specific example of the types of industries because frankly, it’s been somewhat broad based. There’s been some demand from numerous sectors of the economy so large space has outdone light industrial.

Michael J. Ruen

I would agree and I would add to that the large use activity that we’ve seen has been driven primarily by your consumer staples and food related groups, a lot of activity on the build to suit side there as well. We are seeing a couple bright spots though, specifically [dolus], government driven as well as just starting to see some local activity in Orlando with more of the bread and butter tenants and the 15,000 to 25,000 second quarter range.

Daryl H. Mechem

I would also add to that the interest from our larger customers as it relates to activity in 2010, they’ve shown a stronger interest towards discussing renewals and we’ve also had some large customers that renewed in the fourth quarter which was obviously good news for us. Well capitalized companies are moving forward a little quicker than they have in the past.

Ki Kim - Macquarie Research Equities

The space that you mentioned that you’re forecasting an occupancy drop in the first quarter, is that space built out, what’s that build out look like and [inaudible] where you could possibly sell out pretty quickly?

Daryl H. Mechem

Actually yes, we are losing an appliance manufacturer in Northern California and it is a very good building, very generic, two office pods, demisable, so we never like to lose space but if you ‘re going to get space back, this is a very good building for it. We also had a [taxing] company move out, very generic space, bulk space, so the largest spaces in the west region are very generic.

Michael J. Ruen

I would agree, the larger space that we took back was in Columbus, half a million square feet, but highly functional flow through building and it’s actually rail served as well so we feel pretty confident about that one.

Ki Kim - Macquarie Research Equities

What was the occupancy drop that you were looking at for first quarter?

Philip L. Hawkins

We haven’t put specific guidance out. It’s going to be in the range of 100 to 200 basis points.

Ki Kim - Macquarie Research Equities

You made comments about some demand coming from your development pipeline. You said you’re looking at 600,000 square feet in terms of negotiations with tenants. How much of that would you consider solid?

Daryl H. Mechem

I would consider all of it solid. Two of the leases have already been executed with the 670 out for signature for a total of 773,000 square feet and we feel very confident about them.

Operator

Your next question comes from Steven Frankel – Greenstreet Advisors.

Steven Frankel – Greenstreet Advisors

I guess first of all looking at your developing leasing strategy you made some progress in the period but the total lease of portfolios is about 17% leased. We incorporate all the new leases that you guys are mentioning and it looks like we’re closer to 28%. Can you guys just comment on how some of the personnel changes, how it might affect this or kind of why your leasing is dragging your [peers pace] over the last couple of quarters?

Michael J. Ruen

The changes in the personnel won’t make much difference on the development pipeline, primarily our third party operators, the managing partners handle the leasing efforts. I don’t think we’re going to do anything different than we’ve been doing and that’s just solid blocking and tackling and trying to secure deals.

I would point out that our exposure on the development side is Class A Bulk which as you know is one of the softest segments of the market today.

Steven Frankel – Greenstreet Advisors

Kind of looking at your guidance and looking at what some of your peers have been talking about in the period, you were mentioning how there’s demand drivers returning to the sector but you guys have a forecast of same store going down 6% to 8%. It’s probably about 500 basis points worse than A&B and [Pro Lodge’s]. Can you just comment on why you think there’s such a gap between your guys’ outlook on the market this year and those companies’?

Philip L. Hawkins

I only focus on us because I’m probably not the best person to compare and contrast. I can tell you from our view we’ve got a bump down in occupancy happening in the first half of the year, front end loaded in the first quarter. Then we expect rental rates to cycle negatively in the 6% to 8% range, maybe higher, as you roll over new leases, old leases into new.

This gets you to a number of where you are and I don’t know how I would or could be immune from that. It’s just how the math works in my view.

Steven Frankel – Greenstreet Advisors

Looking at your guys’ thoughts on liquidity and your position to really acquire stuff, you guys have about $15 million of cash on your balance sheet. You do have capacity under your line. In order to fund potential acquisitions, you were mentioning pocket deals or off market type of deals. Are you financing that by levering up or are you planning on another kind of equity offering if there is enough of an acquisition pipeline in front of you?

