Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

DCT Industrial Trust, Inc. (NYSE:DCT)

Q4 2013 Earnings Conference Call

February 07, 2014 11:00 AM ET

Executives

Melissa Sachs, VP, Corporate Communications and IR

Phil Hawkins - Chief Executive Officer

Matt Murphy - Chief Financial Officer

Mike Ruen - MD, East Division

Analysts

Michael Bilerman - Citi

George Auerbach - ISI Group

Jamie Feldman - Bank of America Merrill Lynch

Brendan Maiorana - Wells Fargo

Eric Frankel - Green Street Advisors

John Guinee - Stifel

Craig Mailman - KeyBanc Capital Markets

Ross Nussbaum - UBS

Emil Shalmiyev - JP Morgan

Paul Adornato - BMO

Ki Bin Kim - SunTrust

Eric Frankel - Green Street Advisors

Operator

Good day, and welcome to the DCT Industrial Fourth Quarter and Full Year 2013 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

At this time I would now like to turn the conference over to Ms. Melissa Sachs, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Melissa Sachs

Thanks, Ed. Hello everyone, and thank you for joining DCT Industrial Trust’s fourth quarter and full year 2013 earnings call. Today’s call will be led by Phil Hawkins, our Chief Executive Officer; and Matt Murphy, our Chief Financial Officer, who will provide more details on the quarter’s results and our 2014 guidance. Additionally, Mike Ruen our Managing Director for the East will be available to answer questions about the markets and our real estate activities.

Before I turn the call over to Phil, I would like to remind everyone that management’s remarks on today’s call will include forward-looking statements within the meaning of federal securities laws. This includes, without limitations, statements regarding projections, plans, or future expectations. Actual results may differ materially from those described in the forward-looking statements and will be affected 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 in our supplemental, which can be found in the Investor Relations section of our site at dctindustrial.com.

And now, I will turn the call over to Phil.

Phil Hawkins

Thanks Melissa and good morning everyone. The fourth quarter served as a strong finish to a productive and successful 2013 for DCT. Industrial leasing markets continue to improve across the U.S. with healthy net absorption in every one of our markets. In response to declining vacancies and supply to remains in check, rents are continuing to improve most notably face rents.

For some time, free rent has been coming down across our markets, but now we are starting to see a more broad base recovery in face rents as well. Reflecting this positive operating environment, our market team’s delivered another quarter of strong results. Highlights include occupancy in our consolidated operating portfolio increased by 50 basis points to 93.3%, higher than we expected going into the quarter. Excluding the impact of acquisition and dispositions during the fourth quarter, occupancy would have been an additional 50 basis points higher reflecting our general bias to buy vacancy and sell occupancy.

Rents growth increase a strong 15.5% on a GAAP basis and 5.1% on a cash basis. While we continue to believe that GAAP rents are a more complete comparison of overall rental economics, it's so good to see cash spread move in the positive territory. This metric will continue to move around based on the mix of rolling leases, but the overall trend should remain in a positive direction given the improving markets.

Turnover cost of a $1.33 per square foot continued a positive downward trend over the past several quarters, again reflecting an improving leasing environment. And leasing has set it off the New Year strong with 1.6 million square feet executed in January. Including all of the 500,000 square foot space in Columbus that has been vacant for quite some time bringing us to 100% leased in this market.

At a side note market leasing activity in Columbus especially the Rickenbacker or Southeast sub market where all our assets are located has picked up significantly in recent months with Southeast bulk warehouse net absorption of 1.5 million square feet in the fourth quarter and 2.7 million square feet for the year. As a result, bulk warehouse vacancy in the Southeast submarket declined from 11.5% a year ago to 7.0% at year-end quite a remarkable turnaround.

We’re also busy in the fourth quarter on the capital deployment front, acquiring a little over a $150 million in 12 separate transactions located at seven different markets. All, but two of these transactions and 80% of the square footage were sourced on an off market basis reinforcing the value of our market-based platform. The average occupancy of the acquired assets was 83.6% with a 140 basis points difference between in place yields and expected stabilized yields.

Shifting to development, in the Inland Empire we completed the fully pre-leased 650,000 square foot Slover Logistics Center I and broke ground on the 928,000 square foot Rialto Logistics Center. In Houston we completed a lease for all of our 267,000 square foot Airtex Industrial Center and have two leases in active negotiations for 70% of Beltway Tanner to 133,000 square foot project expected to be completed this quarter.

In South Florida we’re successful in acquiring a 36 acre parcel in Broward County, on which we expect to develop three buildings totaling 567,000 square feet. And lastly we acquired a 6.4 acres site in the DFW Airport submarket of Dallas on which we expect to development a 95,000 square foot building.

Given the healthy leasing markets combined with the strength of our market-focused operating platform I am very optimistic about our business in 2014. Our team is doing a great job leasing space as well as sourcing acquisition and development opportunities that will generate attractive internal and external growth for DCT.

With that let me turn the call over to Matt. Who will provide more color on the fourth quarter as well as our 2014 guidance?

Matt Murphy

Thanks Phil. And good morning everyone. Thank you all for joining us today. The fourth quarter of 2013 was strong for DCT particularly with regard to continuing improvement in occupancy and other operating metrics. As Phil mentioned our consolidated operating occupancy increased 50 basis points during the quarter to 93.3% a little ahead of our projections.

However on a same portfolio basis that is excluding the impact of acquisitions and dispositions during the quarter, our occupancy would have been another 50 basis points higher at 93.8%. This progress, combined with another strong leasing quarter with over $3.5 million feet of leases including almost $1.3 million square feet of new space, clearly demonstrate that the leasing markets and tenant demand remains strong. This new leasing on top of retention of 83.4% for the quarter ensures that we had a 2014 on an excellent trajectory.

