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

DCT Industrial Trust Inc. (NYSE:DCT)

Q1 2008 Earnings Call Transcript

May 2, 2008 12:00 pm ET

Executives

Sara Knapp – Corporate Communications and IR

Phil Hawkins – CEO

Jim Cochran – President and CIO

Stuart Brown – CFO

Daryl Mechem – Managing Director, National Director of Property Operations

Matt Murphy – SVP of Finance and Accounting

Analysts

Paul Adornato – BMO Capital Markets

Christopher Haley – Wachovia

Michael Mueller – JP Morgan

Mitchell Germain – Banc of America

Cedrik Lachance – Green Street Advisors

Jason Payne – Morgan Keegan

Chris Pike – Merrill Lynch

Operator

Hello and welcome to the DCT Industrial Trust First Quarter 2008 Earnings Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions) Please note this conference is being recorded. Now, I'd like to turn the conference over to Sara Knapp. Ms. Knapp, please go ahead.

Sara Knapp

Thank you, Andrea. Hello everyone, and thank you for joining DCT Industrial Trust first quarter 2008 conference call. Before I turn the call over to Phil Hawkins, our CEO, I would like to mention that management's remarks on today's call may include statements that are not historical facts and are considered forward-looking within the meaning of applicable securities laws, including statements regarding projections, plans or future expectations. These forward-looking statements reflect current views and expectations, which are based on currently available information and management’s assumptions. We assume no obligation to update these forward-looking statements and we can give no assurance that the expectations will be attained. 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 at our supplemental package, which can be found in the Investor Relations section of our website at dctindustrial.com.

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

Phil Hawkins

Thanks, Sara, and welcome everyone to our call. I'll make some comments on the first quarter as well as share some perspective on the unfolding economic and operating environment before turning the call over to Jim Cochran who will review our capital deployment activities, and then Stuart Brown will provide some additional detail and color on our financial performance and guidance. Also joining us on the call are Tom Wattles, Daryl Mechem, and Matt Murphy.

We had a pretty good quarter. Leasing remained strong with volume of 1.9 million square feet, consistent with prior quarter’s activities as well as with our internal expectations. We were pleased with rent growth of 11.1% GAAP and 2.4% cash, and tenant retention of 72%.

Same store NOI growth over the prior year was disappointing, caused in large part by the bankruptcy of Wickes furniture, a 440,000 square foot tenant in Chicago as well as some smaller one-time items that Stuart will describe in further detail. But without these, same store growth would have been more in line with our expectations of 1% to 3%.

With regard to two other initiatives, Mexico and SCLA, we had another good quarter of progress, although in the case of SCLA nothing to announce quite yet in the first quarter. Jim will provide additional color on both.

As we said last quarter we are very focused on managing our balance sheet and continue to make good progress in that regard. We exercised our renewal option on a $175 million of ING debt expiring in June and are working on a new facility with excellent response for the balance and we think favorable pricing will be received. It's a further reminder that a strong balance sheet as well as broad relationships are critical to success in today's credit environment.

We also continue with our disposition program, and while the investment climate is a little more challenging than it was six months ago for sure, we are encouraged by the responses we have had and expect to meet our internal disposition objectives for the year in terms of volume as well as cap rate.

Looking ahead to the balance of 2008, we have reaffirmed our previous FFO guidance of $0.68 to $0.73 per share. We continue to believe that the economy and the real estate markets will soften and are acting accordingly in our leasing efforts. While our leasing pipeline remained at the same level as prior quarters we are starting to see signs of deals taking a little longer to get done, and I wouldn't be surprised, frankly, if our closing ratio declined somewhat as tenants become increasingly hesitant to make decisions. Of course, that phenomenon may also help us with our renewal efforts as well. I am particularly pleased with Memphis where we now have 700,000 square feet of leases out for execution, split about 50:50 between renewals and new deals.

In addition to leasing, we also pay close attention to be tenant collection issues. Outside of the Wickes bankruptcy, we have not seen a noticeable change in receivables, but that is an obvious area to watch as the economy softens. The other area which we are watching closely is our development pipeline in terms of both leasing as well as take-out cap rates. We are very focused on leasing and activity is encouraging at many of our projects, but in this environment you can never take anything for granted. Jim will with provide further comment in that area in a moment.