Philip L. Hawkins

Let me look at this again and comment. Short term, very short term, we clearly have recent proceeds from dispositions. We have capacity on the line and so an $8 million, $10 million, $15 million deal here and there. We’re not uncomfortable in the very short term. We’re funding that through our credit facility.

Longer term, I don’t mean years, but I mean over months, I believe we should not lever up. In fact, we said we will reduce leverage over time by growth, meaning we will fund new acquisitions with either equity or proceeds from dispositions. Obviously market considerations, timing, may mean the match isn’t perfect but over the 12 month period of time I would expect it to be pretty well aligned.

Steven Frankel – Greenstreet Advisors

What terms of return criteria are you looking at, at deals in some of the markets that you’re targeting right now?

Philip L. Hawkins

We have internal return criteria and hurdles that we’ve identified. We have asset quality specific sub market location criteria, building size, and underwriting guidelines. For a lot of reasons I’d rather not share that publicly but it’s a pretty disciplined process and one that sort of keeps us focused in the fairway.

What you will not see us do is very outside in terms of location, quality assets, quality challenged assets. You might see those deals. In fact, there’s been one or two that have traded. Empty buildings, kind of an off location, things that we just haven’t decided we wanted to chase. We’re going to be more focused down the fairway as we define it in our markets.

Doing that, what we have said, we won’t say which markets. We’ve identified 13 markets internally as opposed to the 25 that we’re in that we will deploy capital in. Some of those markets might not be receptive to that right now or appropriate so we may not necessarily be buying in all 13 but over a 5 year period of time we’ve identified 13 markets that we’d like to be focused on with our assets, our capital, and our people so that’s also factoring in.

So I didn’t answer your exact question but hopefully you understand perhaps why.

Steven Frankel – Greenstreet Advisors

Looking at your target leverage ratio with where you guys are today, where do you see your leverage going to over the next year or two?

Stuart B. Brown

Long term I think if you looked at sort of debt, you’d sort of took consensus, NAV, debt to total asset value, we’re probably about 50% today. I think at this point in the economic cycle nothing that worries us. I think longer term you want to be closer to 40% to 45% in sort of a normal environment.

Steven Frankel – Greenstreet Advisors

You plan on doing that by growing into it as opposed to raising equity or doing something else?

Philip L. Hawkins

We may grow into it by raising equity but we’ll do it through acquisitions, especially funding with 100% equity as opposed to raising equity and using those dollars to de-lever directly.

Michael J. Ruen

The other thing, hopefully over time is that the ship will float more as goes up in the entire end and in a while your total asset value will grow as well.

Operator

Your next question comes from James Feldman – Bank of America Merrill Lynch.

James Feldman – Bank of America Merrill Lynch

The expiration schedule for 2010 looks like 22.5% of in place rent. Can you give us a little more color on how you feel about that, how much of that is put to bed, how much of that is still at risk, just give a little more color on how we should be thinking about that.

Philip L. Hawkins

When you have 20% or 22% of your portfolio rolling over, you don’t feel comfortable until the last deal is put to bed. I’m more encouraged than I would have been a year ago given level of activities, given early discussions as well as side deals and I’ll let Daryl talk about where we are on that. We didn’t change our guidance because we feel confident where we were a quarter ago but we also didn’t narrow our guidance range because my crystal ball isn’t as good as I’d like it to be.

Daryl H. Mechem

I don’t have specific break out on renewals and new deals at this point but I can tell you that we have approached 2010, we have contacted every single customer in our portfolio and we have executed 22% of the expected activity for the calendar year-to-date, it’s 22% of that in the first month and a half of the year.

I think a very important indicator of activity is our lease negotiation activity. The deals are actually negotiated at business points on a lease document. It’s at the highest level it’s been at in over a year and a half. It’s almost 5 million square feet of lease document negotiation. Two-thirds of that is renewals. The rest is new deals.

We would also track the proposal activity and that’s still running at about 12 million square feet of proposals out on our entire portfolio which once again is an uptick from the first half of 2009 and then really sort of in line with what we saw in the third quarter and fourth quarter of 2009. So the activity picked up in the second half and it is looking like it has continued into the first quarter. So early signs we’re happy with.

