Document



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 001-33201 (DCT Industrial Trust Inc.) 333-195185 (DCT Industrial Operating Partnership LP)
_______________________________________________________________________
DCT INDUSTRIAL TRUST INC.
DCT INDUSTRIAL OPERATING PARTNERSHIP LP
(Exact name of registrant as specified in its charter)
________________________________________________________________________
Maryland (DCT Industrial Trust Inc.)
 
82-0538520
Delaware (DCT Industrial Operating Partnership LP)
 
82-0538522
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
555 17th Street, Suite 3700
Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(303) 597-2400
(Registrant’s telephone number, including area code)
________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
DCT Industrial Trust Inc.    Yes  x    No  ¨
 
 
 
DCT Industrial Operating Partnership LP    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
DCT Industrial Trust Inc.    Yes  x    No  ¨
 
 
 
DCT Industrial Operating Partnership LP     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
DCT Industrial Trust Inc.:
Large accelerated filer
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
 
 
 
¨
DCT Industrial Operating Partnership LP:
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
 
 
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DCT Industrial Trust Inc.    Yes  ¨    No  x
 
 
 
DCT Industrial Operating Partnership LP     Yes  ¨   No  x
As of July 27, 2018, 94,204,340 shares of common stock of DCT Industrial Trust Inc., par value $0.01 per share, were outstanding.
 
 
 
 
 

1



EXPLANATORY NOTE
This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2018 of DCT Industrial Trust Inc., a Maryland corporation, and DCT Industrial Operating Partnership LP, a Delaware limited partnership. Except as otherwise indicated herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
We are a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. DCT has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. We own our properties through the Operating Partnership and its subsidiaries. As of June 30, 2018, DCT owned approximately 96.7% of the outstanding equity interests in the Operating Partnership.
We operate DCT and the Operating Partnership as one enterprise. The management of DCT consists of the same members as the management of the Operating Partnership. As general partner with control of the Operating Partnership, DCT consolidates the Operating Partnership for financial reporting purposes. DCT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of DCT and the Operating Partnership are the same on their respective financial statements.
We believe combining the quarterly reports on Form 10-Q of DCT and the Operating Partnership into this single report results in the following benefits:
•
enhances investors’ understanding of DCT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•
eliminates duplicative disclosures and provides a more streamlined and readable presentation as a substantial portion of the Company’s disclosures apply to both DCT and the Operating Partnership; and
•
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
Stockholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the Consolidated Financial Statements of DCT and those of the Operating Partnership. Equity interests in the Operating Partnership held by entities other than DCT are classified within partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in DCT’s financial statements. Equity interests of 3.3% of the Operating Partnership were owned by executives and non-affiliated limited partners as of June 30, 2018.
To help investors understand the differences between DCT and the Operating Partnership, this report provides separate Consolidated Financial Statements for DCT and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes distinct information related to each entity.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for DCT and the Operating Partnership to establish that the requisite certifications have been made and that DCT and the Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

1

DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Index to Form 10-Q
 
 
 
 
  
Page
PART I.
 
FINANCIAL INFORMATION
  
 
 
 
 
Item 1.
 
Consolidated Financial Statements:
  
 
 
 
DCT Industrial Trust Inc.
  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
DCT Industrial Operating Partnership LP
  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
DCT Industrial Trust Inc. and DCT Industrial Operating Partnership LP
  
 
 
 
  
Item 2.
 
  
Item 3.
 
  
Item 4.
 
  
 
 
 
PART II.
 
  
 
 
 
 
Item 1.
 
  
Item 1A.
 
  
Item 2.
 
  
Item 3.
 
  
Item 4.
 
  
Item 5.
 
  
Item 6.
 
  
 
 
 
  

2



DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share information)
 
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
(unaudited)
 
 
Land
 
$
1,216,121

 
$
1,162,908

Buildings and improvements
 
3,385,873

 
3,284,976

Intangible lease assets
 
57,869

 
65,919

Construction in progress
 
173,139

 
149,994

Total investment in properties
 
4,833,002

 
4,663,797

Less accumulated depreciation and amortization
 
(961,173
)
 
(919,186
)
Net investment in properties
 
3,871,829

 
3,744,611

Investments in and advances to unconsolidated joint ventures
 
73,031

 
72,231

Net investment in real estate
 
3,944,860

 
3,816,842

Cash and cash equivalents
 
19,843

 
10,522

Restricted cash
 
15,813

 
14,768

Straight-line rent and other receivables, net of allowance for doubtful
   accounts of $230 and $425, respectively
 
82,726

 
80,119

Other assets, net
 
19,904

 
25,740

Assets held for sale
 
—

 
62,681

Total assets
 
$
4,083,146

 
$
4,010,672

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
106,714

 
$
115,150

Distributions payable
 
35,184

 
35,070

Tenant prepaids and security deposits
 
36,654

 
34,946

Other liabilities
 
36,669

 
34,172

Intangible lease liabilities, net
 
16,985

 
18,482

Line of credit
 
324,000

 
234,000

Senior unsecured notes
 
1,287,426

 
1,328,225

Mortgage notes
 
163,330

 
160,129

Liabilities related to assets held for sale
 
—

 
1,035

Total liabilities
 
2,006,962

 
1,961,209

 
 
 
 
 
Equity:
 
 

 
 

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none
   outstanding
 
—

 
—

Shares-in-trust, $0.01 par value, 100,000,000 shares authorized, none
   outstanding
 
—

 
—

Common stock, $0.01 par value, 500,000,000 shares authorized, 94,113,116
   and 93,707,264 shares issued and outstanding as of June 30, 2018 and
   December 31, 2017, respectively
 
941

 
937

Additional paid-in capital
 
3,000,086

 
2,985,122

Distributions in excess of earnings
 
(1,015,254
)
 
(1,022,605
)
Accumulated other comprehensive loss
 
(5,036
)
 
(11,893
)
Total stockholders’ equity
 
1,980,737

 
1,951,561

Noncontrolling interests
 
95,447

 
97,902

Total equity
 
2,076,184

 
2,049,463

Total liabilities and equity
 
$
4,083,146

 
$
4,010,672

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


3



DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited, in thousands, except per share information)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018