Our same stores results for the quarter were slightly ahead of plan, which allowed us to achieve the high end of our guidance for the year with cash same store NOI growth of 4.9% over 2012. For the fourth quarter, cash same store NOI was up 1.6% versus the fourth quarter of 2012, or GAAP same store NOI was down 0.9%.

Average occupancy in the fourth quarter of same stores pool was up 10 basis points over 2012. The fourth quarter GAAP decline was caused prominently by a 3.8% increase and expenses quarter-over-quarter. In addition to the unusually low expenses in the fourth quarter of 2012 that I discussed both in last year’s and in last quarter’s call the next largest component of this expense grows a little over $300,000 with bad debt expense associate with our tenant delinquency on 500,000 square feet in Indianapolis.

Absent to recovery of any amounts odd this dispute will also negatively affect our first quarter 2014 same store results by about the same dollar amount. After the first quarter the comparisons will be on more of an apples-to-apples basis. Sequentially, same store results were strong for the quarter on the same group of assets, fourth quarter net operating income increased 1.6% over the third quarter driven by strong embedded rent bumps an increase in average occupancy of 10 basis points and more normalized expenses.

We ended the quarter with occupancy 60 basis points higher than the average for the quarter. So once again our trajectory is excellent. When you added all up we finished the fourth quarter of 2013 with funds from operations of $0.11 per share and $0.45 per share for the full year of 2013. At the top end of our initial guidance for the year and an increase of 7.1% over 2012.

Turning to capital funding, our strategy of max funding deployment with the combination of dispositions and the proceeds from equity issuances was highly successful in 2013. We invested approximately $360 million on acquisitions during the year and spend an additional $150 million funding development.

The capital for these activities was generated by dispositions of $260 million, plus $250 million in net proceeds from equity issuances effectively balancing our sources and uses for the year. In addition as previously announced, we closed our inaugural bond offering in the fourth quarter issuing $275 million of tenure bonds with a coupon of 4.5% and a yield of maturity of 4.62%.

As I have mentioned before, we’re very pleased with the execution on this transaction, but more importantly, we are excited about the flexibility and liquidity that access to this market can provide moving forward. All this leads our balance sheet stronger than ever and with excellent optionality to execute on our business plan in 2014 and beyond.

Now, let me take you through some of the details of our initial guidance for 2014. We have initiated our 2014 FFO guidance with a range of $0.45 to $0.48 per diluted share. We have based these expectations on an economic backdrop of continued modest economic growth which we believe will generate positive net absorption of industrial space at similar levels to 2013. More specifically, our guidance is based on the following assumptions.

Occupancy for the consolidated operating portfolio is expected to average between 93.5% and 94.5% for the year. As has been the case for the last few years, we expect occupancy to decline a little at the beginning of the year due to seasonal trends and the anticipated vacancy in Indianapolis. We expect occupancy will then build during the remainder of the year ending somewhere between 94% and 95%.

Same store net operating income is expected to increase 3% to 4.5% on a cash basis and 3.25% to 4.75% on a GAAP basis. Approximately 40% of this cash growth will be derived from existing contractual rent bumps. We expect to achieve average occupancy gains in our 53.4 million square foot same store portfolio of between 75 and 150 basis points. Finally, we expect GAAP rent spreads to continue the positive trend that they have been on for the last 10 quarters and believe that cash rent spreads will continue to improve and move into positive territory more and more frequently.

It’s important to keep in mind that these projected operating statistics do not take into account the potential impact of any acquisitions or dispositions during the year, but they do reflect the projected impact of our current development portfolio stabilizing and entering the operating portfolio. It should also be noted that our same-store results do not contain development or re-development assets until they have been stabilized throughout both periods.

Shifting to capital deployment, our teams continue to uncover opportunities to deploy capital at attractive returns into focus markets and target submarkets which we believe will continue to perform well over time. Consequently, we have included in our guidance a $100 million to $200 million of acquisitions. These acquisitions will be a combination of stabilized assets and value add opportunities in a mix which is likely to be similar to 2013. Additionally, we are planning to start construction on between $100 million and $200 million of development projects in 2014. The majority of the projects assumed are on land we currently own, however we will continue to pursue land opportunities in markets where we have confidence in fundamentals and leasing activity and which we believe we can put into production quickly.

From a capital markets perspective, we plan to fund the deployment I described with the proceeds of property dispositions and where appropriate the issuance of equity in a manner similar to 2013. We expect that the combination of investment in development and value-add acquisitions as well as the effect of disclosing of stabilized lower growth assets will cause short term dilution of approximately $0.01 to $0.02 per share in 2014. In addition, our bond deal will be approximately $0.015 diluted to 2014 relative to 2013 at the 4.5% interest rate of bonds while attractive in and of itself is over 200 basis points greater than the interest rate on the mostly floating rate debt that was paid off with the proceeds.

We aggregated to issue the short-term debt in order to provide the use of proceeds for the bond transaction. Consequently, we have very little debt maturing in 2014 as our bond deal in part was used to refinance our only significant 2014 maturity.

In summary, we believe the 2014 resembled 2013 in many respects. We expect market fundamentals most importantly tenant demand will remain strong. We believe the supply will remain disciplined and the positive trends in rent growth will continue and even accelerate in many markets where the recovery started later. So most importantly, we expect our market teams to continue to do an outstanding job focusing in our customers and sourcing and executing on prudent real-estate transactions that will continue to upgrade our portfolio and create value for our shareholders.

With that I’ll turn it back over to Ed for questions. Thank you.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). And it looks like that our first question comes from Michael Bilerman of Citi. Please go ahead.

Michael Bilerman - Citi

A little bit more in terms expected yields and whether you start talking to tenants yet?

Phil Hawkins

We just heard the last few words of your question, would you mind restating it?

Michael Bilerman - Citi

Yes, no problem. Can you just talk about the large spec development you started in Inland Empire in terms of expected yields and whether you guys have started talking to tenants yet?