We are starting to hear about situations where developers and other owners are facing pressures from banks due to financings coming due in the face of leasing challenges as well as more stringent loan terms and costs which over time, we believe, will be a source of opportunity. It is still early and we have not yet seen anything real compelling, but it does reinforce our belief that this environment will create some exciting investment opportunities for DCT given our balance sheet strength.

However, at least for the next quarter or two, I would not expect to see much, if any, on balance sheet acquisition activity for us as I think it will take at least that long for the markets to sort themselves out.

With that, I'll now turn the call over to Jim Cochran who will provide more detail on our investment activities.

Jim Cochran

Thanks, Phil. The overall industrial market performed reasonably well over the first quarter with only a 20 basis point decrease in occupancy from the fourth quarter of 2007. Construction starts during the quarter were down 40% from the peak quarter in 2007 as developers scaled back plans and construction financing became tougher to obtain. The capital and investment markets, however, have become more challenging than they were at the end of 2007. There is a lot of capital on the sidelines as many investors are choosing not to invest at the present time. Those that are investing are underwriting deals with much more scrutiny, going in yields are now more important and there is less reliance on future rental rate growth.

That being said, there is liquidity in the market, but it takes more work to sell assets. Consistent with our business plan, we have roughly $100 million under agreement to be either sold or contributed to our Funds. Cap rates for Class A product have moved up to a small degree and cap rates for B and C product have moved up in excess of 100 basis points.

Currently, we have 9.2 million square feet under development, an increase of 1.8 million square feet over the last quarter. The majority of this new activity is in projects located in Mexico and at SCLA. Currently two-thirds of our development activity is in projects located on the coasts or in Mexico.

The Inland Empire industrial market, where we have a major presence, slowed, but still performed reasonably well in the first quarter with two million square feet of net absorption and seven million square feet of gross activity. The net absorption numbers include roughly one million square feet that was vacated by furniture-related companies.

We are pleased with user activity at SCLA and are close to finalizing several transactions, which we hope to announce soon. During the quarter, we initiated development of a one million square foot building at SCLA. We will be one of three buildings that can accommodate a user of this size and with our low land basis we can underwrite competitive rents and achieve strong returns even with a long lease-up period.

We continue to experience excellent leasing activity in Mexico. To-date, DCT has developed or is under construction on a total of 1.4 million square feet in Monterrey through our venture with Nexxus. We have leased or sold over 700,000 square feet of this total in the past 15 months with leases in negotiation for an additional 258,000 square feet. Due to this strong leasing activity, we initiated construction on four additional buildings in Monterrey totaling 482,000 square feet in the quarter, of which 128,000 square feet is pre-leased.

Finally, our institutional funds management business grew by $51 million with acquisitions directly into our venture with TRT and our venture with JP Morgan. Total assets under management grew to $738 million in total.

These are certainly interesting times and I am pleased with our continued progress especially in Mexico, SCLA, and our Institutional Capital Management business. We have been patient from an investment perspective, and believe opportunities may become more exciting and plentiful towards the latter part of the year.

With that I'll now turn it over to Stuart.

Stuart Brown

Thanks, Jim. Good morning. Good afternoon, everybody. DCT Industrial earned FFO of $30.2 million or $0.15 per share in the first quarter of 2008, including gains from contributions of land of $250,000. This compares to FFO per share of $0.17 earned in the first quarter of 2007, which include $0.02 related on gains on disposition of real estate.

Before reviewing our operating results I think it's important in this economic environment to begin by discussing our financial position. As you are aware, we have $275 million of senior unsecured notes scheduled to mature in June. When we negotiated these notes in 2006, Matt did a great job structuring an option of allowing us to extend the maturity on $175 million at rates based on Corporate Bond Index. As we began to work on the refinancing it became obvious that the terms under the extension were clearly favorable to market rates. So we exercised our option to extend for five years and locked the rate at 6.11%. This step helps ensure that our balance sheet remains strong and takes the maturity out to 2013, a year where we only had $41 million maturing. For the remaining $100 million of maturities, we are in discussions with various lenders and are very confident in our ability to refinance at rates consistent with our previous forecasts.

Our leverage remains conservative and we are maintaining the capacity inherent in our best – strong balance sheet for future flexibility. We will continue to be patient and treat capital preciously until exciting opportunities present themselves.