2017
 
2018
 
2017
REVENUES:
 
 
 
 

 
 
 
 
Rental revenues
 
$
109,781

 
$
104,217

 
$
219,204

 
$
209,641

Institutional capital management and other fees
 
288

 
304

 
672

 
776

Total revenues
 
110,069

 
104,521

 
219,876

 
210,417

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 

 
 

 
 
 
 
Rental expenses
 
9,246

 
9,226

 
19,485

 
18,688

Real estate taxes
 
17,061

 
15,529

 
33,785

 
32,295

Real estate related depreciation and amortization
 
41,896

 
41,447

 
83,128

 
83,052

General and administrative
 
12,824

 
7,821

 
20,288

 
15,013

Casualty loss (gain)
 
240

 
—

 
245

 
(270
)
Total operating expenses
 
81,267

 
74,023

 
156,931

 
148,778

Operating income
 
28,802

 
30,498

 
62,945

 
61,639

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 

 
 

 
 
 
 
Equity in earnings of unconsolidated joint ventures, net
 
1,089

 
2,737

 
2,166

 
4,253

Gain on dispositions of real estate interests
 
11,784

 
28,076

 
43,974

 
28,102

Interest expense
 
(16,133
)
 
(16,805
)
 
(32,183
)
 
(33,560
)
Other expense
 
(114
)
 
(7
)
 
(80
)
 
(12
)
Impairment loss on land
 
—

 
(938
)
 
(371
)
 
(938
)
Income tax expense and other taxes
 
(140
)
 
(69
)
 
(221
)
 
(203
)
Consolidated net income of DCT Industrial Trust Inc.
 
25,288

 
43,492

 
76,230

 
59,281

Net income attributable to noncontrolling interests
 
(1,172
)
 
(1,858
)
 
(3,291
)
 
(2,688
)
Net income attributable to common stockholders
 
24,116

 
41,634

 
72,939

 
56,593

Distributed and undistributed earnings allocated to participating securities
 
(191
)
 
(162
)
 
(408
)
 
(323
)
Adjusted net income attributable to common stockholders
 
$
23,925

 
$
41,472

 
$
72,531

 
$
56,270

 
 
 
 
 
 
 
 
 
NET EARNINGS PER COMMON SHARE:
 
 

 
 

 
 
 
 
Basic
 
$
0.25

 
$
0.45

 
$
0.77

 
$
0.61

Diluted
 
$
0.25

 
$
0.45

 
$
0.77

 
$
0.61

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 
 
Basic
 
94,101

 
92,307

 
93,956

 
92,030

Diluted
 
94,124

 
92,429

 
93,981

 
92,156

 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.36

 
$
0.31

 
$
0.72

 
$
0.62

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


4



DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Consolidated net income of DCT Industrial Trust Inc.
 
$
25,288

 
$
43,492

 
$
76,230

 
$
59,281

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Net derivative gain (loss) on cash flow hedging instruments
 
1,516

 
(1,503
)
 
5,171

 
(1,142
)
Net reclassification adjustment on cash flow hedging instruments
 
906

 
1,402

 
2,006

 
2,888

Other comprehensive income (loss)
 
2,422

 
(101
)
 
7,177

 
1,746

Comprehensive income
 
27,710

 
43,391

 
83,407

 
61,027

Comprehensive income attributable to noncontrolling interests
 
(1,278
)
 
(1,882
)
 
(3,611
)
 
(2,781
)
Comprehensive income attributable to common stockholders
 
$
26,432

 
$
41,509

 
$
79,796

 
$
58,246

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


5



DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
(unaudited, in thousands)
 
 
 
Total Equity
 
Common Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess
of Earnings
 
Accumulated Other Comprehen-
sive Loss
 
Non-controlling
Interests
 
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
 
$
2,049,463

 
93,707

 
$
937

 
$
2,985,122

 
$
(1,022,605
)
 
$
(11,893
)
 
$
97,902

Cumulative effect of revenue
   accounting change (Note 2)
 
2,256

 
—

 
—

 
—

 
2,256

 
—

 
—

Net income
 
76,230

 
—

 
—

 
—

 
72,939

 
—

 
3,291

Other comprehensive income
 
7,177

 
—

 
—

 
—

 
—

 
6,857

 
320

Issuance of common stock, net
of offering costs
 
10,769

 
191

 
2

 
10,767

 
—

 
—

 
—

Issuance of common stock, stock-based compensation plans
 
(764
)
 
36

 
—

 
(764
)
 
—

 
—

 
—

Amortization of stock-based compensation
 
3,852

 
—

 
—

 
880

 
—

 
—

 
2,972

Distributions to common stockholders and noncontrolling interests
 
(71,588
)
 
—

 
—

 
—

 
(67,844
)
 
—

 
(3,744
)
Capital contributions from noncontrolling interests
 
873

 
—

 
—

 
—

 
—

 
—

 
873

Redemptions of noncontrolling interests
 
(2,084
)
 
179

 
2

 
4,081

 
—

 
—

 
(6,167
)
Balance at June 30, 2018
 
$
2,076,184

 
94,113

 
$
941

 
$
3,000,086

 
$
(1,015,254
)
 
$
(5,036
)
 
$
95,447

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


6

DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
OPERATING ACTIVITIES:
 
 

 
 

Consolidated net income of DCT Industrial Trust Inc.
 