Phil Hawkins

A good kind of activity, early and so nothing eminent but lots of interest in a project of that size in that market, it’s a strong market. We really haven’t disclosed individual asset yields, development yields, but I think it’s safe to say for the California we can develop for a couple of 100 basis points over cap where rates are and which is attractive, and cap rates right now are kind of in the high 4s to 5.

Michael Bilerman - Citi

Okay. Thanks. And then just my next question is on, maybe you guys could make some more comments on the acquisition market, is there any large portfolios out there? And then also what the competition is like for the value add asset that you guys are targeting?

Phil Hawkins

Good question. The market for acquisitions remains as competitive as ever. Cap rates have not -- really haven’t moved much, I think it’s fair to say in primary markets, not down, nor up; up you might think because of interest rates recently had come up, but cap rates are pretty well flat. I’d say the spread between A & B markets for A assets through that -- between primary markets and secondary markets, for A assets is narrowed a little bit, so more capital considering secondary markets. We sold a building in Cincinnati in the fourth quarter that was very well received and went to a very well known, very large institutional investor that probably wouldn’t look at mid-western market or secondary market a year ago and frankly one looking at it part of the down turn either. It’s a -- so there is a lot of pressure to get capital out and as a result investors are making compromises or decisions or alternatives that leads into broader directions.

I would think competition for value-add assets has become more fears. I’d say value add in large part, a lot of owners aren’t selling at the value add stage anyway. So it’s never been easy for us. So I’d say it’s a little bit more competitive than it was a year ago, particularly in primary markets, which obviously where our focus is as well. But one thing about value add is it takes talent not just money to see the opportunities, to plan for the redevelopments or whatever might be involved. And so there is still to me an opportunity there, which we had and maybe others as well, but who have counted on the ground people that can see the opportunities as well as then have the confidence in executing against those opportunities.

Michael Bilerman - Citi

Okay. Thanks a lot.

Operator

Our next question comes from George Auerbach of ISI Group. Please go ahead.

George Auerbach - ISI Group

Thanks, Phil two questions on leasing. First, I may have missed it, but could you update us on where the small space occupancy stands in the portfolio and what your guidance implies for the lease up of that part of the portfolio?

Phil Hawkins

I’ll let Matt answer that question.

Matt Murphy

Hey, George. Actually the occupancy in the fourth quarter went down slightly, it was really more as a result of transactions. We bought some vacancy associated with the Elgin portfolio in those small spaces as well as some in Southern California. So we ticked down like 20 basis points from, and I’m talking about spaces 50,000 square feet and below. The lease up trajectory on that is excellent. We continue to see strong demand and a lot of leasing activity in the smaller space. So I think it’s safe to say that a meaningful component of the growth that I talked about in terms of the guidance will come from smaller space leasing and we’re seeing that activity on the ground.

George Auerbach - ISI Group

Great thanks. And second, can you remind us about the large vacancies in the portfolio and any activity in particular Columbus and Atlanta?

Phil Hawkins

Well, you would go into my script. Columbus is leased, done. Great job by our team there that market has come around really nicely, that’s done. Memphis not yet done, some activity -- Mike you are on the phone, why don’t you give a quick update on Memphis? Go ahead.

Mike Ruen

Sure. With respect to Memphis, I will add on a positive note, we had two vacancies in Memphis; one has leased, which will bring us up 300 basis points. So, we are literally down to one space. And we have, I would say steady activity, but slow, certainly slower than the Mississippi side. As you know Tennessee competes with Mississippi in that market. But again, it is a little slow, but steady. We’ve got two active proposals out today on the space.

Phil Hawkins

That is my big finish, come on.

George Auerbach - ISI Group

Sorry then, but thank you.

Operator

Our next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman - Bank of America Merrill Lynch

Great, thank you. So I guess thinking ahead to 2014 in your guidance you talked about modest economic growth outlook. But I am just wondering if there is any other kind of key shifts in the market that we should be thinking about? I know George was talking about small tenants versus larger tenants. But just as you guys are thinking about the year ahead, whether it's supply or intermodal or housing or e-commerce kind of what do you think the key drivers are going to be?

Phil Hawkins

I think the drivers and the risks are the same as ‘13. The drivers will remain I think ongoing consolidation and streamlining of the large kind of global distributors who are looking to continuously fine-tune in some cases dramatically redo supply chains. Second, e-commerce clearly is a force that will remain. And you're starting to see, for example Wal-Mart become much more active in their e-commerce supply chain in some ways they’re playing catch-up. But that's positive for our business. Next, I think small tenants as Matt already talked about is a trend that will continue it's not a trend thankfully. But it's an important trend; I don't see it slowing down.

We see ups and downs to the economy. One week everything is positive, the next week there is concerns again. But the small user has more confidence than a year ago. And I don't see that changing, I don't think it's that fragile. So, that will continue in part helped by housing, but I don't think housing has been the dramatic driver of small tenant or e-commerce demand that some people might have thought. It's helpful, it's important, but it's not dramatic. It's important.

And then the key risk is supply, which I'm not telling anybody on this call something they don't already know. Supply has moved up, capital has moved in, my comment about capital chasing value-add applies to development as well. It remains disciplined, but as you, as many of you of the analysts have noted, we’ve now gone to the point where supply has caught up to net absorption in many of the strong markets. If it overshoots that and/or if demand for whatever reason drops significantly, we will be talking about that, we’re talking about it now I guess.

So, to me that’s -- and maybe this is something we don’t see around the corners to identify, but I think ‘14 is a pretty straight forward year. We’re in a good recovery and economy that not great, but not broken, improving slowly with strong external drivers to the industrial business that really helps us beyond this economic growth.