Michael J. Ruen

I would add a little color to using Columbus which is a good example of how we’re looking at these markets. Columbus was our number 1 exposure coming into 2010. We were aggressive on renewal negotiations. We did about 1.5 million leasing in ’09 that was attributable to 2010 through early renewals. We’ve got an additional 670,000 feet out for signature today that will put 44% of our rolling exposure to bed for ’10.

James Feldman – Bank of America Merrill Lynch

So of that 22.5%, how much do you think at this point is not even under discussion?

Michael J. Ruen

The 22.5% is not under discussions.

Philip L. Hawkins

I would be speculating to pull a specific number out but I’ll tell you that at 12 million square feet of proposal activity across the board is a significant amount. We don’t have an exact number but the 12 million square feet tells you it’s a good number.

Michael J. Ruen

We’re in discussion with each of them. The question is are we exchanging paper or are we simply exchanging phone calls or meetings. We are in discussion with each of them. A few, as we already know in the first quarter, are no longer in discussions or they’re done or they’re gone.

Daryl H. Mechem

I could actually comment a little on Indianapolis which was a fairly high expiration year for us for 2010 and serves to Mike’s example with Columbus. We’ve engaged 100% of the customers and every one of the customers, which is about 74% of them that we thought would be renewing in 2010. They have engaged in discussion of some level or another. The same can be said for our Phoenix expiration which is about [inaudible] square feet. It’s been very promising responses from them to get engaged in deals.

James Feldman – Bank of America Merrill Lynch

Given all the leasing to do, what do you think your AFFO looks like for 2010 based on your FFO guidance?

Stuart B. Brown

We don’t give specific guidance on AFFO. If you look at it, and everybody sort of calculates it a little bit differently, I don’t think overall that the run rate or the adjustments from FFO to AFFO in 2010 will be that different than 2009. Operating Cap Ex, we’ve sort of talked about it in the past a little bit, it typically runs $0.20 per square feet. Turnover costs on new deals is pretty straightforward. Typically even though lighter in 2009, on average we sort of expect it to be about $2.00 per square feet in total and equity comp amortization, when you take out the onetime adjustments from Q4, the Q4 run rate will be a pretty good number for 2010 as well.

James Feldman – Bank of America Merrill Lynch

In your initial comments you mentioned the government stimulus being kind of driving recent GDP growth. In terms of what that actually means for the warehouse market, have you guys actually seen government driven demand and stuff that may actually disappear when that burns off or is it more just a comment on what’s driving GDP?

Philip L. Hawkins

It was meant to be more of a general comment that I don’t think is sustainable, betting on 5.5% growth. Mike mentioned there is indirect and direct government demand at our Dulles project which having lived in DC for a long time, I would describe as permanent. Whether or not it’s funded temporarily or not.

But otherwise I’d say it’s more I feel an indirect impact as people see positive GDP numbers, as our customers are seeing increased orders or increased business, that they’re feeling better about the world. I think everybody feels better about the world even though maybe where we are today isn’t where we’d have liked it to have been two years ago if we were going to project forward. It’s still tough out there. It feels a lot better. So it was more of a general comment about the economic mood is lifting.

Operator

Your next question comes from Brendan Maiorana - Wells Fargo Securities.

Brendan Maiorana - Wells Fargo Securities

You guys mentioned that the RFPs on larger space had been a bright spot for you but you also said that your development exposure which is Class A Bulk has been weak and can you just help me reconcile what is better stuff on RFPs than the existing portfolio versus the development pipeline?

Michael J. Ruen

I would comment by saying first that the activity levels are lower or have been lower. The RP activity has been lower on the larger Class A segment but we’re starting to see some improvement there. But again, we haven’t seen as many transactions on that side of the size spectrum.

Philip L. Hawkins

I think what we’re really trying to say is looking backwards, [inaudible] development pipeline has underperformed. I think that one is as we are exposed to larger bulk Class A spaces, new spaces which were underperforming in general in terms of demand. What’s changed and then the count about demand picking up in the bigger spaces wasn’t just about our operating portfolio.

We were looking forward. It’s on account of our recent observations. Let’s hope it becomes a permanent trend and that is demand in that segment seems to have picked up noticeably or has picked up noticeably in the past few months which we hope will translate into better results going forward in both the bigger spaces in our operating portfolio where we do have a few as well as our bulk distribution development portfolio where it’s predominantly that kind of space.