$
76,230

 
$
59,281

Adjustments to reconcile consolidated net income of DCT Industrial Trust Inc.
   to net cash provided by operating activities:
 
 

 
 

Real estate related depreciation and amortization
 
83,128

 
83,052

Gain on dispositions of real estate interests
 
(43,974
)
 
(28,102
)
Distributions of earnings from unconsolidated joint ventures
 
3,353

 
22,717

Equity in earnings of unconsolidated joint ventures, net
 
(2,166
)
 
(4,253
)
Impairment loss on land
 
371

 
938

Stock-based compensation
 
3,198

 
3,004

Casualty loss (gain)
 
245

 
(270
)
Straight-line rent
 
(2,553
)
 
(4,214
)
Other
 
2,286

 
2,515

Changes in operating assets and liabilities:
 
 

 
 

Other receivables and other assets
 
4,234

 
8,395

Accounts payable, accrued expenses and other liabilities
 
(5,179
)
 
(3,599
)
Net cash provided by operating activities
 
119,173

 
139,464

INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(78,157
)
 
(35,555
)
Capital expenditures and development activities
 
(152,827
)
 
(97,532
)
Proceeds from dispositions of real estate investments
 
133,619

 
52,868

Investments in unconsolidated joint ventures
 
(622
)
 
(11,891
)
Proceeds from casualties
 
—

 
300

Distributions of investments in unconsolidated joint ventures
 
773

 
3,546

Other investing activities
 
(733
)
 
(3,278
)
Net cash used in investing activities
 
(97,947
)
 
(91,542
)
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from senior unsecured revolving line of credit
 
145,000

 
189,000

Repayments of senior unsecured revolving line of credit
 
(55,000
)
 
(131,000
)
Proceeds from senior unsecured notes
 
—

 
51,940

Repayments of senior unsecured notes
 
(41,500
)
 
(76,000
)
Proceeds from mortgage notes

 
7,113

 
—

Principal payments on mortgage notes
 
(3,417
)
 
(37,770
)
Net settlement on issuance of stock-based compensation awards
 
(764
)
 
(1,452
)
Proceeds from issuance of common stock
 
10,963

 
60,694

Offering costs for issuance of common stock and OP Units
 
(194
)
 
(1,199
)
Redemption of noncontrolling interests
 
(2,084
)
 
(4,280
)
Dividends to common stockholders
 
(67,700
)
 
(56,908
)
Distributions paid to noncontrolling interests
 
(3,774
)
 
(2,868
)
Contributions from noncontrolling interests
 
873

 
532

Other financing activity
 
(365
)
 
(698
)
Net cash used in financing activities
 
(10,849
)
 
(10,009
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
10,377

 
37,913

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
 
25,845

 
18,074

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
 
$
36,222

 
$
55,987

 
 
 

 
 

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest, net of capitalized interest
 
$
29,190

 
$
30,616

Supplemental Disclosures of Non-Cash Activities
 
 

 
 

Retirement of fully depreciated and amortized assets
 
$
20,651

 
$
15,660

Redemptions of OP Units settled in shares of common stock
 
$
4,083

 
$
2,380

Increase in dividends declared and not paid
 
$
(114
)
 
$
(410
)
Contributions from noncontrolling interests
 
$
—

 
$
745

Decrease in capital expenditures accruals
 
$
(901
)
 
$
(8,301
)
Capitalized stock compensation
 
$
654

 
$
687

 The accompanying notes are an integral part of these Consolidated Financial Statements.

7

DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except unit information)
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
(unaudited)
 
 
Land
 
$
1,216,121

 
$
1,162,908

Buildings and improvements
 
3,385,873

 
3,284,976

Intangible lease assets
 
57,869

 
65,919

Construction in progress
 
173,139

 
149,994

Total investment in properties
 
4,833,002

 
4,663,797

Less accumulated depreciation and amortization
 
(961,173
)
 
(919,186
)
Net investment in properties
 
3,871,829

 
3,744,611

Investments in and advances to unconsolidated joint ventures
 
73,031

 
72,231

Net investment in real estate
 
3,944,860

 
3,816,842

Cash and cash equivalents
 
19,843

 
10,522

Restricted cash
 
15,813

 
14,768

Straight-line rent and other receivables, net of allowance
   for doubtful accounts of $230 and $425, respectively
 
82,726

 
80,119

Other assets, net
 
19,904

 
25,740

Assets held for sale
 
—

 
62,681

Total assets
 
$
4,083,146

 
$
4,010,672

 
 
 
 
 
LIABILITIES AND CAPITAL
 
 

 
 

Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
106,714

 
$
115,150

Distributions payable
 
35,184

 
35,070

Tenant prepaids and security deposits
 
36,654

 
34,946

Other liabilities
 
36,669

 
34,172

Intangible lease liabilities, net
 
16,985

 
18,482

Line of credit
 
324,000

 
234,000

Senior unsecured notes
 
1,287,426

 
1,328,225

Mortgage notes
 
163,330

 
160,129

Liabilities related to assets held for sale
 
—

 
1,035

Total liabilities
 
2,006,962

 
1,961,209

 
 
 
 
 
Partners' Capital:
 
 

 
 

General Partner:
 
 

 
 

OP Units, 973,093 and 969,565 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
20,657

 
20,467

Limited Partners:
 
 

 
 

OP Units, 96,336,213 and 95,986,961 issued and outstanding as of
   June 30, 2018 and December 31, 2017, respectively
 
2,045,062

 
2,026,234

Accumulated other comprehensive loss
 
(5,205
)
 
(12,303
)
Total partners' capital
 
2,060,514

 
2,034,398

Noncontrolling interests
 
15,670

 
15,065

Total capital
 
2,076,184

 
2,049,463

Total liabilities and capital
 
$
4,083,146

 
$
4,010,672

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


8

DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited, in thousands, except per unit information)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES:
 
 
 
 

 
 
 
 
Rental revenues
 
$
109,781

 
$
104,217

 
$
219,204

 
$
209,641

Institutional capital management and other fees
 
288

 
304

 
672

 
776

Total revenues
 
110,069

 
104,521

 
219,876

 
210,417

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 

 
 

 
 
 
 
Rental expenses
 
9,246

 
9,226

 
19,485

 
18,688

Real estate taxes
 
17,061

 
15,529

 
33,785

 
32,295

Real estate related depreciation and amortization
 
41,896

 
41,447

 
83,128

 
83,052

General and administrative
 
12,824

 
7,821

 
20,288

 
15,013

Casualty loss (gain)
 
240

 
—

 
245

 
(270
)
Total operating expenses
 
81,267

 
74,023

 
156,931

 
148,778

Operating income
 
28,802

 
30,498

 
62,945

 
61,639

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 

 
 

 
 
 
 