Jamie Feldman - Bank of America Merrill Lynch

Okay thanks. And then thinking about the development starts 100 to 200 I think certainly that’s a new you had done this year, how do we think about that in the context of what you just said about the supply is a risk and then maybe thinking about potential upside to that as well?

Phil Hawkins

Well, we would certainly love to do more. The 200 does not have ceiling on it, not a flow I guess, although I think $100 million I think is pretty achievable. To me that range and in fact that’s below 2013 reflects our, I think discipline, but certainly a measured approach to development. We’ve never said we want a pedal to the metal, we want to do the right deals, quality and execution more important than quantity more is doesn’t less [similar] to that.

We just don’t want to put anything out there that puts us into the box. We have to decide between achieving high expectations or doing the right thing. And the right thing for me is much more important than volume. And it’s much more important to me that we’ve leased what we have underway.

So, if you see more leasing, you'll see more development. If you see less leasing, you'll see less development, it's real simple. And again, we love to do more, I hope to do more. But I don't want to guide anybody to that expectation because I don't think that's realistic.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then finally, can you talk a little bit about that Broward County JV land and just what your thoughts are in that market and opportunities there?

Phil Hawkins

We love South Florida, love the land site. The JV was the best and most practical way to get access to the land and that's why it’s structured that way. The entity that control that land well respected partner, well respected player in that market. But I think it shows our flexibility to think about how do we acquire great land sites?

However, we have complete control over decision making. And so that is also important to us that we want to control our own destiny. On the other hand, we're willing to accommodate seller needs in a way that is compatible with our objectives, but also helps them achieve their objective.

Operator

Our next question comes from Brendan Maiorana of Wells Fargo. Please go ahead.

Brendan Maiorana - Wells Fargo

Thanks, good morning. So Phil, just on the supply outlook and the development outlook, you guys have done a really great job kind of picking up some of these land parcels and you got Dallas this quarter and South Florida and you did Jurupa stuff in Southern California last quarter, I sort of look at the returns that you're getting on these projects and they look attractive. Is there something about what you are able to do in terms of picking up these land parcels and putting them in motion to achieve attractive returns. That’s a lot more difficult than other players replicating that strategy in the market such that we wouldn’t get a big supplier response at least in 2014?

Phil Hawkins

You know in the markets we bid -- thank you first of all. The market that we have been focused on probably the coastal supply chain market is clearly, it’s not easy to acquire land. And you would, I know you [resides] in Southern California, so the Jurupa Ranch, the [Ag] Ranch was a little more straight forward, but then from a zoning and [timing] perspective it gets complicated and takes time.

So the other acquisitions we've made, we’ve assembled land that takes time. It takes on the ground talent and we’re not the only ones that have it, but I wouldn’t trade my team for anybody else’s. And I’m not saying it can’t be done by anybody because it is being done by others, and we’re looking the supply numbers. But I like our ability to compete, the reputations and credibility you have on a local level to earn the attention of a land owner is important.

It’s not like selling a stabilized building where you hire CB or (inaudible) and you had talked to a thousand of your favourite friends and then you get 50 proposals, they are all the same and you just picked the highest price. Land is much more difficult than that as a seller, not just as a buyer.

It takes a relationship, it takes time and they want to pick something that’s comfortable will get you through the approval process, the review process they will be reasonable, creative, confident in solving problems as they go through all that. And so, reputation matters a lot more with land than it does with, I would say buying stabilized buildings.

I am not sure I answered your question but I will stop and let you ask again.

Brendan Maiorana - Wells Fargo

No that’s helpful, yeah that’s great color thank you. Question is, just last question for Matt. I think you said that capital activity in the quarter I mean in the year would be $0.01 to $0.02 dilutive to the FFO outlook is that driven by the change between the cap rates that you sell at and what you acquire and develop at or is that also the strategy that you guys have done over the past couple of years which is develeraging through growth such that we might see leverage tick down a little bit as you go throughout ‘14?

Matt Murphy

Yes. It’s probably a little bit -- it’s definitely a little bit of both. It is clearly much more impacted in the numbers by the fact that we have been selling stabilized fully occupied buildings and buying vacancy. And then also deploying the capital that we’ve been raising both through dispositions and equity into development which over the longer terms is highly accretive both from a portfolio quality and cash flow growth perspective but you are turning say low 7s disposition cap rates into something that generates zero for a while and so it’s really more of the former that it’s the sort of cap rate and timing trade of the NOI associated with the recycling of the portfolio. But it does have a little bit of the latter, I think that’s less impactful in ‘14 honestly than it was in ‘13 because I think basically we’re in pretty shape from the deleveraging that we still have to do is as much about growing cash flows as it is about sort of having relatively less debt.

Brendan Maiorana - Wells Fargo

Okay. So it’s just that the NOI, you will get the NOI growth sort of it’s not that you would issue on the ATM at a sort of 100% equity finance some of the growth kind of thing.

Matt Murphy

Well, like I said it's always been a combination of each. And if you are going to grow which we have done and you don't want to delever you will issue equity to do so. But I think the dilution obviously the stock price that you issue has part to do with it, but I think the dilution I described is much more about the trade-off in immediate sort of year one cap rates than it is about the capital structure.

Brendan Maiorana - Wells Fargo

Okay, got it. Thank you.

Matt Murphy

You are welcome.

Operator

Our next question comes from Eric Frankel of Green Street Advisors. Please go ahead.

Eric Frankel - Green Street Advisors

Thank you. So, I know you guys mentioned that as part of your guidance for next year, you haven't disclosed how you're going to fund or your acquisition and development starts just curious, at this point what appeared more attractive right now, issuing equity or funding it through sales and maybe I just want to get a sense of the size of your potential disposition pool.

Phil Hawkins

We're pretty pleased with what we're seeing in a disposition world. We had a some sales in the fourth quarter that were really well received, we have several packages out now, some formal, some informal. And I think that window is pretty attractive right now.