Michael J. Ruen

We could note too that one of the deals that’s out for signature falls in this category, in approximately 0.5 million feet.

Brendan Maiorana - Wells Fargo Securities

Is that on the development --

Michael J. Ruen

That’s the development.

Brendan Maiorana - Wells Fargo Securities

And then in terms of the reduction of the expected yield on the pipeline I think went from 6.5% down to 6%. Is that rate driven or is that just a longer lease up timeframe?

Philip L. Hawkins

It’s a combination but primarily rate driven. [Hot] time hasn’t helped either but most of the capitalization is done there anyway, so it’s rate.

Brendan Maiorana - Wells Fargo Securities

Thinking on the comments about de-levering over time and acquiring assets and growing to de-lever, you’ve also talked for some time about markets that you would like to exit. How do you think about the markets or areas of properties that you want to sell and the rate that you may get on those sales versus how you may do on some of the acquisitions that you’re looking at?

Philip L. Hawkins

Our current plan of disposition is simply to react optimistically to offers that may come in in any of our markets but also in our nonstrategic assets or nonstrategic markets. However, while there’s been a rush of capital into the business, that has been predominantly focused on a relatively few number of markets, the coastal markets, and there has been less demand so far in the interior markets./

While we’ve got identified markets, I can tell you one of our other overlaying strategies or desires is to increase our coastal presence relative to the interior markets. So it’s not our intent short term to be looking to exit any markets because frankly the markets we’re looking to exit haven’t yet returned in terms of capital.

My belief is that over time, as capital is frustrating going where it wants to go first, which is the coast, that it will gradually be moving into other quality distribution markets and over time that capital will be a little bit more spread out throughout the country but today that’s not the case and it’s not my desire to be selling into a market that doesn’t have multiple credible quality buyers.

The second thing though is it’s also not my desire to dilute earnings, certainly not materially, and as a result, the other thing I’m looking for is a pickup in more meaningful abilities to deploy capital. I’m encouraged, we’ve got a few deals working, but they’re not moving the needle much honestly.

I’m hoping that activity will increase and that we will be able to both find deals that aren’t in the market but also then compete for deals successfully that may be marketed. But that is still not at a level that gives me encouragement that we should be ramping up our disposition effort.

Brendan Maiorana - Wells Fargo Securities

As we think about it, longer term, I think the target level of dispositions is fairly significant. I would think that there’s always going to be somewhat of a cap rate differential between the markets that you’re planning to exit versus the ones where you would like to acquire, so as we think about potential short term dilution from that recycling, do you feel like there is going to be some meaningful dilution at least near term as that program gets underway or do you think you’ll be able to offset that?

Philip L. Hawkins

I don’t think it will be meaningful dilution. There may be a modest amount, hopefully not. One is you’ve got occupancy differentials, you’ve got cap rates on our in place may or may not be the same, you’ve got the ability to source creatively in markets that perhaps are at attractive cap rates, you also have the ability, we’re staffing up to pursue value add deals which are also higher return and so it’s my belief, my goal that dilution as an issue will be managed successfully. But I don’t see anything in the near future because I don’t see disposition volume ramping up for the foreseeable future.

Brendan Maiorana - Wells Fargo Securities

In terms of the expectations on the financing that you hope to do, how are you guys thinking about the rate and then the $93 million that you paid off? Is the assumption that you will then longer term effectively repay that with some unsecured issuance further down the line?

Stuart B. Brown

That’s right. I’ll actually turn it over to Matt Murphy. He can give you a little bit of color sort of what’s going on in the market in terms of rates today and sort of what our expectations are.

Matthew T. Murphy

I guess the way that I would look at it is the predominance of what we have to do in the short term in terms of what our expectations are, in terms of yield, is frankly our revolver and term loan i.e. the bank market. I think the wind is a little bit at our back. I wouldn’t call it a gale at our back.

But in terms of spreads, there’s been enough activity sort of in our peer group that you can get a pretty good expectation of how pricing is going to work out. LIBOR plus 300 give or take is probably a pretty good benchmark both in terms of what our expectations are and also looking backwards in terms of some of the recent transactions that have been done.