Now with regards to operating results, our performance this quarter has been solid despite facing some headwind. Phil mentioned our leasing activity of 1.9 million square feet signed in the first quarter, which compares favorably to the first quarter of 2007 when we signed leases totaling 1.4 million square feet.

Average occupancy of our consolidated operating portfolio increased 80 basis points to 93.6% in the first quarter of this year from 92.8% in the first quarter of 2007. In line with our own expectations, occupancy since the beginning of the year has decreased 80 basis points representing approximately 500,000 square feet. The largest new vacancy was a 555,000 square foot lease expiration – 155,000 square foot lease expiration in southern California where active lease negotiations are ongoing with a new tenant. Overall occupancy was consistent with our previous guidance.

Turning to net operating income, our total NOI for the quarter declined from a year ago primarily as a result of our capital recycling activities. Our reported same store NOI growth was a negative 0.6% for the quarter. As Phil mentioned, this was impacted negatively by the bankruptcy of Wickes Furniture, which occupied 440,000 square feet in the Chicago market. [inaudible] bankruptcy, which rejected the lease last week and therefore they will not pay outstanding 2007 or 2008 real estate taxes for which they were directly responsible. We expensed over $600,000 in the first quarter related to the real estate taxes and bad debt.

Our operations team was monitoring Wickes closely, so rent was only one month in arrears when they filed bankruptcy. Excluding the impacts of Wickes bankruptcy and $300,000 of nonrecurring expense recovery adjustments, our same store cash NOI would have increased 1.9%, consistent with our annual guidance of 1% to 3%. The loss of rent at Wickes will continue to depress NOI until the space is re-leased, which could amount to $1.2 million for the remainder of the year.

Moving on to other financial results, our general and administrative costs were $5.9 million in the first quarter. This is higher than our normal run rate due mainly to timing of professional and other expenses. We remain comfortable with our previous guidance for G&A of approximately $0.11 per share for the year.

Interest expense this quarter was $14.5 million including approximately 1.4 million of additional expense related to forward-starting interest rate swaps. The swaps were settled subsequent to the quarter-end, which will result in a reversal of the 1.4 million in the second quarter. Excluding the impact of the hedge, which will effectively cancel itself out in Q2, our fixed charge coverage this quarter was a conservative 2.9 times.

As Phil discussed earlier, our FFO guidance of $0.68 to $0.73 per share for 2008 remains unchanged. The underlying assumptions require a little updating, though. Same store NOI growth will more likely be towards the lower end of our 1% to 3% guidance without some increased activity to offset Wickes. Similarly, occupancy will average in 93%. Further, as discussed last quarter, we continue to be cautious on development leasing and cap rates and would expect gains near the low end of our $0.06 to $0.08 per share guidance. Lastly, we expect that interest expense will be favorable relative to prior guidance.

While we clearly had a couple of hurdles this quarter between the hedge charge and the Wickes bankruptcy, our underlying operating performance was healthy and our financial condition is strong. We remain concerned about the softening economy and the near-term impact it will have on our business, but continue to focus on executing our business plan and building long-term value while pursuing unique opportunities that these unsettled markets may create.

I'll now turn the call over for questions. Thank you.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from Paul Adornato of BMO. Please go ahead.

Paul Adornato – BMO Capital Markets

Hi, good afternoon. Phil. You mentioned that dispositions might be a little bit slower than previously anticipated. I was wondering if you could give us a little bit of color on why that's the case. Is there a disagreement on price? Or is financing falling through on part of the buyers or what's happening there?

Phil Hawkins

Actually, Paul, that's not what I said, or not what I meant to say. Dispositions are going along fine. I think we'll be right on our annual target. Let me ask Jim to give some more color. As he had said, we have about 100 million under contract now. Whether they'll close or not to be determined, of course, but we are actually rather pleased with our disposition activity. Jim, can you add some color on that?

Jim Cochran

Yeah. Maybe, Paul, it was my comment that there is capital on the sidelines and it is tougher to sell assets, but even with that there still is liquidity in the market and we've had multiple offers for the properties we have on the market. So, again, it's clearly a different environment, but it's an environment where there's still liquidity.