Clearly we have the desire to continue to manage the balance-sheet and that will remain an objective in a way to do that besides as Matt said build more space, cash flow helps a lot. I would not be surprised if we overtime did issue some more equity in ‘14, it's hard to say when and what for a variety of different reasons, but as Matt said in his prepared remarks, I think you'll see a combination of both. And depending on the market at the time, you might see a bias towards asset sales over equity, on the other hand if equity is attractive relative to the opportunities we see to deploy that capital we certainly demonstrated a willingness to do that.

Eric Frankel - Green Street Advisors

Great, thanks. And then just talking about the development pipeline. One obviously you’ve been super successful in Inland Empire and now that you have a new development start there. Just want to get a sense of supply in that particular market and then just get a sense of leasing activity for the rest of the year development pipeline aside from Beltway Tanner?

Phil Hawkins

I am not sure I’ll take an add about supply out there, other than that there is a fair amount of supply underway or recent completed. What we have is I think really well located in the west a fair amount of supplies in the east. We like that. Like the leasing activity we’re seeing and also the market that starts of low vacancy, I don’t have up to a [minute] vacancy on 500,000 foot space or above but it is -- last time I looked it was under 1%. So you can have a lot of supply in that environment and not be the same threat as it might be in another market where you’ve got maybe even less supply but 6% or 7% vacancy.

We’re seeing that but it isn’t 1%. We’ve got good activity everywhere. Houston, I mentioned we decide signing a lease. We have got two leases at Justin, I am feeling pretty good about they’ve never done till they have done and so it probably matter me for even mentioning it on the call but I did. Chicago, we increased the size of the tenant that we -- first we (inaudible) growing up late in the fourth quarter. We did start of the 300,000 foot tenant, they changed it to last minute high class problem to grow by another 100,000 feet that put us back further. We now know what we’re selling, or leasing, leasing a 200,000 foot space Neil and Brian Roche are very optimistic or encouraged, rates are higher.

The good news is we will be behind lease up, that’s fair to say but the rates would be a lot higher than we pro formaed and the yields will be higher. So it’s a nice situation to be analoged rather to be leased. I think we will get that leased in fairly near future although, again nothing imminent.

Seattle, really good leasing activity there, we have got two projects under construction that are spec. both of them have good leasing activity. Again nothing imminent, but they are busy talking and exploring ideas with tenants who are pretty serious about their needs of space.

I think that covered a bulk of our pipelines. If I miss anything, Matt?

Matt Murphy

No.

Phil Hawkins

Okay.

Eric Frankel - Green Street Advisors

Thank you.

Operator

Our next question comes from John Guinee of Stifel. Please go ahead.

John Guinee - Stifel

Great. Thank you very much. Two questions, one is just more curiosity. You guys have the land acquisitions located in your press release it says Southeast Broward County and then in the supplemental it says Miami. So my question is where is that?

And then second it seems like, you are buying it fir about $100,000 an acre and about $7 per buildable foot, which seems like a very low number in attractive pricing. Can you talk about total development costs and yield given that basis that you are starting?

Phil Hawkins

I will answer the first. Mike Ruen, thank you for handing him a question. The first is simple, I corrected the press release, we think Miami is a market, a regional market that is not. It is in South Broward County. I got the press release. We forgot to fix the supplemental, it’s South Broward. Mike you want to talk about the deal in more specific terms.

Mike Ruen

Sure. Happy to do that. To drill down John on a location it is actually just adjacent to a master plan part called (inaudible) in Pembroke which is a South Broward sub market. So it would be consider South Broward, Fort Lauderdale. The land base is a little bit misleading because we took down the land, but then in a subsequent pay down, we will buy the fill that's being prepared currently by the land seller.

So I would have to really break it down for you and I’d be happy to do that offline. But it’s a much more commensurate number with market as far as when you would include the cost of the fill. And as far as the overall cost, we’re somewhere in the low 100s all-in stabilized.

John Guinee - Stifel

Okay. All right that's what we would have expected. Okay. And then the second question things have gone pretty well, the dividend’s been $0.28 for ages. Any thoughts about the dividend Phil?

Phil Hawkins

Well it depends on the results. I thought you mean the same which is we've got terrific uses for the capital as company may generate, recent, unfortunate not generate a lot of excess capital but that’s what we do have. I think we are putting the good use. We are obviously paying attention to tax with minimums and that's kind of our approach to the dividend in this environment.

Some of that is fairly predictable base on operating results (inaudible) selling assets, that also can trigger gains from a tax perspective that may impact that dividend, but I thought we don’t think dividend is a ‘14 issue, or question, or opportunity.

John Guinee - Stifel

All right, thank you.

Operator

Our next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Craig Mailman - KeyBanc Capital Markets

Hi guys. Phil, maybe just a follow up on the sales; I know you have some packages out there but just give me your comments about some of the leasing that’s put at some of the larger vacancies and kind of the spreads between As and Bs. Is this a year where maybe you can accelerate the exit from some non-core markets that maybe you didn’t think you would be able to do till ‘15, accelerating your ability to get out of some of those markets?

Phil Hawkins

Our focus is more on buildings and markets, but clearly our thoughts on buildings in large part besides the asset itself derives from our thoughts in the market. And I think you are correct in thinking about how my comments impact our divestments -- our sales strategy. Although we’ve got some buildings on the market now that are in markets that we like long term, it’s just that we think that those buildings for whatever reason have less growth and maybe more attractive in the hands of a different kind of owner, a more institutional owner than us. So, it’s not just market driven but clearly my comments about the investment sales market and secondary markets combined then with leasing would lead you to -- I think you are thinking about it correctly.

Craig Mailman - KeyBanc Capital Markets

Okay. Then the second question, we talked a lot about supply today and you have obviously -- I think you have a pretty realistic view of the world at this point. I am just curious, has the underwriting process changed at all for you guys as you go to the investment committee on new builds?

