DCT Industrial Trust Inc (DCT)

DCT 
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DCT Industrial Trust (DCT)

Q4 2009 Earnings Call

February 12, 2010 11:00 am ET

Executives

Briana Ochiltree – Unidentified Executive

Philip L. Hawkins – President and Chief Executive Officer

Daryl H. Mechem - Managing Director, West Region

Michael J. Ruen - Managing Director, East Region

Matthew T. Murphy - Treasurer

Stuart B. Brown - Chief Financial Officer

Analysts

Ki Kim - Macquarie Research Equities

Steven Frankel – Greenstreet Advisors

James Feldman – Bank of America Merrill Lynch

Brendan Maiorana - Wells Fargo Securities

Michael W. Mueller - J.P. Morgan

Mitchell Germain - JMP Securities

Paul Adornato - BMO Capital Markets

Ross Nussbaum - UBS

Mark Lutenski - BMO Capital Markets

Presentation

Operator

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

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

Briana Ochiltree

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

Before I turn the call over to Phil Hawkins, our President and CEO, I would like to mention that our remarks on today call may include statements that are not historical facts and are considered forward-looking within the meaning of relevant securities laws, including statements regarding projection, plans or future expectations. These forward-looking statements reflect current views and expectations, which are based on currently available information and management assumptions.

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

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

Philip L. Hawkins

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

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

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

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

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

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

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

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

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

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

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

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