I think obviously the movement of the public debt market today gives you an indication of sort of where our unsecured debt issuances may go. We have less of that in terms of a refinancing. The maturities that are facing us, that’s not what we’re refinancing. Then the mortgage markets again, I think have had some clarity around them and sort of Treasuries plus 300 again plus or minus 25 basis points is probably a pretty good expectation.

I think one of the things that we talked about in our press release, I think we’ve talked about it pretty consistently is pushing our maturities out from the basically 3.5 years that they are today, if you pro-forma the refinancing that we did at the end of the year or right after the end of the year, our intent is to push that out a little bit further and frankly the expectation of that is part of what’s built into the guidance that we put out that our interest costs are going up.

How all these things will come together in the reasonably short near future is still to be determined but I think what you’ll see is you’ll see our capital structure push out in terms of maturities, continue the unsecured bias, and deal with the upcoming bank maturities that we have and if you do the algebra on that, you sort of end up with the guidance that we have.

Brendan Maiorana - Wells Fargo Securities

Just in terms of the specific number, in my recollection, your overall interest expense is $0.04 higher and that’s a combination of higher interest rates plus the burnoff of the capitalized interest?

Philip L. Hawkins

Exactly.

Operator

Your next question comes from Michael W. Mueller - J.P. Morgan.

Michael W. Mueller - J.P. Morgan

On the development pipeline, is there a leasing target that you expect to have by year end?

Stuart B. Brown

In terms of guidance for next year, the year end number is actually less important than when you get it leased up. So on average we basically said our average occupancy for the year in the development pipeline built into guidance is 30% to 35% average occupancy. Obviously we’re making good headway on that already and that equates to about $0.01 per share in our FFO.

Michael W. Mueller - J.P. Morgan

So 30% to 35% midyear kind of takes you to 40% or 50%, something like that by year end roughly?

Stuart B. Brown

Yes.

Michael W. Mueller - J.P. Morgan

Then on Matt’s comments about the pricing of the term loan and the credit line, the Treasuries plus 300, that was for the term loan, correct?

Matthew T. Murphy

Yes, I’m sorry if I said Treasuries, I meant LIBOR. LIBOR plus 300 is a much better gauge for the bank debt.

Michael W. Mueller - J.P. Morgan

How does that tie to the credit line as well? Is that tied to both components?

Matthew T. Murphy

I think the pricing expectation is I think you’ll have sort of a drawn and revolving component to how we refinance this but the pricing is pretty consistent in terms of the actual spreads over the underlying LIBOR.

Michael W. Mueller - J.P. Morgan

Are LIBOR floors going away at this point or are they still out there?

Matthew T. Murphy

I think they’re still out there to a certain degree but they’re not anywhere near as prevalent as it looked like they were going to be if you looked sort of nine months ago. The present ones that are out there are much lower than what the small instances that were but the expectations that were in place, again 9 to 12 months ago.

Operator

Your next question comes from Mitchell Germain - JMP Securities.

Mitchell Germain - JMP Securities

I believe you had mentioned build to suit activity was up for the big boxes. Any specific regions that you guys are seeing more build to suit activity?

Michael J. Ruen

I can tell you specifically in our region, markets like Atlanta, your true [RDC] locations we’re seeing activity and by reference, build to suit, the lion’s share of the activity we have seen, users are gravitating toward land control to accommodate future expansion. I think that’s been a big driver for the overall markets.

Daryl H. Mechem

Not much to talk about in my region.

Operator

Your next question comes from Paul Adornato - BMO Capital Markets.

Paul Adornato - BMO Capital Markets

You mentioned that there was good interest among the life companies in financing real estate. I was wondering if there was a changing appetite for joint ventures and if that is an attractive exit for you or source of liquidity for you going forward.

Philip L. Hawkins

The answer is it’s not been a target for us given where acquisition volumes are and our desire to frankly grow our company and grow directly. So we’re not actively in the market. My sense is in just talking to a few others out there that reduction queues are down are gone and that some funds, some well known, well reputed advisors and funds are experiencing inflows and are looking to do more business. We’ve had a few conversations with people for example but in our case, at least in the short term, it’s not a priority. I think we’re better served to acquire assets directly.

