DCT Industrial Trust Inc (DCT)

DCT 
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DCT Industrial Trust (DCT)

Q2 2008 Earnings Call

August 5, 2008 12:00 pm ET

Executives

Phil Hawkins - CEO

Jim Cochran - President and Chief Investment Officer

Stuart Brown - CFO

Daryl Mechem - Managing Director Operations

Sara Knapp - Corporate Communications and Investor Relations

Analysts

Paul Atarata - BMO Capital Mortgage

Derek Bauer - Merrill Lynch

Chris Hailey - Wacovia

Michael Mueller - JPMorgan

Cedric Lachance

Nat Overton - Watings, Kagon

Mitch Germane - Banc of America Securities

Presentation

Operator

Hello, and welcome to the DCT Industrial Trust second quarter 2008 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) Please note, this conference is being recorded.

Now I would like to turn the conference over to Miss Sarah Knapp. Miss Knapp you may begin.

Miss Sarah Knapp

Thank you Camille. Hello everyone and thank you for joining DCT Industrial Trust second quarter of 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 that are considered forward-looking within the meaning of applicable security laws, including statements regarding projections, plans and future expectations. These forward-looking statements reflect current views and expectations, and 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. Reconciliation of these non-GAAP financial measures are available in our supplemental package which can be found in the industrial relations section of our website at dctindustrial.com. Now, I'll turn the call over to Phil.

Phil Hawkins

Thanks Sara and welcome everyone. Operationally, we had another good quarter. We signed a record 2.5 million square feet of leases as we remained focused on competing in a leasing environment which is becoming increasingly competitive. Retention of additional tenants remains strong at 74%. Rent growth on signed leases in this quarter was 5.4% on a cash basis, and 12.7% on a GAAP basis, with turnover costs averaging $1.18 per square foot. Total occupancy of our consolidated buildings has declined to 93.1% on March 31st, to 91.8% as of June 30th, due in large part to the 440 000 square foot vacancy at Wickes in April, as we discussed last quarter.

Excluding Wickes and portfolio changes such as the disposition of fully-leased buildings, occupancy was essentially flat, quarter over quarter. Same Store NLI increased 1.3% on a cash basis and 0.3% on a GAAP basis, excluding the Wicks Bank up city, Cash Same Store NLI would have grown 2.5% on solid rental rate growth. Our pipeline of lease deals shows that the proposal and the lease negotiation stages remains consistent with the last couple of quarters.

We also had another good month in July, with the completion of 1.6 million square feet of leases. I want to make two comments. First, a note on last quarter deals are taking longer to complete which is no surprise given the uncertainty that customers are facing in this environment. Second, we are seeing better activity on renewals of all sizes, and on smaller vacant warehouse spaces as compared to larger vacancies in both our development and our operating portfolios where activity has slowed somewhat. With market vacancy rates having risen by about 30 basis points over the past quarter, and likely to continue rising modestly over the next few quarters, we expect that the leasing markets in general will continue to weaken.

Therefore, we are running our business with a bias towards making deals and emphasizing occupancy.

Current conditions are highly competitive, but long term we are very bullish on both building values and rental rates given that replacement costs have increased and are expected to continue to increase substantially. Construction costs have increased by about 7-10% in the past year and 40-50% over the past three years while financing costs have also moved up significantly in the past twelve months. Over time, rental rates have to go up to keep pace with higher replacement costs.

While we had a good second quarter, we have reduced our guidance for the balance of the year. The primary reason behind the reduction is slower that previously expected lease-up of several of our development assets. This results in a reduction in our forecast of merchant building gains of approximately five cents per share. The remaining reduction of about two cents per share is split evenly between lower occupancy and a reduction in expected new acquisition activity with our two active joint venture partners. We continue to look at acquisition opportunities with both of our partners, but they, like us, are appropriately cautious in this environment. We therefore considered it prudent to reduce our forecast of additions to assets in the management by about $150 million.

While the reduction in guidance for the year is obviously disappointing, we remain very committed to and very confident in our longer term strategy of building value through development and value-adding investments, including SCLA, growing our funds management business, and expanding our presence in Mexico. With a softening in the real estate markets we also believe that now is an excellent time to expand and strengthen our organization; especially in the areas of capital employment and development execution in Mexico. For example, we recently hired Tom Tucci, formerly the head of CBRE's New York Tri-State industrial practice.

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