Equity in earnings of unconsolidated joint ventures, net
 
1,089

 
2,737

 
2,166

 
4,253

Gain on dispositions of real estate interests
 
11,784

 
28,076

 
43,974

 
28,102

Interest expense
 
(16,133
)
 
(16,805
)
 
(32,183
)
 
(33,560
)
Other expense
 
(114
)
 
(7
)
 
(80
)
 
(12
)
Impairment loss on land
 
—

 
(938
)
 
(371
)
 
(938
)
Income tax expense and other taxes
 
(140
)
 
(69
)
 
(221
)
 
(203
)
Consolidated net income of DCT Industrial Operating Partnership LP
 
25,288

 
43,492

 
76,230

 
59,281

Net income attributable to noncontrolling interests
 
(366
)
 
(247
)
 
(754
)
 
(480
)
Net income attributable to OP Unitholders
 
24,922

 
43,245

 
75,476

 
58,801

Distributed and undistributed earnings allocated to participating securities
 
(191
)
 
(162
)
 
(408
)
 
(323
)
Adjusted net income attributable to OP Unitholders
 
$
24,731

 
$
43,083

 
$
75,068

 
$
58,478

 
 
 
 
 
 
 
 
 
NET EARNINGS PER OP UNIT:
 
 

 
 

 
 
 
 
Basic
 
$
0.25

 
$
0.45

 
$
0.77

 
$
0.61

Diluted
 
$
0.25

 
$
0.45

 
$
0.77

 
$
0.61

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE OP UNITS OUTSTANDING:
 
 
 
 
Basic
 
97,311

 
95,827

 
97,223

 
95,622

Diluted
 
97,334

 
95,949

 
97,248

 
95,748

 
 
 
 
 
 
 
 
 
Distributions declared per OP Unit
 
$
0.36

 
$
0.31

 
$
0.72

 
$
0.62

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

9



DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Consolidated net income of DCT Industrial Operating Partnership LP
 
$
25,288

 
$
43,492

 
$
76,230

 
$
59,281

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Net derivative gain (loss) on cash flow hedging instruments
 
1,516

 
(1,503
)
 
5,171

 
(1,142
)
Net reclassification adjustment on cash flow hedging instruments
 
906

 
1,402

 
2,006

 
2,888

Other comprehensive income (loss)
 
2,422

 
(101
)
 
7,177

 
1,746

Comprehensive income
 
27,710

 
43,391

 
83,407

 
61,027

Comprehensive income attributable to noncontrolling interests
 
(389
)
 
(236
)
 
(833
)
 
(483
)
Comprehensive income attributable to OP Unitholders
 
$
27,321

 
$
43,155

 
$
82,574

 
$
60,544

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


10



DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statement of Changes in Capital
(unaudited, in thousands)
 
 
 
Total Capital
 
General Partner
 
Limited Partners
 
Accumulated Other
Comprehensive Loss
 
Non-controlling Interests
 
 
 
OP Units
 
OP Units
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
Balance at December 31, 2017
 
$
2,049,463

 
970

 
$
20,467

 
95,987

 
$
2,026,234

 
$
(12,303
)
 
$
15,065

Cumulative effect of revenue accounting
   change (Note 2)
 
2,256

 
—

 
23

 
—

 
2,233

 
—

 
—

Net income
 
76,230

 
—

 
755

 
—

 
74,721

 
—

 
754

Other comprehensive income
 
7,177

 
—

 
—

 
—

 
—

 
7,098

 
79

Issuance of OP Units, net of selling costs
 
10,769

 
—

 
—

 
191

 
10,769

 
—

 
—

Issuance of OP Units, share-based
   compensation plans
 
(764
)
 
—

 
—

 
198

 
(764
)
 
—

 
—

Amortization of share-based compensation
 
3,852

 
—

 
—

 
—

 
3,852

 
—

 
—

Distributions to OP Unitholders
   and noncontrolling interests
 
(71,588
)
 
—

 
(704
)
 
—

 
(69,725
)
 
—

 
(1,159
)
Capital contributions from
   noncontrolling interests
 
873

 
—

 
—

 
—

 
—

 
—

 
873

Redemption of limited partner OP Units, net
 
(2,084
)
 
—

 
—

 
(37
)
 
(2,142
)
 
—

 
58

Conversion of limited partner OP Units
   to OP Units of general partner
 
—

 
3

 
116

 
(3
)
 
(116
)
 
—

 
—

Balance at June 30, 2018
 
$
2,076,184

 
973

 
$
20,657

 
96,336

 
$
2,045,062

 
$
(5,205
)
 
$
15,670

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


11



DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
OPERATING ACTIVITIES:
 
 

 
 

Consolidated net income of DCT Industrial Operating Partnership LP
 
$
76,230

 
$
59,281

Adjustments to reconcile consolidated net income of DCT Industrial Operating
Partnership LP to net cash provided by operating activities:
 
 

 
 

Real estate related depreciation and amortization
 
83,128

 
83,052

Gain on dispositions of real estate interests
 
(43,974
)
 
(28,102
)
Distributions of earnings from unconsolidated joint ventures
 
3,353

 
22,717

Equity in earnings of unconsolidated joint ventures, net
 
(2,166
)
 
(4,253
)
Impairment loss on land
 
371

 
938

Share-based compensation
 
3,198

 
3,004

Casualty loss (gain)
 
245

 
(270
)
Straight-line rent
 
(2,553
)
 
(4,214
)
Other
 
2,286

 
2,515

Changes in operating assets and liabilities:
 
 

 
 

Other receivables and other assets
 
4,234

 
8,395

Accounts payable, accrued expenses and other liabilities
 
(5,179
)
 
(3,599
)
Net cash provided by operating activities
 
119,173

 
139,464

INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(78,157
)
 
(35,555
)
Capital expenditures and development activities
 
(152,827
)
 
(97,532
)
Proceeds from dispositions of real estate investments
 
133,619

 
52,868

Investments in unconsolidated joint ventures
 
(622
)
 
(11,891
)
Proceeds from casualties
 
—

 
300

Distributions of investments in unconsolidated joint ventures
 
773

 
3,546

Other investing activities
 
(733
)
 
(3,278
)
Net cash used in investing activities
 
(97,947
)
 