Phil Hawkins

I think the underwriting process is so case by case, so individually driven that it’s hard to say that. I would say that most members of the committee, maybe every member of the committee, both the management investment committee as well as the board investment committee are probably a little more skeptical about lease up times and rents than we were two years ago. On the other hand, we are more confident in the markets and sales that the economy is I think in better shape and in a more solid trajectory than it was two years ago.

Cap rates are a little lower in markets than two years ago. So yields have come down a little bit. So, I think it's changed, but I can't necessary say it’s changed in one direction. Again, it remains -- it is a very detailed project by project discussion that it should be.

Craig Mailman - KeyBanc Capital Markets

Okay, that's helpful. Maybe just one more in there; what has Airtex come in at relative to its pro forma for the return?

Phil Hawkins

Well, above pro forma; I don't think we divulge…

Matt Murphy

Specific yields, we haven't, but it is meaningfully ahead, both and really sort of hit the tri factor which is, it's a little bit better in timing, a little bit better in cost and meaningfully better in rent.

Phil Hawkins

So, I guess that's why even I can answer the question better on pro forma. Great job by Justin and Will in our Houston team in executing that deal.

Operator

Our next question comes from Gabe Hilmoe of UBS. Please go ahead.

Ross Nussbaum - UBS

Hey guys, it's Ross Nussbaum here with Gabe.

Phil Hawkins

Hey Ross.

Ross Nussbaum - UBS

How are you?

Phil Hawkins

Great.

Ross Nussbaum - UBS

Can you talk about the TRT joint ventures that you exited in January? If my math is right, it looks like it was just under seven cap on the dispositions, so number one, is that about the right math? And number two, why weren't you a buyer of the majority interest in those ventures, continue the asset so well?

Phil Hawkins

Not surprising, your math’s good, I wouldn’t want to criticize your math anyway in public. So no, your math’s pretty close. I don’t know the exact cap rate myself, but you’re close.

We thought a year ago now, not quite a year ago but probably a year ago, we started talking to TRT and we acquired the assets that we did like, markets and assets that made sense to DCT. We continued to talk to our partner about that -- those ventures and concluded that the assets that we just sold were really not of interest. There is one, maybe two that could have been but the package was much more attractive on its entirety. And the -- think the value of those assets that we would have taken were pretty de minimis and so the right decision for the venture and the right decision for DCT. But I’ll just start with the first was to sell to a third-party which we then went to a very a fully marketed program and terrific investor interest; we learned a lot, all good and a very satisfied sellers in that regard. We still have a couple of assets left in the TRT venture that as lease progresses and/or markets change or further improve, I think it’s likely to say that we will sell those as well and we’re not likely buyers of those assets either.

Ross Nussbaum - UBS

And is it fair to say that this is sort of the end of the relationship with TRT and your dividend capital relationship or are you open to doing future ventures with them?

Phil Hawkins

Well, our strategy for five years at least has been to really focus on balance sheet ownership and not pursue the joint venture or fund management approach. I think we are better equipped, our strengths are much better focused on acquiring and developing on our own balance sheet and acquiring and developing assets we want to own long term. And so the winding down of that venture, our acquisition of Boubyan venture a year ago, the acquisition of many of the TRT assets, nine months ago; all consistent with that strategy of really -- if it’s worth owning part of, own all of it and vice versa. And we would never rule out joint ventures, we just did one in fourth but done in a way that very strategic that allows us to control land that we wouldn’t have otherwise been able to acquire as opposed to some way of splitting out our balance sheet among more projects and in some cases, diluting control as well. And I am not a fan of either one of those.

Ross Nussbaum - UBS

Okay, that’s helpful. And then finally, you guys have done a nice job shifting the portfolio over the past couple of years, but I am looking at the portfolio listing, you still have a couple of markets where you got less than five assets and I am thinking it’s really Charlotte, Denver; Louisville, Nashville, what’s the game plan for those markets in particular; are those -- are those going to be exist markets or growth markets?

Phil Hawkins

I would say not growth market -- they maybe growth markets, they’re not growth opportunity for us. Denver is one where to grow market, grow little market, we bought some assets over the last couple of years, wouldn’t be opposed of buying there with obviously we live here and operate here, not a priority but certainly not something we’ve stayed away from.

Charlotte, we actually exited two years ago probably, a year and half ago. We then took down assets from TRT and they’re all cost collateralized on a loan, which with the opportunity for us, because strength of the portfolio was fairly eclectic and therefore not all that marketable to -- at the time. We took the Charlotte assets, it’s leased long term, we've seen opportunity actually to renew that lease, but not – not on the tenants terms and so where we (inaudible) value creation at this moment and very patient to great asset.

The other markets, I don’t think you see us expand, but natural to grow market. We've actually -- think there is more growth in those assets and the cash flows there than perhaps elsewhere, not necessarily some place we want to grow aggressively and or just have, it’s really because we see the opportunity to grow cash flows as that market is really recovered over the last couple of years and really market -- get leases that are below market, backup to market before we sell.

Ross Nussbaum - UBS

Okay. That's helpful thanks.

Phil Hawkins

Thanks.

Operator

Our next question comes from Michael Mueller of JP Morgan. Please go ahead.

Emil Shalmiyev - JP Morgan

Hi, good morning. This is Emil Shalmiyev on the line for Mike. A few questions on development. I think you said, you were to mention returns on specific projects, but what's the range looking like for the current pipeline? And then in terms of leasing, how much time are you factoring in for lease up upon completion of the current pipeline on average?

Matt Murphy

Emil, this is Matt. As we’ve shown in the supplemental, current pipeline, the average yield is 7.3%. That’s obviously a mixture of the portfolio that we have. From a lease up, perspective again, as Phil mentioned, it’s facts and circumstances on each market. I would say simple answer is probably a nine month average. It’s probably a little bit more than nine because it’s combination of 9s and 12s. So, but it is obviously determined on a specific case basis. And that excludes obviously build-to-suite liquidate in Seattle that doesn’t affect the average I was talking about.

Emil Shalmiyev - JP Morgan

Okay, thank you. And in terms of the mix of funding, you said it’s similar to 2013. I think I am seeing about it was 50-50 asset sales in new [liquidation], is that about right?

Matt Murphy

That is absolutely right for ‘13. As Phil mentioned, it will be a combination, you evaluate the appropriate source of funding given the combination of the use of proceeds and the relative strengths of it that sort of two sources from a capital markets perspective and you’ll make the determination accordingly. I think over the long-term, it clearly ends up being a mix that approaches 50-50. In the short-term, it’s really more about evaluating the markets at that given point in time.

Phil Hawkins

The good news from our perspective is that we’ve made a lot of progress not for the portfolio but on the balance sheet. And we are very comfortably within the range of balance sheet metrics that we need to -- relative to the ratings and the obligations we’ve committed to for our new bond investors and the rating agencies. We are mindful of balance sheet but we are also now in a position where we have to do anything. So we can do what’s right for the company to manage, both the portfolio and the balance sheet and take the opportunity as they present it to us.

Emil Shalmiyev - JP Morgan

Okay, thank you guys.

Phil Hawkins

Thank you.

Operator

Our next comes from Paul Adornato of BMO. Please go ahead.

Paul Adornato - BMO

Thanks very much. Good morning. I just have one quick question that is, I was wondering if you could tell us about tenant sentiment today versus six months ago. Is there more of a sense of urgency among your tenants and maybe if you could also drill down to large tenants versus smaller tenants and any geographical differences?

Phil Hawkins

Hey Mike, that's right up your alley.

Matt Murphy

Sure, sure. Paul, I would say that with respect to our larger well capitalized tenants, they really got out over the last couple of years. So there is not as much sense of urgency. I mean you certainly -- you don't want to generalize, because there are groups specifically looking at perhaps getting out a little early on a renewal perhaps. We are seeing some of that activity. Where I would focus my comments is on the small business pick up. Sales are up, confidence is up, and more importantly now their valuations are up. And so what we're hearing from the smaller users is that they are now seeking capital for growth. And that is really important for us, it's not only that lift Class A, it also lifts Class B quality class being in fill locations, which is very important and provides significant balance in this recovery and overall fundamental improvement.

So, I think that's where we're really seeing a consistent change in seeing. But overall, I mean people are feeling pretty good. And to Phil's comments earlier, you see economy feels more sustainable. So, it's positive.

Paul Adornato - BMO

Okay. And I guess as a follow up, since there is more activity and more urgency on the small tenant size, does this imply that we might see more speck development since the largest tenants might tend to do build-to-suite activity and the smaller tenants be left to multi-tenant spec?

Mike Ruen

Well, we’ve seen…

Phil Hawkins

Sorry, go ahead. Mike, go ahead.

Mike Ruen

No, go ahead Phil. I’ll follow-up with some color.

Phil Hawkins

We’ve seen success on large box expected [element] I mean that’s been our calling card over the last couple of years. I think you’re going to start to see -- well, it’s early some smaller box development that makes sense. We started building 100,000 foot of the box. We’ve brought people in, actually bought right next to (inaudible) which is one of the complexities of that deal which was our advantage I think. We’re really optimistic about that development in Dallas. We think that Dallas is a large box market. Well, we’ve got -- we’re doing really well with the quality kind of small building, which gave us a confidence to go after that deal. We will see start something in Pennsylvania which Mike can talk about. That will be again 400,000 kind of the size which is not the 1 million foot big [bomber] that you’ve been reading about, which we’re much more optimistic today than we might have been three years ago. Mike go ahead with any other color you want to add.

Mike Ruen

No, I would say -- I would just to add to that that again the multi-tenant segment is very important to our development program and we like to focus on that core tenant base. And what takes that to an actual start or opportunity is rent growth. And again, and I would just iterate as the markets become more balanced, we’re able to push rents in this tenant size range and it bodes very well for us in certain markets where we are looking to build single loaded multi-tenant product.

Paul Adornato - BMO

Okay, great. Thank you.

Operator

(Operator Instructions). Our next question comes from Ki Bin Kim of SunTrust. Please go ahead.

Ki Bin Kim - SunTrust

Thank you. So I look at the past few years of how you guys provided guidance, I would always consider you as one of the most straight forward CEOs out there. And it’s a little surprising; I am certainly surprised to see strong guidance come out from you guys for 2014. So my question is, how much of this is embedded in terms of the road getting better in 2014 for at least what you are seeing on the ground today and leasing that you’ve done today that gives you the optimism especially for that occupancy increase portion of that guidance? And maybe you said differently, how much of the leasing that you are guiding towards is already pretty much done?

Matt Murphy

Well Ki, I’ll take this, it’s Matt. I don’t know that I can separate the two. Ultimately as I talk about, we are anticipating leasing in order to hit our guidance numbers, but that anticipation is based upon what we are seeing today. I don’t think of it as the world needs to get better in order for us to achieve these numbers, I think it needs to stay on the same path, which is basically what we believe is going to happen.

So I think the guidance -- there is a lot of leasing to do in that guidance. We were in an environment where -- and we have a platform where we should believe that that raising is going to occur. So I think that go very much hand-in-hand. I think it will be very disappointing to me personally and to DCT in general if we weren’t able to achieve further both rental rate growth and occupancy growth given the portfolio we have assembled and therefore our guidance reflects that.

Ki Bin Kim - SunTrust

Well maybe let me ask it differently. You have about 150 basis points of higher occupancy embedded in your guidance for ‘14. How much of that is already in kind of what you consider solid negotiations or attraction?