Phil Hawkins

Let me add a little bit more, one more comment on our disposition thinking. What we are doing is obviously recycling capital to reinvest into higher growth opportunities. What we are also doing is when thinking about dispositions, however, is making sure that we are selling assets that we believe will help further our objectives to increasing NAV and FFO per share over time, but doing so in a way that we think is economically prudent. So we are focusing on assets that are attractive to the marketplace and in markets with investor activity but where we again think we are better served to redeploy capital. So we are not trying to swim upstream too hard here. We are doing the right thing economically, but it remains an important aspect of our overall strategy to recycle capital and then to continue to look for ways to increase over the long term our FFO and NAV growth per share.

Paul Adornato – BMO Capital Markets

And, Phil, have you changed the composition of the properties that you are looking to dispose of based on market conditions or is that group of properties still the same?

Jim Cochran

Yes. To a certain degree. I mean as you know, we are primarily a bulk distribution oriented company and through some portfolio acquisitions over time we had to pick up some service center. We did attempt to sell that last year and found that cap rates really had moved for that service have product, and we decided not to sell it. So we – as Phil mentioned, we are selling some Class A assets in good market where there is demand from investors.

Paul Adornato – BMO Capital Markets

Okay. And with respect to the joint ventures, both existing and potential new JV partners, what's the appetite there in this environment?

Jim Cochran

Again, this is Jim. I would characterize both of those groups as cautious, but still on the market. They are – like much of the capital is trying to understand where the market is, but as I mentioned, we closed an acquisition into both of those ventures in the first quarter.

Paul Adornato – BMO Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question comes from Christopher Haley of Wachovia.

Christopher Haley – Wachovia

Good morning. Stuart, where does the $1.4 million swap item hit the income statement?

Stuart Brown

It flows straight through to the interest expense line.

Christopher Haley – Wachovia

Okay. And obviously reversal in the 2nd quarter?

Stuart Brown

Right. So the 1.4 million will come back when we settle the hedge last week. So in the second quarter it will completely reverse itself year-to-date.

Christopher Haley – Wachovia

Thanks. And just to make sure I understand the increased reserve taken in the first quarter was related to – not related to rent receivables but taxes? What was it related – And then the expectation of lower NOI from the move out and bankruptcy is rent based, 1.2 million.

Stuart Brown

So the Wickes bankruptcy is a little bit unique situation. This was an asset we bought with a furniture company and in the lease that was on there had Wickes paying real estate taxes directly. Again, a little more detail people want to hear. But in Illinois you pay real estate taxes here in arrears, so 2007 real estate taxes hadn't been billed yet, so they hadn't paid them. So when they filed bankruptcy and rejected the lease, they are probably not going to be able to pay those real estate taxes. We went ahead and picked that up. It’ – that was the majority. Actually the $600,000 was real estate taxes. They were – when they filed, they were one month in arrears. It was about a little over $100,000 of rent for that month and post petition before they rejected the lease essentially as of the end of May they've been paying their rent. So as of the end of May they'll be out of this space.

Christopher Haley – Wachovia

All right. Thank you. I wanted to ask you on the leasing side what is the – including the first quarter aggregate leasing pace plus the expected second, third, and fourth quarter leasing pace for 2008, when you combine all that together for the calendar year 2008 to reach your guidance range, how does that compare to the aggregate volumes that were actually recorded in the 2007 year?

Daryl Mechem

Sure, Chris, this is Daryl.

Christopher Haley – Wachovia

Daryl.

Daryl Mechem

Based on the first quarter activity, we are actually ahead of budget by about 350,000 square feet. Lease activity – we tracked on our pipeline, as Phil mentioned earlier, is actually running slightly higher than we've seen in the last two quarters at about seven million square feet. Of that seven million square feet, Chris, three million is in the leased document stage, negotiation and/or out for signature. Two and a half million of that is in renewals. So activity today, a snapshot today, the volume velocity is still in the marketplace to achieve the 8.6 million square feet that is necessary to hit our goals. Now, crystal ball, with all the economic news that comes out, who's to say if all those deals ink, all seven million, who knows? It's awfully cloudy to – looking into that crystal ball. Relative to '07, Chris, we actually are – we are ahead by about 600,000 square feet, first quarter to first quarter.

Christopher Haley – Wachovia

What was the aggregate amount leased in 2007, Daryl?

Daryl Mechem

7.9 million square feet.

Christopher Haley – Wachovia

Okay. So your expectation is a higher leasing velocity in 2008 than 2007?

Daryl Mechem

Correct, yes.

Christopher Haley – Wachovia

Okay. All right. Thank you.

Daryl Mechem

Sure.

Operator

Thank you. Our next question comes from Michael Mueller of JP Morgan.

Michael Mueller – JP Morgan

Yeah, hi. With respect to the development pipeline, can you talk about the momentum of leasing going from the projects that were listed in say the year-end supplemental to the first quarter because I know the overall leasing percentage went down a few hundred basis points, but you also had starts in the quarter. So what's the trend for the stuff that just – has been around for a quarter or so?

Jim Cochran

Yes, Mike. This is Jim. I'll handle that one. First off, and I think you are probably referring primarily to Page 11 of our supplemental, but there is 3.7 million square feet that have pro forma stabilization in 2008, and of that total 31% is leased. And with the exception of South Creek in Atlanta, which is a 556,000 square foot building, and Delta Point in Memphis, 885,000 square feet, all of our development projects are in their pro forma lease-up period.

What I can do is go to Page 11 on our supplemental quickly, talk about individual projects to give you a flavor of activity. Our Chicago project, which we call Veterans 2, we have leases out that would bring that building to 100%. Our Nexxus projects, the 547,000 square feet that were brought onto our balance sheet, we have leases in negotiation or temporary leases signed for 447,000 of that total. Our national project Logistics Way, of the total 570 we've leased 250. Orlando, we have a small project there that's – we've got activity, nothing signed.

Sycamore Canyon A in southern California, I will say that 450,000 square foot building is in a part of the submarket where there is a fair amount of the competition for that project right now, but we've got some activity there. Our Dulles project that's under construction, we are 27% leased. Our Cincinnati buildings, which are 840,000, we don't expect to even complete those until October, and we've already had three meaningful proposals out. So, hopefully – we are actually very pleased with activity there. Our other Orlando project, 200,000, that just started last month. Our other southern California projects 85% pre-leased.

You get to SCLA, we completed our two small buildings last month – are 21% leased, and we have two leases out in negotiation, and our 300,000 square foot building is not even completed at this time. On this supplemental, for those of you who don't have it in front of you, that's 8.5 million feet. I spoke to 9.2, which is our forward commitment structure in Mexico, but of that basically 700,000 square feet that would add to this total, 49% of that is lease. So we have – we feel pretty good activity. In this environment we are thinking about it. We are concerned, but overall we think we have pretty good activity and development pipeline.

Michael Mueller – JP Morgan

Okay. The 31% numbers you moved through the year do you think that will move up ratably? Or you're going to have leases signed near term or do you think it’s looking like it's going to be a much more back-end loaded?

Jim Cochran

Ideally it would move up ratably, but realistically with pro forma lease-up it's the latter part of the year, so –

Michael Mueller – JP Morgan

Okay, okay. Second question, can you talk a little bit about the difference in operating statistics for say the bulk component of the portfolio versus the service centers, i.e., what's happening with occupancy trends and lease spreads?

Daryl Mechem

Sure. Yeah, this is Daryl. The performance in the first quarter from the bulk portfolio was right in line with what we expected. Velocity has been good. Light industrial as well has held up. Service center has been a little weak. Luckily it's 2% of our portfolio but it’s been a little slow.

Michael Mueller – JP Morgan

Okay. Thank you.

Jim Cochran

Thanks, Mike.

Operator

Thank you. Our next question comes from Mitch Germain of Banc of America.

Mitchell Germain – Banc Of America

Hey, guys. We saw some occupancy declines, some pretty notable occupancy declines during the quarter. Would you characterize that as according to kind of what your expectations were?

Phil Hawkins

Yeah. You are talking about the 80 basis points, Mitch.

Mitchell Germain – Banc Of America

Yeah. Overall but some of the markets we saw some pretty big moves.

Phil Hawkins

Well, as relates to the quarter results, it really came down to three spaces – the reference space by Stuart, the 155,000 square footer in LA expected to come back to us, budgeted to come back. We also had 120,000 square feet in New Jersey budgeted to come back, we knew is coming back. Those two drove most of that variance. Cincinnati, if I'm not mistaken we are down about 200 basis points mostly compiled – built-up smaller spaces coming back. On the positive side, on the positive news as relates to the portfolio, in the first quarter – Memphis has always been a topic of conversation on our calls. We had some very good activity there. We signed 700,000 square feet of leases, which will flow through in the second quarter, so –

Mitchell Germain – Banc Of America

Great. And just in talking about SCLA specifically, Jim or Phil, I know, Phil, you mentioned in your prepared comments about some demand and some things that are in the pipeline. I mean how would you characterize activity there and comparing it to maybe six or nine months ago?