(91,542
)
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from senior unsecured revolving line of credit
 
145,000

 
189,000

Repayments of senior unsecured revolving line of credit
 
(55,000
)
 
(131,000
)
Proceeds from senior unsecured notes
 
—

 
51,940

Repayments of senior unsecured notes
 
(41,500
)
 
(76,000
)
Proceeds from mortgage notes

 
7,113

 
—

Principal payments on mortgage notes
 
(3,417
)
 
(37,770
)
Net settlement on issuance of share-based compensation awards
 
(764
)
 
(1,452
)
Proceeds from the issuance of OP Units in exchange for contributions from the REIT, net
 
10,769

 
59,495

OP Unit redemptions
 
(2,084
)
 
(4,280
)
Distributions paid on OP Units
 
(70,315
)
 
(59,387
)
Distributions paid to noncontrolling interests
 
(1,159
)
 
(389
)
Contributions from noncontrolling interests
 
873

 
532

Other financing activity
 
(365
)
 
(698
)
Net cash used in financing activities
 
(10,849
)
 
(10,009
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
10,377

 
37,913

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
 
25,845

 
18,074

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
 
$
36,222

 
$
55,987

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 

 
 

Cash paid for interest, net of capitalized interest
 
$
29,190

 
$
30,616

Supplemental Disclosures of Non-Cash Activities
 
 

 
 

Retirement of fully depreciated and amortized assets
 
$
20,651

 
$
15,660

Contributions from noncontrolling interests
 
$
—

 
$
745

Decrease in capital expenditures accruals
 
$
(901
)
 
$
(8,301
)
Capitalized stock compensation
 
$
654

 
$
687

The accompanying notes are an integral part of these Consolidated Financial Statements.

12



DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTERNSHIP LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1 – Organization
DCT Industrial Trust Inc. is a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. As used herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
DCT was formed as a Maryland corporation in April 2002 and has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. DCT owns properties through the Operating Partnership and its subsidiaries. As of June 30, 2018, DCT owned approximately 96.7% of the outstanding equity interests in the Operating Partnership.
As of June 30, 2018, the Company owned interests in approximately 74.0 million square feet of properties leased to approximately 830 customers, including:
•
63.5 million square feet comprising 388 consolidated operating properties that were 96.9% occupied;
•
1.7 million square feet comprising seven consolidated properties developed by DCT which are shell-construction complete and in lease-up;
•
0.1 million square feet comprising one consolidated property under redevelopment;
•
1.1 million square feet comprising five consolidated value-add acquisitions; and
•
7.6 million square feet comprising 21 unconsolidated properties that were 99.0% occupied and which we operated on behalf of two unconsolidated joint ventures.
In addition, the Company has 17 projects under construction and 15 projects in pre-development. See “Note 3 – Investment in Properties” for further details related to our development activity.

Note 2 – Summary of Significant Accounting Policies
Interim Financial Information 
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with our audited Consolidated Financial Statements as of December 31, 2017 and related notes thereto included in our Form 10-K filed on February 16, 2018.
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the financial position, results of operations and cash flows of the Company, the Operating Partnership, their wholly-owned qualified REIT subsidiaries and taxable REIT subsidiaries, and their consolidated joint ventures in which they have a controlling interest.

13



Equity interests in the Operating Partnership held by entities other than DCT are classified within partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in DCT’s financial statements. Equity interests in entities consolidated into the Operating Partnership that are held by third parties are reflected in our accompanying balance sheets as noncontrolling interests. We also have noncontrolling partnership interests in unconsolidated institutional capital management and other joint ventures, which are accounted for under the equity method. All significant intercompany transactions and balances have been eliminated in consolidation.
We hold interests in both consolidated and unconsolidated joint ventures for the purposes of operating and developing industrial real estate. All joint ventures over which we have financial and operating control, and variable interest entities (“VIEs”) in which we have determined that we are the primary beneficiary, are included in the Consolidated Financial Statements. We use the equity method of accounting for joint ventures where we exercise significant influence, but do not have control over major operating and management decisions and we include our share of earnings or losses of these joint ventures in our consolidated results of operations.
We analyze our joint ventures in accordance with GAAP to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Our judgment with respect to our level of influence or control over an entity and whether we are the primary beneficiary of a VIE involves consideration of various factors including the form of our ownership interest, our representation on the entity’s board of directors (or equivalent body), the size of our investment (including loans), our obligation or right to absorb its losses or receive its benefits and our ability to participate in major decisions.  
If a joint venture does not meet the characteristics of a VIE, we apply the voting interest model to determine whether the entity should be consolidated. Our ability to assess our influence or control over an entity affects the presentation of these investments in the Consolidated Financial Statements and our financial position and results of operations.
We concluded our Operating Partnership meets the criteria of a VIE as the Operating Partnership’s limited partners do not have the right to remove the general partner and do not have substantive participating rights in the operations of the Operating Partnership. Under the Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Partnership Agreement”), DCT is the primary beneficiary of the Operating Partnership as we have the obligation to absorb losses and receive benefits, and the power to control substantially all the activities which most significantly impact the economic performance of the Operating Partnership. Accordingly, the Operating Partnership is consolidated within DCT’s financial statements.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. We have not realized any losses in our cash and cash equivalents and believe that these short-term instruments are not exposed to any significant credit risk. Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and capital replacement reserves, security deposits and amounts held by intermediary agents to be used for tax-deferred, like-kind exchange transactions. As of June 30, 2018 and June 30, 2017, approximately $14.0 million and $36.3 million, respectively, of restricted cash was included in “Cash, Cash Equivalents and Restricted Cash” in our Consolidated Statements of Cash Flows related to tax deferred, like-kind exchange transactions.
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Consolidated Balance Sheets to amounts reported within our Consolidated Statements of Cash Flows (in thousands):
 
 
As of June 30,
 
 
2018
 
2017
Cash and cash equivalents
 
$
19,843

 
$
17,229

Restricted cash
 
15,813

 
38,339

Restricted cash included in Other assets, net (1)
 
566

 
419

Total cash, cash equivalents and restricted cash
 
$
36,222

 
$
55,987

(1) Includes cash balances presented in assets held for sale in our Consolidated Balance Sheets.

14



Revenue Recognition
At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) are equal to 90% or more of the excess estimated fair value (over retained investment tax credits) of the leased building. Generally, our leases do not meet any of the listed criteria above and are classified as operating leases.
We record rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, receivables from tenants that we expect to collect over the remaining lease term are recorded on the balance sheet as straight-line rent receivables. The total increase to “Rental revenues” due to straight-line rent adjustments was approximately $0.9 million and $2.6 million for the three and six months ended June 30, 2018, respectively, and approximately and $0.8 million and $4.2 million for the three and six months ended June 30, 2017, respectively.
If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant generally is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When we are the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into rental revenues over the lease term. When the tenant is the owner of the tenant improvements, we record any tenant improvement allowance funded as a lease incentive and amortize it as a reduction of rental revenue over the lease term. Tenant recovery income includes reimbursements due from tenants pursuant to their leases for real estate taxes, insurance, repairs and maintenance and other recoverable property operating expenses and is recognized as “Rental revenues” during the period the related expenses are incurred. The reimbursements are recognized and presented on a gross basis, as the Company generally has control for fulfillment of services and other costs that are reimbursable, with respect to purchasing goods and services from third party suppliers. Tenant recovery income recognized as “Rental revenues” was approximately $26.6 million and $53.5 million for the three and six months ended June 30, 2018, respectively, and approximately $24.7 million and $50.6 million for the three and six months ended June 30, 2017. We maintain an allowance for estimated losses that may result from the inability of our customers to make required payments. If a customer fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances.
In connection with property acquisitions qualifying as asset acquisitions or business combinations, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an intangible lease asset or liability and amortized to “Rental revenues” over the reasonably assured term of the related leases. We consider a reasonably assured term to be the measurement period equal to the remaining non-cancelable term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. The unamortized balances of these assets and liabilities associated with the early termination of leases are fully amortized to their respective revenue line items in our Consolidated Statements of Operations on a straight-line basis over the estimated remaining contractual lease term. The total net impact to “Rental revenues” due to the amortization of above and below market rents was an increase of approximately $0.9 million and $1.6 million for the three and six months ended June 30, 2018, respectively, and approximately $0.7 million and $1.4 million for the three and six months ended June 30, 2017, respectively.
Early lease termination fees are recorded in “Rental revenues” on a straight-line basis over the estimated remaining contractual lease term or upon collection if collectability is not assured. Early lease termination fees were approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2018, respectively, and approximately $0.4 million and $0.9 million for the three and six months ended June 30, 2017, respectively.
We earn revenues from asset management fees, acquisition fees, property management fees and fees for other services pursuant to joint venture and other third-party agreements. These are included in our Consolidated Statements of Operations in “Institutional capital management and other fees.” We recognize revenues from asset management fees, acquisition fees, property management fees and fees for other services when the related underlying performance obligations to the customer are satisfied, which is when the services are performed.

15



New Accounting Standards
New Accounting Standards Adopted
In May 2014, FASB issued ASU 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), that requires companies to recognize revenue from contracts with customers based upon the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. The FASB subsequently issued additional ASUs which improve guidance and provide clarification of the new standard. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The Company adopted the standard effective January 1, 2018 and utilized the modified retrospective transition method.
Given the nature of our business, our primary revenue stream is from relatively short-term operating leases with tenants. Additionally, our historical property dispositions have been cash sales with no contingencies and no future involvement in the property operations. Our revenues that are under the scope of ASU 2014-09 are related to our asset management fees, acquisition fees, property management fees and fees for other services pursuant to joint venture and other third-party agreements, which are included in our Consolidated Statements of Operations in “Institutional capital management and other fees" as shown below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Rental revenues
 
$
109,781

 
$
104,217

 
$
219,204

 
$
209,641

Institutional capital management and other fees
 
288

 
304

 
672

 
776

Total revenues
 
$
110,069

 
$
104,521

 
$
219,876

 
$
210,417

As a result of adoption, the total impact to our financial statements in the first quarter of 2018 was a cumulative adjustment recorded as an increase of $2.3 million to “Investments in and advances to unconsolidated joint ventures” and a decrease to “Distributions in excess of earnings” related to the de-recognition of deferred gains related to a previous contributions of real estate properties into our joint ventures. No other material impacts to the Consolidated Financial Statements and related disclosures or internal control environment were identified upon adoption.
Substantially all of our revenues are generated from lease rentals, which fall under the scope of the new lease accounting ASU discussed below in New Accounting Standards Issued but not yet Adopted. We are still evaluating the treatment of nonlease components in our leases that primarily relate tenant recovery income for such items as common area maintenance expenses, which are also under the scope of the new lease accounting ASU.


16



New Accounting Standards Issued but not yet Adopted
In February 2016, the FASB issued an ASU that modifies existing accounting standards for lease accounting. The new standard requires a lessee to record a lease asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. Leases in which we are the lessors will be accounted as sales-type leases, direct financing leases or operating leases. Revenue related to the lease components of a lease contract will be recognized on a straight-line basis. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016.
Additionally, in July 2018, the FASB issued various practical expedients that impact both lessors and lessees that are also effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016. Specifically, the FASB issued a package of practical expedients that if adopted, must all be adopted. These expedients apply to all leases entered into prior to adoption and allow a Company to not: (1) reassess whether existing arrangements contain a lease (2) reassess lease classification and (3) re-evaluate treatment of initial direct costs. The Company expects to elect this package of practical expedients.
Also, another lessor relevant practical expedient was issued in July 2018, that allows lessors to be allowed to combine lease and associated nonlease components for accounting under the new lease standard if the timing and pattern of transfer of nonlease components match those of the related lease components and the lease is classified as operating on a stand-alone basis.
The Company, as a lessee, has a limited number of office and ground leases which will require further evaluation by the Company, but we anticipate they will be treated as operating leases, which will result in the Company recording a lease liability for our obligation for payments over the remaining lease term and an offsetting right-of-use asset in our Consolidated Balance Sheets. As disclosed in our annual Consolidated Financial Statements as of December 31, 2017 and related notes thereto included in our Form 10-K, we had $18.9 million of future noncancelable lease payments primarily related to our office and ground leases that will be required to be recorded on our Consolidated Balance Sheets. Our operating leases for which we are the lessee will generally have an expense pattern consistent with our historical recognition for operating leases. We don't anticipate the impact of the lease accounting ASU for leases in which we are the lessee to have a material impact on our Consolidated Financial Statements.
Leases in which we are the lessor will continue to be accounted for as operating leases with minimal impact on the Company's financial condition or results of operation; however, this standard may impact the timing of recognition and disclosures related to our tenant recovery income earned from leasing our consolidated operating properties. As such, we are currently evaluating the impact of nonlease components such as tenant recovery income. Additionally, the standard only allows for the capitalization of the initial direct costs that would have been incurred if the lease had not been obtained. The adoption of this guidance will impact our current policy regarding the capitalization of internal direct costs related to the successful origination of new leases and likely will reduce the amount of costs we currently capitalize for new leases. During the six months ended June 30, 2018, we capitalized $1.6 million of internal direct costs related to successful origination of new leases.
We are currently evaluating the impacts of the new lease standard for leases in which we are the lessee, which includes changing internal policies and processes with regards to the cost to obtain leases, evaluating the appropriate accounting treatment for nonlease elements in which we are the lessor and evaluating the impact on our internal controls. The standard requires a modified retrospective transition approach for all capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued additional transition relief, which allows a company to present the cumulative impacts of adoption of the lease standard on a modified retrospective approach via a cumulative-effect adjustment in opening retained earnings in the year of adoption instead of being required to restate the impacts of the new lease standard to all comparable periods presented in the year of adoption.  The Company expects to adopt this standard effective January 1, 2019 using the newly issued modified retrospective transition method.
Note 3 – Investment in Properties
Our consolidated investment in properties consists of our operating portfolio, value-add acquisitions, properties under development, properties in pre-development, redevelopment properties and land held for development or other purposes. The historical cost of our investment in properties was (in thousands):

17



 
 
As of June 30, 2018
 
As of December 31, 2017
Operating portfolio
 
$
4,296,341

 
$
4,249,242

Properties under development
 
359,835

 
280,492

Properties in pre-development
 
76,864

 
51,883

Properties under redevelopment(1)
 
10,133

 
9,481

Value-add acquisitions(2)
 
86,173

 
68,673

Land held(3)
 
3,656

 
4,026

Total investment in properties
 
4,833,002

 
4,663,797

Less accumulated depreciation and amortization
 
(961,173
)
 
(919,186
)
Net investment in properties
 
$
3,871,829

 
$
3,744,611

(1) 
Represents properties out of service while significant physical renovation of the property is underway or while the property is in lease-up subsequent to such renovation. May include properties taken out of service to change the properties' use and/or enhance its functionality.
(2) 
Consolidated properties that were acquired and upon acquisition met either of the following criteria:
•
Occupancy of less than 75% upon acquisition; or
•
Occupancy of less than 75% expected to occur due to known move-outs within 24 months of the acquisition date.
Consolidated properties that were acquired vacant or with known move-outs within 24 months of the acquisition date with the intention to have the property out of service for significant physical renovations are classified as redevelopment properties.
(3) 
Land held that is not intended to be improved or developed in the near future.
Acquisition Activity
During the six months ended June 30, 2018, we acquired three buildings totaling approximately 221.0 thousand square feet located in our Denver, Northern California and Seattle markets for a total purchase price of approximately $34.1 million.
Development Activity
Our properties under development include the following:
•
Seven buildings in our Chicago, Dallas, Denver, Miami and Northern California markets totaling approximately 1.7 million square feet that we completed shell-construction as of June 30, 2018 with cumulative costs to date of approximately $128.0 million. These properties are 11.2% leased and occupied based on weighted average square feet as of June 30, 2018.
•
Seventeen projects under construction totaling approximately 4.8 million square feet with cumulative costs to date of approximately $231.8 million.
During the six months ended June 30, 2018, we acquired approximately 143.2 acres of land for development in our Chicago, Cincinnati, New Jersey, Northern California, Pennsylvania and Southern California markets for approximately $44.6 million.
Disposition Activity
During the six months ended June 30, 2018, we sold 16 consolidated operating properties totaling approximately 2.6 million square feet from our Atlanta, Charlotte, Memphis, Northern California, Phoenix and Southern California markets to third-parties for gross proceeds of approximately $137.3 million. We recognized net gains of approximately $44.0 million on the disposition of these properties.
Impairment Loss on Land
During the six months ended June 30, 2018, the Company recognized a $0.4 million impairment loss on land held and used. Located in Reno, Nevada, the land was being held for future development. Based on the Company’s intent to sell and various market estimates, we recorded an impairment to recognize the land at estimated fair value, which was primarily based on level 3 fair value inputs.

18



Intangible Lease Assets and Liabilities
Aggregate amortization expense for intangible lease assets recognized in connection with property acquisitions (excluding assets and liabilities related to above and below market rents; see “Note 2 – Summary of Significant Accounting Policies” for additional information) was approximately $2.5 million and $4.7 million for the three and six months ended June 30, 2018, respectively, and approximately $2.6 million and $5.4 million for the three and six months ended June 30, 2017, respectively. Our intangible lease assets and liabilities included the following (in thousands):
 
 
As of June 30, 2018
 
As of December 31, 2017
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Other intangible lease assets
 
$
54,811

 
$
(32,694
)
 
$
22,117

 
$
62,785

 
$
(37,114
)
 
$
25,671

Above market rent
 
$
3,058

 
$
(1,908
)
 
$
1,150

 
$
3,134

 
$
(1,756
)
 
$
1,378

Below market rent
 
$
(27,556
)
 
$
10,571

 
$
(16,985
)
 
$
(28,883
)
 
$
10,401

 
$
(18,482
)
 
Note 4 – Investments in and Advances to Unconsolidated Joint Ventures
We enter into joint ventures primarily for purposes of operating and developing industrial real estate. Our investments in these joint ventures are included in “Investments in and advances to unconsolidated joint ventures” in our Consolidated Balance Sheets.

The following table summarizes our unconsolidated joint ventures (dollars in thousands):
 
 
As of June 30, 2018
 
Investments in and Advances to as of
 
 
Ownership Percentage
 
Number of Buildings
 
June 30,
2018
 
December 31,
2017
Unconsolidated Joint Ventures
 
 
 
 
Institutional Joint Ventures:
 
 

 
 

 
 
 
DCT/SPF Industrial Operating LLC
 
20.0
%
 
13

 
$
38,522

 
$
36,630

TRT-DCT Venture III
 
10.0
%
 
—

 
8

 
220

Total Institutional Joint Ventures
 
 

 
13

 
38,530

 
36,850

Other:
 
 

 
 

 
 

 
 

SCLA(1)
 
50.0
%
 
8

 
34,501

 
35,381

Total
 
 

 
21

 
$
73,031

 
$
72,231

 
(1) 
Although we contributed 100% of the initial cash equity capital required by the venture, after return of certain preferential distributions on capital invested, profits and losses are generally split 50/50.
Guarantees
There are no lines of credit or side agreements related to, or between, our unconsolidated joint ventures and us, and there are no derivative financial instruments between our unconsolidated joint ventures and us. In addition, we do not believe we have any material exposure to financial guarantees.


19



Note 5 – Financial Instruments and Hedging Activities
Fair Value of Financial Instruments
As of June 30, 2018 and December 31, 2017, the fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximated their carrying values due to the short-term nature of settlement of these instruments. The fair values of other financial instruments subject to fair value disclosures were determined based on available market information and valuation methodologies we believe to be appropriate estimates for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. Our estimates may differ from the actual amounts that we could realize upon disposition. The following table summarizes these financial instruments (in thousands):
 
 
As of June 30, 2018
 
As of December 31, 2017
 
 
Carrying
Amounts
 
Estimated
Fair Value
 
Carrying
Amounts
 
Estimated
Fair Value
Borrowings:(1)
 
 

 
 

 
 

 
 

Senior unsecured revolving credit facility
 
$
324,000

 
$
324,000

 
$
234,000

 
$
234,000

Fixed rate debt(2)
 
$
1,325,294

 
$
1,336,720

 
$
1,370,421

 
$
1,419,518

Variable rate debt
 
$
132,113

 
$
132,452

 
$
125,000

 
$
123,020

 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 

 
 

 
 

 
 

Interest rate swap asset(3)
 
$
8,729

 
$
8,729

 
$
3,866

 
$
3,866

 
(1) 
The fair values of our borrowings were estimated using a discounted cash flow methodology. Credit spreads and market interest rates used to determine the fair value of these instruments are based on unobservable Level 3 inputs which management has determined to be its best estimate of current market values.
(2) 
The carrying amount of our fixed rate debt includes premiums and discounts and excludes deferred loan costs.
(3) 
The fair values of our interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash flows and the discounted expected variable cash flows based on an expectation of future interest rates derived from Level 2 observable market interest rate curves. The asset or liability is included in “Other assets, net” or “Other liabilities,” respectively, in our Consolidated Balance Sheets.
Hedging Activities
To manage interest rate risk for variable rate debt and issuances of fixed rate debt, we primarily use treasury locks and interest rate swaps as part of our cash flow hedging strategy. These derivatives are designed to mitigate the risk of future interest rate increases by providing a fixed interest rate for a limited, pre-determined period of time. Such derivatives have been used to hedge the variability in existing and future interest expense associated with existing variable rate borrowings and forecasted issuances of debt, which may include issuances of new debt, as well as refinancing of existing debt upon maturity.
Accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the designation of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

For derivatives designated as “cash flow” hedges, the change in the fair value of the derivative is initially reported in “Other comprehensive income” (“OCI”) in our Consolidated Statements of Comprehensive Income (i.e., not included in earnings) and subsequently reclassified into “Interest expense” when the hedged transaction affects earnings or the hedging relationship is no longer highly effective. We assess the effectiveness of each hedging relationship whenever financial statements are issued or earnings are reported and at least every three months. We do not use derivatives for trading or speculative purposes.
During June 2013, certain of our consolidated ventures entered into two pay-fixed, receive-floating interest rate swaps to hedge the variability of future cash flows attributable to changes in the 1 month USD LIBOR rates. The pay-fixed, receive-floating interest rate swaps have an effective date of June 2013 and a maturity date of June 2023. These interest rate swaps effectively fix the interest rate on the related debt instruments at 4.72%. As of June 30, 2018, and December 31, 2017, we had borrowings payable subject to these pay-fixed, receive-floating interest rate swaps with aggregate principal balances of approximately $6.4 million for both periods presented.

20



During December 2015, we entered into a pay-fixed, receive-floating interest rate swap to hedge the variability of future cash flows attributable to changes in the 1 month USD LIBOR rates on our $200.0 million unsecured term loan. The pay-fixed, receive-floating interest rate swap has an effective date of December 2015 and a maturity date of December 2022. During December 2017, we amended the senior unsecured term loan, lowering our margin to between .90% to 1.75% per annum effective January 1, 2018. The interest rate swap effectively fixes the interest rate on the related debt instrument at 2.81%, however, there is no floor on the variable interest rate of the swap whereas the current variable rate debt is subject to a 0.0% floor. In the event that USD LIBOR is negative, the Company will make payments to the hedge counterparty equal to the negative spread between USD LIBOR and zero. As of June 30, 2018 and December 31, 2017, the entire $200.0 million principal amount of the term loan was subject to this pay-fixed, receive-floating interest rate swap.
The following table presents the effect of our derivative financial instruments on our accompanying Consolidated Financial Statements (in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Derivatives in Cash Flow Hedging Relationships
 
 

 
 
 
 
Interest Rate Swaps:
 
 
 
 

 
 
 
 
Amount of gain (loss) recognized in OCI for derivatives
 
$
1,516

 
$
(1,503
)
 
$
5,171

 
$
(1,142
)
Amount of loss reclassified from accumulated OCI for derivatives into interest expense and equity in earnings of unconsolidated joint ventures, net
 
$
(906
)
 
$
(1,402
)