Operator

Your next question comes from Ki Kim - Macquarie Research Equities.

Ki Kim - Macquarie Research Equities

I wanted to follow up on your development pipeline. It looks like the leasing projected yield went down to 6% from last quarter’s 6.6%. Was that just due to the leasing that you signed recently this quarter or something else?

Philip L. Hawkins

Mostly projected rents on future lease up.

Ki Kim - Macquarie Research Equities

Is that just kind of broad based or market specific?

Philip L. Hawkins

It’s fairly broad based. Unfortunately there aren’t any markets that I can think of that has been immune to the downdraft in rents.

Ki Kim - Macquarie Research Equities

The 6% to 8% negative same store NOI guidance, how much of that is embedding the bad debt expense that we talked about last quarter?

Daryl H. Mechem

Overall with bad debt expense, we expect right now is going to drop a bit. We’ve definitely got some bad debt expense in there as well as potential loss from bankrupt tenants but again as we talked about last quarter and should talk a little bit more earlier, we have seen a fairly significant decline in tenants on our credit watch list. Even though we had sort of a flood in the first half of last year, quarter by quarter we’ve seen a decline of new tenants coming on in the fourth quarter, it was pretty quiet in terms of any new tenants on the watch list. We’re feeling pretty good about that.

Ki Kim - Macquarie Research Equities

So let’s say that trend continues. If you could adjust that, what would be pro-forma kind of taking out bad debt expense? It’s probably not realistic but just to give a sense where things are economically.

Michael J. Ruen

Our guidance basically assumes that bad debt expense drops half a penny a share from 2009 to 2010. Bad debt expense together with the lost NOI from those tenants.

Operator

Your next question comes from Ross Nussbaum – UBS.

Ross Nussbaum - UBS

Are there going to be any charges in terms of early retirement of debt [inaudible] on the terming out of your debt here?

Stuart B. Brown

We’ve looked at it, there’s nothing meaningful. There may be a little bit but that would be baked into our guidance as well.

Ross Nussbaum - UBS

So I would think that if you’re refi’ing debt a year or two early there would be some pretty meaningful hits on that front.

Stuart B. Brown

Most of the debt that’s being refinanced… First of all you’ve got the term loan and that technically expires in June of this year even though it extends for another year, so those costs would all be fully amortized. Some of the other debt on the credit facility, that expires in December, so any small amount there would basically roll forward in the new credit facility so there could be a little on the mortgage side, nothing material.

Operator

Your next question comes from Mark Lutenski - BMO Capital Markets.

Mark Lutenski - BMO Capital Markets

You talked about a pick up in the coastal markets interest in terms of acquiring. I’m wondering have you seen any pick up in interest maybe from SCLA that’s not necessarily coastal but sort of around there.

Philip L. Hawkins

The pick up that we talked about was really more on the capital side. Leasing markets, if you go almost market by market, SCLA, and I’ll let Matt chime in, we continue to have respectable demand, a couple land sale prospects, some leasing prospects, a number of proposals have been sent out for example on our million square footer.

We don’t know if we’ll make them. So we’re encouraged. I think that demand is as much driven by the unique attributes of SCLA as opposed to some coastal phenomenon or port phenomenon which is not yet.. I don’t think we’ve sent it through the system. So SCLA again, it is doing okay.

Demand is down from where it would have been two years ago but the good news is it’s more established as well so we’re getting requests, potential customers are contacting us rather than us necessarily trying to find them which is also a positive.

Matthew T. Murphy

I think the way that you can sort of tie all this together is that the Inland Empire is clearly a bulk driven market and the pickup in the bulk activity is clearly a boon to the Inland Empire but quite honestly the oversupply that came into existence in 2006 and 2007 is going to take some time to work though and SCLA is by no means immune to that.

So I think what’s going on in the bulk market is a precursor to the ultimate rebound of the Inland Empire, therefore SCLA, and you’re starting to see the green shoots of that and there’s a lot of square footage in the market that needs to be absorbed before you start to see that have meaningful impacts throughout that market.

Operator

At this time we show no further questions. Would you like to make any closing remarks?

Philip L. Hawkins

I appreciate everybody’s time and your attention in following our company and look forward to talking with and meeting with most or all of you in the near future.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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