Phil Hawkins

Well, I can go ahead. It just geared me; I think I may get your point. So, roughly half of -- so we have 100, numbers are pretty accurate in the midpoint of guidance in terms of the average occupancy in ‘14 versus the average occupancy in ‘13. But important fact, we’re sitting today at well above what our average was in ‘13. So, roughly half of what we need to do is kind of like to [phrase] in the bank, but it’s -- we are starting out. If we were to do nothing, but stay where we are today you are roughly half way home.

Mike Ruen

Let me add one more comment. I think this is still the same Phil Hawkins that was here a year ago. You make me nervous. But to me the biggest difference besides more confidence in the environment, the biggest difference this year versus last year for DCT is that far fewer, almost no current tenants have refill the [towering] on.

This time last year, we had a number of major known move-out. And so in some way, it may look more aggressive to you, it certainly -- we've never tried to be conservative, but things go well sometimes, we think for the last two years that's been the case. I like the fact that our portfolio is starting off not behind the eight ball, but in somewhere ahead. We got a lot of work to do to earn those renewals and we won’t win them all. But at least we got a fighting chance on almost everyone of them and that's the big difference.

Ki Bin Kim - SunTrust

Well, thanks for that great color. And just last question, if you look at your tenants that use bulk industrial space for distribution to their store network versus your bulk industrial space users that are purely for e-commerce like an Amazon. For the retailers that have stores and have online, do they use the same warehouse today to basically cover both functions or is it separate?

Phil Hawkins

I would say the rule of thumb is they are separate for a variety of different reasons since the fulfillment process is much different between the two. When you ship into store you ship in a truck. And you are shipping a truckload when you ship into a user you are selling it to a EPS truck or a FedEx truck that is backed up, but loads one box at a time going on that truck. So a very different -- Mike any further comments you want to make in terms of the differences between the two or the sharing of warehouses?

Mike Ruen

Yes, the only thing that I would add is not only are they in different warehouses, they are often in different locations within the same metro area. I will give you an example of Carters here in Atlanta. For their bricks and mortar deliveries all of their outbound comes out of South Atlanta in Henry County for store replenishment. 100% of their e-commerce comes out of the Northeast sub-market along 85, because it’s a better network to get them over to the i95 quarter and the [stomachs] that they are serving.

Ki Bin Kim - SunTrust

Right, I mean that makes complete sense. I guess… go ahead.

Mike Ruen

No, that’s all.

Ki Bin Kim - SunTrust

Yes, it makes perfect sense. And I guess just different questions about does this industry somewhat cannibalize each other rather if these converge at one point in the future?

Mike Ruen

Yes, that's a million dollar question. I wish we knew that and the only other thing I would add is it as Phil even alluded to with Wal-Mart earlier, you can't generalize because these guys are always in different stages. You hear some feedback that Amazon is now sort of slowing down their regional search and looking for more in-fill locations in the 250,000 to 300,000 square foot range. Wal-Mart conversely, they have four searches for a million feet or better in Northern California, Southern California, Atlanta and Dallas. So, timing is different, it's tough to generalize where these guy’s heads are when it comes to focusing on their supply chain, whether it'd be for store or e-commerce for that matter.

Ki Bin Kim - SunTrust

Right. Well, thank you for that detail.

Phil Hawkins

Thanks.

Operator

Our next question comes from Eric Frankel of Green Street Advisors. Please go ahead.

Eric Frankel - Green Street Advisors

Thank you. Sorry I know the call is running a little bit long, but actually just want to follow-up on Ki Bin's comment. Do you think e-commerce -- do you think it's actually because of the growth in that demand at warehouse space or do you think it's actually replacing what would otherwise be a bricks and mortar type distribution center?

Phil Hawkins

No, absolutely the growth, net growth, I mean for a variety of reasons. But because you've got more products that’s being fulfilled not much store, which isn't our business, but from our warehouse, which is our business. And so, I think it actually has been a substantial increase to net absorption. Now, a lot of it is Amazon and a lot of that has been build to suit to new supply, but nevertheless, we've leased to a number of e-commerce users.

I don't think it's cannibalizing now to the extent traditional retail slows or even goes in reverse direction, which I hope is not the case and then it seems to be the case that clearly will need less growth in a positive way or less warehouse space in a negative way depending what happens to the business, but very different businesses.

Matt Murphy

The other thing that I’d add Eric is that I think ancillary to that is part of the e-commerce trend has been to satisfy in some place in some ways increase people’s desire to have things right now. The movement to immediate delivery absolutely has to be a positive to distribution space you’ve got to push a bit forward. If the trends you deliver same day continues to gain steam it will absolutely be a positive to distribution it has to be.

Eric Frankel - Green Street Advisors

Okay. Well, I look forward to the daily that go to a [drone] related distribution centers. My follow-up question I guess is related to one of your peer’s analysis on development just the replacement cost related analysis. Do you feel where the developments are being budgeted, are the rents that developers want to achieve, are they significantly higher than what the transactions are that have taken place right now?

Phil Hawkins

I don’t speak for us and I would say that we are budgeting or performing developments at current rents. We may run a scenario where we see kind of typical kind of 3% rent growth as I said two year project that’s out two years, but we’re not taking legal phase. Now we’re not developing in every market and we’re not -- so we may not be thinking about like anybody else, but I believe that in the markets we’re developing that we are making money and doing just fine based on current rents. Now we’ve outperformed over the last three years of development because rents have gone up faster than we had projected a leasing in our underwriting, but that’s not something we bank on going forward.

Eric Frankel - Green Street Advisors

Great, thank you for the color.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Phil Hawkins, CEO for any closing remarks.

Phil Hawkins

Well, thank you very much for participating, asking questions and listening. We look forward to talking to many of you over the next few months. And again, I appreciate your interest in DCT. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: DCT Industrial Trust's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts