DCT Industrial Trust Inc (DCT)

DCT 
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DCT Industrial Trust Inc. (DCT)

Q4 2012 Earnings Call

February 8, 2013 11:00 am ET

Executives

Melissa Sachs – Vice President, Corporate Communications and Investor Relations

Philip L. Hawkins – Chief Executive Officer

Matthew T. Murphy – Chief Financial Officer

Jeffrey F. Phelan – President

Analysts

Craig Mailman – KeyBanc Capital Markets

James Feldman – Bank of America Merrill Lynch

John Guinee – Stifel Nicolaus

John Stewart – Green Street Advisors

Michael W. Mueller – J.P. Morgan

Brendan Maiorana – Wells Fargo Securities

Sheila McGrath – Evercore Partners Inc.

Eric Frankel – Green Street Advisors

Presentation

Operator

Good morning and welcome to the DCT Industrial Fourth Quarter and 2012 Year End Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded.

And I would like to turn the conference over to Ms. Melissa Sachs, VP, Corporate Communications and IR. Ms. Sachs, Please go ahead.

Melissa Sachs

Thank you, Keith. Hello everyone and thank you for joining DCT Industrial Trust's fourth quarter and full year 2012 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 as well as our guidance for the balance of the year. Additionally, Jeff Phelan, our President will be available to answer questions about the market 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 limitation statements regarding projections, plans or future expectation. 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 on our supplemental which can be found in the Investor Relations section of our website at dctindustrial.com.

And now I'll turn the call over to Phil.

Philip L. Hawkins

Thanks, Melissa. Good morning everyone and thanks for joining our call. We had a very busy and productive fourth quarter, an excellent way to finish off a really great year.

During Q4, our operating portfolio continue to perform well. We acquired 21 buildings for $242 million, we sold 7 buildings for $111 million, and our development program is progressing very well in some of the new starts and more importantly lease up. These results reflect many months and even years of effort by many people at DCT and I’m very grateful for their talents, hard work and accomplishments.

Let me start off with highlighting our key operating metrics for the fourth quarter which reflect continued progress as well as strengthening market fundamentals. Occupancy in our consolidated operating portfolio increased 50 basis points over last quarter to 92.3%. For the consolidated operating occupancy increased to 170 basis points. Same-store NOI increased 8.6% on a cash basis and 4.9% on a GAAP basis driven by both higher occupancy and higher effective rents. And rental rates increased 15.3% on a GAAP basis and 3.4% on a cash basis reflecting significantly reduced rental concessions as well as gradually improving base rents across our markets.

Current leasing activity is encouraging, we did see a drop in activity in December and the first half of January, which is not unusual given the holiday season, but also could be partially explained by fiscal cliff concerns. However, in the last few weeks, proposal activity is back to normal. My expectation is that 2013 will be pretty consistent with 2012 in terms of activity and net absorption. And like 2012, I'm sure there will be periods were that activity is more robust as well as less so. But overall I think tenants will continue to look for opportunities to upgrade and consolidate the distribution facilities to reduce their overall cost.

Small tenants also continue to be more active than a year ago, and my expectation is that this trend will continue if not further strengthen as the housing recovery gains momentum. With supply and check and demand remaining steady, I am optimistic that effective rents will continue to improve across most markets and in a few select markets we will also see continued growth in base rent as well. In response and reflected in our leasing and operating metrics, we continue to look for opportunities to push effective rents, rent bumps and other related economic terms sometimes if the expensive of quick occupancy gains as these will derive long-term growth and values.

Moving on to capital deployment, we had a very successful quarter acquiring $242 million in very high-quality assets. This includes the purchase of our partner’s interest in DCT Fund I for an incremental investment of $78 million. We know the real estate very well and we are able to accommodate the needs of our partner, and buy it at pricing that we considered attractive.

Shortly after acquiring the interest, we were successful in selling the two buildings that didn’t fit with our long-term investment strategy. The remaining four buildings are expected to generate a year one cash yield of 6.5% and after free rent on a few recently negotiated leases burn-off, a stabilized cash yield of 7.2%. In addition to the joint-venture acquisition, we closed on $164 million of acquisitions in the quarter, which are expected to generate a year one cash yield of 6.3% and a stabilized yield of 6.6%, with further growth expected in the future from annual rent bumps as well as rents rolling up to market.

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