Jim Cochran

This is Jim, Mitch. Boy, I mean that project for those of you it, nine months ago there wasn't much there.

Mitchell Germain – Banc Of America

Yeah. I guess so.

Jim Cochran

So we're completing speculative product and our objective is to have product available in all size ranges or as I call it niches in the demand part of the submarket. So we have a million square footer. We just went under construction on that one. So, we have a very long lease-up time in our pro forma for that building. We have a 300,000 square footer that's not even completed yet. Our smaller projects typically are leased to individual businesses, and those businesses do not lease a building until they see it up and we completed it last month and we are already 21% leased with good activity. And finally, we are willing and will sell land to [inaudible] that want to own or build their own facility out there and we are seeing good activity from users that want to build land at our project.

Mitchell Germain – Banc Of America

Great. Thanks, guys.

Operator

Thank you. Our next question comes from Cedrik Lachance of Green Street Advisors.

Cedrik Lachance – Green Street Advisors

Just returning to SCLA, can you give us a sense whether or not you can still achieve the same rents as what you thought you could achieve 12 or 18 months ago? And also in term of the land sales essentially the same question, do you think you can still get the same kind of prices on land that you were discussing at the time of the IPO?

Jim Cochran

Cedrik, this is Jim. I'll take that one as well. As it relates to rental rates, the answer is yes, we think we can get the same rates. I will say that on our 300,000 square foot building, as I mentioned, there's a fair amount of competition in that size range right now. So our pricing advantage may have deteriorated a bit, but I think we can still get our pro forma lease rates for that building. As relates to landfill the activity is within our expectations.

Cedrik Lachance – Green Street Advisors

Okay. In regards to Monterrey, so you acquired 550,000 square feet. Given that there is no pre-leasing done yet in those buildings do you get a – let's say a discount from your partner or is there any way for you to get a different price given the leasing level?

Jim Cochran

Yeah. The way our structure is put together in Monterrey, it's a forward commitment. So if the building is leased, it comes to us at a pre-described cap rate, and that cap rate effectively is somewhere between a full development yield and a full retail yield because we make an obligation that we will, in fact, own the building at a date certain. And so three buildings – as I mentioned on that 550, we have 440,000 square feet of strong lease activity, I mean lease is out on those buildings and if we take them back vacant we take them back at cost. So if everything else held and the rents are the same we'd actually have a higher yield on those assets the way the structure works.

Cedrik Lachance – Green Street Advisors

Okay. So just to be clear, so if you do sign those 400,000 square feet of leases do you pay an earn out to your partner?

Jim Cochran

Not at that point, no. They're our risk and our benefit.

Cedrik Lachance – Green Street Advisors

Okay. So you bought them at cost essentially?

Jim Cochran

Correct.

Cedrik Lachance – Green Street Advisors

Okay. Just last question, in regards to raising joint venture capital, have you been in the market lately trying to approach new partners and if so what's the reaction or what is the feeling on the part of institutional partners for participating in further core funds?

Jim Cochran

We are always looking to expand our relationships with capital sources and have been in discussions with the banks in getting advice. The answer to your question is that core capital is tough in the U.S. right now. Lot of the capital wants to be more value add or international in focus.

Phil Hawkins

Cedrik, this is Phil, two comments. One is, our business plan for '08 did not contemplate any new relationships. We are very – we are thrilled to have the two we do have. And as Jim mentioned, both are reasonably active in the market and with money available. And then secondly, we clearly are thinking about that, but in terms of how that trend is continuing, but we are not thinking about new relationships, if at all, until next year at the earliest.

Cedrik Lachance – Green Street Advisors

Okay. Thank you.

Operator

Thank you. Our next question comes from Jason Payne of Morgan Keegan.

Jason Payne – Morgan Keegan

Hi, guys. My questions were already answered. Thanks.

Phil Hawkins

Thanks, Jason.

Operator

Thank you. Our next question comes from Chris Pike of Merrill Lynch.

Chris Pike – Merrill Lynch

Good morning, everybody.

Phil Hawkins

Good morning.

Jim Cochran

Hi, Chris.

Chris Pike – Merrill Lynch

How's it going? I guess you guys talked about a backup in DC caps. Can you perhaps put a stake in the ground, tell us where you think the A’s, the more institutional stuff that you guys venture into, where have they backed up?

Jim Cochran

Based on our experience, Chris, with product in the market it's tough to make apples-to-apples comparisons, but I would say 5 to 25 basis points somewhere in that range.

Chris Pike – Merrill Lynch

Okay. And, Jim, I guess I'll just stay with you. With respect to some of the statistics you talked about in Inland Empire absorption was down two million square feet. Can you just remind us where does absorption usually tick on a quarterly basis in that market? And has there been any noticeable uptick in vacancy in and around the basin there?

Jim Cochran

Yeah. I said that net absorption was two million square feet, and that market has run annually at – I don't know – 16, approaching 20 million square feet over the past few years. So one could conclude that net absorption was off – I don't know – maybe as much as 50%, but still positive. Gross activity was very strong. There were two furniture companies that went bankrupt in the Inland Empire west that accounted for a million square feet, which is a negative against that gross activity. So the market has performed well. The increase in vacancy is primarily in what's called the Inland Empire east, which is basically further away from Monterrey airport, as you know. And overall the market vacancy per CB [ph] went up about 150 basis points to 7% total.

Chris Pike – Merrill Lynch

Was that also a function of more supply coming on in the east versus the west?

Jim Cochran

Primarily. A little bit of uptick in vacancy in the west, but primarily the east.

Chris Pike – Merrill Lynch

Okay. I guess you talked about your internal sales or contribution forecasts and I don't think you are apt in terms of giving them out except for saying right now you are looking at 100 million. Is that overall forecast is it significantly in excess of a 100 or is that closer to the internal forecasts–?

Phil Hawkins

You know, Chris, I would say it's more than halfway.

Chris Pike – Merrill Lynch

Okay. And then I guess lastly, you had the one Wickes Furniture situation this quarter. You know, when is the thing [ph] just filed? Are there any other, I guess, customers at risk for lack of a better term or do you have exposure to folks that you are a little concerned about or could be close to filing?

Daryl Mechem

Yeah, Chris, this is Daryl. Red Envelope filed bankruptcy a week and a half ago, 230,000 square foot space in Columbus. Fortunately, they have a buyer that has come to the table who has infused some capital to continue to operate for now. Clearly, we're going to be watching that very closely, and we have a bulk mail customer in 74,000 square feet in Baltimore who we are concerned with. Those are the two primary customers. You know, when it comes to AR, we are watching it very closely on all fronts.

Chris Pike – Merrill Lynch

Okay. And I guess just the last question, with respect to terming out – although you do have a little bit of debt coming due, the 100 million, we've heard some a anecdotal chit-chat that the kind of market starting to come back on, granted it takes anywhere between three to six months before that machine’s back up and humming. But what are you seeing and hearing outside, let's say, some of the financing alternatives that you've been exposed to over the last three months, three to six month? Are you starting to see conduit lending perhaps tick up or get some type of life? Any other type of other financing alternatives you guys are looking at?

Matt Murphy

Yeah, Chris, this is Matt. I think, all of the sort of capital markets are open to a certain degree. You have seen a little about bit more activity in the CMBS, obviously nothing like it was in 2007. A number of steps have put a fair amount of liquidity back in the bank markets. I think that's what you are seeing being the most active. And while it's clearly getting – the process itself is getting more complicated to raise capital through those markets – those markets clearly are open to the right kind of borrower, and I think you've seen a lot of sort of the big players tap that market. Obviously, PLD hit the unsecured bond market yesterday and it's good to see some activity in that regard as well. You know, I think the live company markets kind of are what they are. They have a reasonably fixed amount of capital available and it has been a little bit more of a seller's market, if you will, in that regard, and pricing has reacted accordingly. What you are going to see, I think pretty, historically normal levels of capital available in the live market. So I think it is – CMBS is key to this or some form of that where you've got investor based debt capital available in the market and that's starting to ease up I mean you are starting to see a little bit more activity in that. So I think all the shops are open. It takes a little bit longer to get the deals done and this is where being sort of lower leveraged in a conservative vein tends to be pretty beneficial to us.

Chris Pike – Merrill Lynch

Like we said last quarter, hug your banker, hug often.

Operator

Thank you. Our next question comes from Christopher Haley of Wachovia.

Christopher Haley – Wachovia

I was just going to say how about hugging research?

Phil Hawkins

Don't we do that already?

Christopher Haley – Wachovia

Not at all. I actually wanted to go into a little bit of SCLA, the couple of projects, smaller projects that are still in the works and you announced a larger project and their supply in the Inland Empire east, kind of review this with Jim. Can you give me a sense as to your confidence levels in providing a big box product while the other product is still moving forward, still available?

Jim Cochran

Well, yes, Chris. Our strategy again is to try to have product available in what I would call all segments of the market. So big picture, we think there is demand for smaller tenant space, 10,000 square feet, and our two buildings that are basically 100,000 feet each and are leasing very well we think. But that doesn't compete with the million square footers, you know. The LA market is – people have heard me say this, but I truly believe – the most dynamic and dominant distribution market in the country. So you see very large requirements there. So 300,000 square feet in certain markets is a very large requirement. In the Inland Empire that is not what I would call a large requirement. So we have a 300,000 square foot building that could be divided down to four very easily. With trailer parking on both sides, we think that's a good product and that building's not even complete yet, so it's near completion. And then we have a million square foot building, which again we think does not compete with the other product. Now, you could ask why in today's environment put up a million square footer, which I think is one of your questions and we have thought long and hard about it. We think we've got an excellent project plan with above standard trailer parking. The building will not even be completed till the end of this year and our pro forma lease-up goes out to mid-2010. So we've been very conservative in how we underwrote it. Even with that, we can offer we think very competitive rates and there are not that many opportunities to build a building of that size. You need over 50 acres or roughly 50 acres of land to build a building of that size and it's tough to find contiguous tracts of that size in the Inland Empire. So as I suggested today, we are one of three buildings in that market. So, actually I feel more comfortable about the million square footer today relative to competition than the 300. And again with our long lease-up period we are still very optimistic on that building and in the final component is again sales to users and activities going well there – sale of land to users.

Christopher Haley – Wachovia

speaking of sales, the contribution, Stuart, the contribution of the land in Atlanta, is this – this is into the IDI grouping of assets that you talked about last quarter?

Stuart Brown

Right. We've got – yes. We've got a joint venture with IDI for four buildings that’s basically a 50:50 venture with IDI and as part of that agreement with them we have essentially a separate venture that's 75% owned by us, 25% them that we've contributed the land into. The four buildings, Jim can touch on a little bit more, are basically under construction. The land in Buford right now is – we have put that into the venture but don't anticipate starting any construction on those any time in the near future. Jim, is there anything to add?

Jim Cochran

Really, the only thing to add is IDI is based in Atlanta, Chris, as you probably know. They do a lot of development in the northeast market where this land is located and we thought they could help execute on the development, #1. And #2, effectively it reduces our exposure to land on market to have a partner.

Christopher Haley – Wachovia

Thank you. Was there any markup associated with the land?

Stuart Brown

Yeah.

Jim Cochran

Yes. That's why there's a gain noted in our financials.

Christopher Haley – Wachovia

Great. Thank you.

Operator

Thank you. Our last question today will be from Mitch Germain of Banc of America.

Mitchell Germain – Banc of America

Hey, guys. Just quickly remind me on the JP Morgan joint venture, outside of bulk are there any other investment criteria?

Jim Cochran

This is Jim again, Mitch. No. As a enterprise JP Morgan invest in a lot of product types, but our relationship is 100% bulk distribution, Class A product.

Mitchell Germain – Banc of America

Class A bulk, not in terms of markets or anything like that, correct?

Jim Cochran

For the most part it's a national strategy, a couple of our markets are excepted [ph] just because there is a conflict of interest or a high concentration that JP Morgan already has in the market.

Mitchell Germain – Banc of America

Got you. Thanks a lot, guys.

Operator

Thank you. At this time, I'd like to turn the conference back over to Mr. Hawkins for any closing remarks.

Phil Hawkins

Just a quick thank you to everybody for your time participating in the call and your questions. Look forward to continued conversation as well as hope to see many of you at NAREIT in a month. With that, have a great day and talk to you soon.

Operator

The conference has 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 Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts