10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark one)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

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.

(Exact name of registrant as specified in its charter)

 

Maryland   82-0538520

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

518 17th Street, Suite 800

Denver, Colorado

  80202
(Address of principal executive offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (303) 597-2400

Securities Registered Pursuant to Section 12(b) of the Act:

 

            Title of Each Class            

  Name of Each Exchange on Which Registered
Common Stock  

New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: none

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes [X] No [    ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [    ] No [X]

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. 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).

Yes [X] No [    ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  [X]

    Accelerated filer  [    ]

Non-accelerated filer  [    ] (do not check if smaller reporting company)

  Smaller reporting company  [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [    ] No [X]

As of June 30, 2012, the aggregate market value of the 245.8 million shares of voting and non-voting common stock held by non-affiliates of the registrant was $1.5 billion based on the closing sale price of $6.21 as reported on the New York Stock Exchange on June 30, 2012. (For this computation, the registrant has excluded the market value of all shares of Common Stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the registrant.) As of February 15, 2013 there were 280,952,517 shares of Common Stock outstanding.

 

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement to be issued in conjunction with the registrant’s annual meeting of stockholders to be held May 1, 2013 are incorporated by reference into Part III of this Annual Report.

 

 

 


Table of Contents

DCT INDUSTRIAL TRUST INC.

TABLE OF CONTENTS

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2012

 

     Page  
PART I   

Item 1.

   Business      3   

Item 1A.

   Risk Factors      7   

Item 1B.

   Unresolved Staff Comments      25   

Item 2.

   Properties      26   

Item 3.

   Legal Proceedings      30   

Item 4.

   Mine Safety Disclosure      30   
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      31   

Item 6.

   Selected Financial Data      34   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

Item 7A.

   Quantitative and Qualitative Disclosure about Market Risk      61   

Item 8.

   Financial Statements and Supplementary Data      61   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      61   

Item 9A.

   Controls and Procedures      61   

Item 9B.

   Other Information      64   
PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      65   

Item 11.

   Executive Compensation      65   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      65   

Item 13.

   Certain Relationships and Related Transactions and Director Independence      65   

Item 14.

   Principal Accountant Fees and Services      65   
PART IV   

Item 15.

   Exhibits and Financial Statement Schedules      66   


Table of Contents

FORWARD-LOOKING STATEMENTS

We make statements in this Annual Report on Form 10-K (“Annual Report”) that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are usually identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond our control including, without limitation:

 

   

national, international, regional and local economic conditions, including, in particular, the strength of the United States economic recovery and the potential impact of the financial crisis in Europe;

 

   

the general level of interest rates and the availability of capital;

 

   

the competitive environment in which we operate;

 

   

real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;

 

   

decreased rental rates or increasing vacancy rates;

 

   

defaults on or non-renewal of leases by tenants;

 

   

acquisition and development risks, including failure of such acquisitions and development projects to perform in accordance with projections;

 

   

the timing of acquisitions, dispositions and development;

 

   

natural disasters such as fires, floods, tornadoes, hurricanes and earthquakes;

 

   

energy costs;

 

   

the terms of governmental regulations that affect us and interpretations of those regulations, including the costs of compliance with those regulations, changes in real estate and zoning laws and increases in real property tax rates;

 

   

financing risks, including the risk that our cash flows from operations may be insufficient to meet required payments of principal, interest and other commitments;

 

   

lack of or insufficient amounts of insurance;

 

   

litigation, including costs associated with prosecuting or defending claims and any adverse outcomes;

 

   

the consequences of future terrorist attacks or civil unrest;

 

   

environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us; and

 

   

other risks and uncertainties detailed in the section entitled “Risk Factors.”

In addition, our current and continuing qualification as a real estate investment trust, or REIT, involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, or the Code, and depends on our ability to meet the various requirements imposed by the Code through actual operating results, distribution levels and diversity of stock ownership.

 

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We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The reader should carefully review our financial statements and the notes thereto, as well as the section entitled “Risk Factors” in this Annual Report.

 

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PART I

 

ITEM 1. BUSINESS

The Company

DCT Industrial Trust Inc. is a leading industrial real estate company that owns, operates and develops high-quality bulk distribution and light industrial properties in high-volume distribution markets in the U.S. and Mexico. As used herein, “DCT Industrial Trust,” “DCT,” “the Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its consolidated subsidiaries and partnerships except where the context otherwise requires. We were formed as a Maryland corporation in April 2002 and have elected to be treated as a real estate investment trust (“REIT”) for United States (“U.S.”) federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all of our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP (the “operating partnership”), a Delaware limited partnership, for which DCT Industrial Trust Inc. is the sole general partner. We own our properties through our operating partnership and its subsidiaries. As of December 31, 2012, we owned approximately 93.3% of the outstanding equity interests in our operating partnership.

Available Information

Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to any of those reports that we file with the Securities and Exchange Commission are available free of charge as soon as reasonably practicable through our website at http://investors.dctindustrial.com. The information contained on our website is not incorporated into this Annual Report. Our Common Stock is listed on the New York Stock Exchange under the symbol “DCT”.

Business Overview

Our portfolio primarily consists of high-quality, functional bulk distribution warehouses and light industrial properties. The properties we target for acquisition or development are generally characterized by convenient access to major transportation arteries, proximity to densely populated markets and quality design standards that allow our customers’ efficient and flexible use of the buildings. In the future, we intend to continue to focus on properties that exhibit these characteristics in select U.S. markets where we believe we can achieve favorable returns and leverage our local expertise. We seek to maximize growth in earnings and shareholder value within the context of overall economic conditions, primarily through increasing rents and operating income at existing properties and acquiring and developing high-quality properties in major distribution markets. In addition, we will recycle our capital by disposing of non-strategic, lower growth assets and reinvesting the proceeds into newly acquired or developed assets where we believe the returns will be more favorable over time.

As of December 31, 2012, the Company owned interests in approximately 75.6 million square feet of properties leased to approximately 870 customers, including:

 

   

58.1 million square feet comprising 399 consolidated properties owned in our operating portfolio which were 92.7% occupied;

 

   

14.2 million square feet comprising 45 unconsolidated properties which were 82.9% occupied and operated on behalf of four institutional capital management partners;

 

   

0.3 million square feet comprising four consolidated properties under redevelopment;

 

   

1.0 million square feet comprising three consolidated buildings in development; and

 

   

2.0 million square feet comprising three buildings held for sale.

As of December 31, 2012, our total consolidated portfolio consisted of 409 properties with an average size of 150,000 square feet and an average age of 20 years.

 

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During the year ended December 31, 2012 we acquired 32 buildings. These properties were acquired for a total purchase price of $338.4 million, excluding our existing ownership of 20% in the six properties previously held by DCT Fund I (see “Notes to Consolidated Financial Statements Note 4 – Investments in and Advances to Unconsolidated Joint Ventures” for further detail related to the buyout of our joint venture partner’s interest).

During the year ended December 31, 2012, we sold 36 operating properties to third-parties for gross proceeds of approximately $155.0 million. We recognized gains of approximately $13.4 million on the disposition of 23 operating properties and recognized an impairment loss of approximately $11.4 million on the disposition of a portfolio of 13 properties in Atlanta.

We have a broadly diversified customer base. As of December 31, 2012, our consolidated properties had leases with approximately 870 customers with no single customer accounting for more than 1.6% of the total annualized base rent of our properties. Our ten largest customers occupy approximately 8.6% of our consolidated properties based on square footage and account for approximately 10.9% of the annualized base rent of these properties. We believe that our broad national presence in the top U.S. distribution markets provides geographic diversity and is attractive to users of distribution space which allows us to build strong relationships with our customers. Furthermore, we are actively engaged in meeting our customers’ expansion and relocation requirements.

Our principal executive office is located at 518 Seventeenth Street, Suite 800, Denver, Colorado 80202; our telephone number is (303) 597-2400. We also maintain regional offices in Atlanta, Georgia; Baltimore, Maryland; Chicago, Illinois; Cincinnati, Ohio; Dallas, Texas; Houston, Texas; Paramus, New Jersey; Newport Beach, California; Emeryville, California; Orlando, Florida; Monterey, Mexico; and Seattle, Washington. Our website address is www.dctindustrial.com.

Business Strategy

Our primary business objectives are to maximize long-term growth in Funds From Operations, or FFO per share (see definition in “Selected Financial Data”), and to maximize the net asset value of our portfolio and total shareholder return. The strategies we intend to execute to achieve these objectives include:

 

   

Maximizing Cash Flows From Existing Properties.    We intend to maximize the cash flows from our existing properties by active leasing and management, maintaining strong customer relationships, controlling operating expenses and physically maintaining the quality of our properties. Renewing tenants, leasing space and effectively managing expenses are critical to achieving our objectives and are a primary focus of our local real estate teams.

 

   

Profitably Acquiring Properties.    We seek to acquire properties that meet our asset, location and financial criteria at prices and potential returns which we believe are attractive. We have selected certain markets and sub-markets where we focus our efforts on identifying buildings to acquire. Acquisitions may include fully-leased buildings, vacant properties, or land where we think our leasing and development expertise can add value.

 

   

Selectively Pursuing New Development.    To meet current tenant demand, we continue to develop new assets in in-fill locations in select markets where rents and vacancy levels demonstrate the need for new construction. During 2012, we acquired seven land parcels for future development totaling approximately 216.4 acres and a shell-complete building totaling approximately 0.3 million square feet in Houston. Also during 2012, we stabilized one development building totaling 103,000 square feet, completed shell complete construction on two buildings, which are partially leased totaling approximately 0.7 million square feet and have three buildings under construction, which are partially leased, totaling approximately 1.0 million square feet. As of December 31, 2012, we also had two build-to-suit for sale buildings under contract. The buildings under construction, as well as the two build-to-suit for sale buildings, are all projected to be completed in 2013.

 

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Recycling Capital.    We intend to selectively dispose of non-strategic assets and redeploy the proceeds into higher growth acquisition and development opportunities. In 2012, we sold $155.0 million of non-strategic assets for deployment into higher growth assets.

 

   

Conservatively Managing Our Balance Sheet.    We plan to maintain financial metrics, including leverage and coverage ratios on a basis consistent with our investment grade peers. In addition, we believe that a conservatively managed balance sheet provides for a competitive long-term cost of capital.

Our Competitive Strengths

We believe that we distinguish ourselves from other owners, operators, acquirers and developers of industrial properties. Although our business strategy reflects current market conditions, we believe our long-term success is supported through the following competitive strengths:

 

   

High-Quality Industrial Property Portfolio.    Our portfolio of industrial properties primarily consists of high-quality bulk distribution facilities in high volume leasing markets specifically designed to meet the warehousing needs of regional and national companies. The majority of our properties are specifically designed for use by major distribution users and are readily divisible to take advantage of re-tenanting opportunities. We believe that our concentration of high-quality bulk distribution properties provides us with a competitive advantage in attracting and retaining distribution users across the markets in which we operate.

 

   

Experienced and Committed Management Team.    Our executive management team collectively has an average of nearly 27 years commercial real estate experience and 16 years of industrial real estate experience. Additionally, our executive management team has extensive public company operating experience.

 

   

Strong Operating Platform.    We have a team of 74 experienced transaction and property management professionals working in twelve regional offices to maximize market opportunities through local expertise, presence and relationships. We believe successfully meeting the needs of our customers and anticipating and responding to market opportunities will result in achieving superior returns from our properties as well as the sourcing of new acquisitions and development opportunities.

 

   

Proven Acquisition and Disposition Capabilities.    The company has extensive experience in acquiring industrial real estate, including both smaller transactions as well as larger portfolio acquisitions. Our local market teams are an important advantage in sourcing potential marketed as well as off-market transactions. The average size of our acquisitions in 2010, 2011 and 2012 was $8.7 million per building; demonstrating our ability to access a significant pipeline of smaller acquisitions. Further, consistent with our capital recycling strategy, we have disposed of a cumulative $1.1 billion of real estate investments since inception. Our ability to acquire and sell real estate is driven by the experience of our transaction personnel and our extensive network of industry relationships within the brokerage and investor communities.

 

   

Extensive Development and Redevelopment Expertise.    Our local market teams have significant experience in all facets of value-add activities, ground up development, build-to-suits and redevelopment capabilities. We believe our local teams’ knowledge of our focus markets and their relationship with key market participants, including land owners, users and brokers, combined with the technical expertise required to successfully execute on complex transactions, provides us with an excellent platform to create value while appropriately managing risk.

 

   

Strong Industry Relationships.    We believe that our extensive network of industry relationships with the brokerage and investor communities will allow us to execute successfully our acquisition, development and capital recycling strategies. These relationships augment our ability to source acquisitions in off-market transactions outside of competitive marketing processes, capitalize on development opportunities and capture repeat business and transaction activity. Our strong relationships with local and nationally focused brokers aids in attracting and retaining customers.

 

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Capital Structure.    Our capital structure provides us with sufficient financial flexibility and capacity to fund future growth. As of December 31, 2012 we had $190.0 million available under our senior unsecured revolving credit facility and 328 of our consolidated operating properties with a gross book value of $2.5 billion were unencumbered.

Operating Segments

Our operating results used to assess performance are aggregated into three reportable segments, East, Central and West, which are based on the geographical locations organized into markets by where our management and operating teams conduct and monitor business. We consider rental revenues and property net operating income aggregated by segment to be the appropriate way to analyze performance. See additional information in “Item 2. Properties” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements, Note 14—Segment Information.”

Competition

The market for the leasing of industrial real estate is highly competitive. We experience competition for customers from other existing assets in proximity to our buildings as well as from proposed new developments. Institutional investors, other REITs and local real estate operators generally own such properties; however no single competitor or small group of competitors is dominant in our current markets. However, as a result of competition, we may have to provide free rental periods, incur charges for tenant improvements or offer other inducements, all of which may have an adverse impact on our results of operations.

The market for the acquisition of industrial real estate is also very competitive. We compete for real property investments with other REITs and institutional investors such as pension funds and their advisors, private real estate investment funds, insurance company investment accounts, private investment companies, individuals and other entities engaged in real estate investment activities, some of which have greater financial resources than we do.

Employees

As of December 31, 2012, we had 131 full-time employees.

 

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ITEM 1A. RISK FACTORS

RISKS RELATED TO RECENT ECONOMIC CONDITIONS

Adverse economic conditions will negatively affect our returns and profitability.

Our operating results may be affected by weakness in the national economy as well as in the local economies where our properties are located. Specific impacts, among others, may include:

 

   

increased levels of tenant defaults under leases;

 

   

re-leasing which may require concessions, tenant improvement expenditures or reduced rental rates due to reduced demand for industrial space;

 

   

overbuilding which may increase vacancies;

 

   

adverse capital and credit market conditions may restrict our development and redevelopment activities; and

 

   

reduced access to credit may result in tenant defaults, non-renewals under leases or inability of potential buyers to acquire our properties held for sale, including properties held through joint ventures.

Also, to the extent we purchase real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracts at the time of our purchases, or the number of companies seeking to acquire properties decreases, the value of our investments may not appreciate or may decline in value significantly below the amount we pay for these investments in an unstable market. The length and severity of any economic slowdown or downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic slowdown or downturn is prolonged or becomes more severe.

Substantial international, national and local government deficits and the weakened financial condition of these governments may adversely impact our business, financial condition and results of operations. In particular, for example, uncertainty about the financial stability of several countries in the European Union, the increasing risk that those countries may default on their sovereign debt and related stresses on financial markets could have an adverse effect on our business, results of operations and financial condition.

The values of, and the cash flows from, the properties we own are affected by developments in global, national and local economies. As a result of the recent severe recession and the significant government interventions, federal, state and local governments have incurred record deficits and assumed or guaranteed liabilities of private financial institutions or other private entities. These increased budget deficits and the weakened financial condition of federal, state and local governments may lead to reduced governmental spending, tax increases, public sector job losses, increased interest rates, currency devaluations, defaults on debt obligations or other adverse economic events, which may directly or indirectly adversely affect our business, financial condition and results of operations.

There can be no assurance that the market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not spread, nor can there be any assurance that future assistance packages will be available or, even if provided, will be sufficient to stabilize the affected countries and markets in Europe or elsewhere. Risks and ongoing concerns about the debt crisis in Europe could have a detrimental impact on the global economic recovery, financial markets and institutions and the availability of debt financing, which may directly or indirectly adversely affect our business, financial condition and results of operations.

 

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RISKS RELATED TO OUR BUSINESS AND OPERATIONS

Our investments are concentrated in the industrial real estate sector, and our business would be adversely affected by an economic downturn in that sector.

Our investments in real estate assets are primarily concentrated in the industrial real estate sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.

We depend on key personnel.

Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our management group, each of whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our management group or to attract suitable replacements should any member of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets. We have not obtained and do not expect to obtain key man life insurance on any of our key personnel.

We also believe that, as we expand, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, investment, financing, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel.

Our operating results and financial condition could be adversely affected if we do not continue to have access to capital on favorable terms.

As a REIT, we must meet certain annual distribution requirements. Consequently, we are largely dependent on asset sales or external capital to fund our development and acquisition activities. Further, in order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Additionally, our ability to sell assets or access capital is dependent upon a number of factors, including general market conditions and competition from other real estate companies. To the extent that capital is not available to acquire or develop properties, profits may not be realized or their realization may be delayed, which could result in an earnings stream that is less predictable than some of our competitors and result in us not meeting our projected earnings and distributable cash flow levels in a particular reporting period. Failure to meet our projected earnings and distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition and on the market price of our common stock.

Our long-term growth will partially depend upon future acquisitions of properties, and we may be unable to consummate acquisitions on advantageous terms or acquisitions may not perform as we expect.

We acquire and intend to continue to acquire primarily high-quality generic bulk distribution warehouses and light industrial properties. The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect, that we may be unable to integrate our new acquisitions into our existing operations quickly and efficiently and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. Further, we face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including both publicly-traded REITs and private institutional investment funds, and these competitors may have greater financial resources than us and a greater ability to borrow funds to acquire properties. This competition increases as investments in real estate become

 

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increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated. In addition, we expect to finance future acquisitions through a combination of borrowings under our senior unsecured credit facility, proceeds from equity or debt offerings by us or our operating partnership or its subsidiaries and proceeds from property contributions and sales which may not be available and which could adversely affect our cash flows. Any of the above risks could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

We may be unable to source off-market deal flow in the future.

A key component of our growth strategy is to continue to acquire additional industrial real estate assets. Properties that are acquired off-market are typically more attractive to us as a purchaser because of the absence of a formal sales process, which can lead to higher prices. If we cannot obtain off-market deal flow in the future, our ability to locate and acquire additional properties at attractive prices could be adversely affected.

Our real estate development strategies may not be successful.

We are involved in the construction and expansion of distribution facilities and we intend to continue to pursue development and renovation activities as opportunities arise. In addition, we have entered into joint ventures to develop, have or will self-develop additional warehouse/distribution buildings on land we already own or control, and we have rights under master development agreements to acquire additional acres of land for future development activities. We will be subject to risks associated with our development and renovation activities that could adversely affect our financial condition, results of operations, cash flows, our ability to pay dividends, and/or the market price of our common stock. These risks include but are not limited to:

 

   

the risk that development projects in which we have invested may be abandoned and the related investment will be impaired;

 

   

the risk that we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;

 

   

the risk that we may not be able to obtain additional land on which to develop;

 

   

the risk that our projections of rental income and expenses, our estimates of construction costs as well as our estimates of the fair market value of the property upon completion of lease-up may be inaccurate;

 

   

the risk that we may not be able to obtain financing for development projects on favorable terms;

 

   

the risk that construction costs of a project may exceed the original estimates or that construction may not be concluded in conformity with plans, specifications and timetables, making the project less profitable than originally estimated or not profitable at all (including the possibility of contractor default and the resulting legal action to rescind the purchase or construction contract or to enforce the builder’s obligations; the effects of local weather conditions; the possibility of local or national strikes; and the possibility of shortages in materials, building supplies or energy and fuel for equipment);

 

   

the risk that delays in construction may give tenants the right to terminate preconstruction leases for space at a newly developed project;

 

   

the risk that, upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we have financed through construction loans.

 

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Actions of our joint venture partners could negatively impact our performance.

Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies or joint ventures, and we intend to selectively continue to develop and acquire properties through joint ventures, limited liability companies and partnerships with other persons or entities when warranted by the circumstances. Such partners may share certain approval rights over major decisions. Such investments may involve risks not otherwise present with other methods of investment in real estate, including, but not limited to:

 

   

that our co-member, co-venturer or partner in an investment might become bankrupt, which would mean that we and any other remaining general partners, members or co-venturers would generally remain liable for the partnership’s, limited liability company’s or joint venture’s liabilities;

 

   

that such co-member, co-venturer or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals;

 

   

that such co-member, co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our current policy with respect to maintaining our qualification as a REIT;

 

   

that, if our partners fail to fund their share of any required capital contributions, we may be required to contribute such capital;

 

   

that joint venture, limited liability company and partnership agreements often restrict the transfer of a co-venturer’s, member’s or partner’s interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 

   

that our relationships with our partners, co-members or co-venturers are contractual in nature and may be terminated or dissolved under the terms of the agreements and, in such event, we may not continue to own or operate the interests or assets underlying such relationship or may need to purchase such interests or assets at an above-market price to continue ownership;

 

   

that disputes between us and our partners, co-members or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable partnership, limited liability company or joint venture to additional risk; and

 

   

that we may in certain circumstances be liable for the actions of our partners, co-members or co-venturers.

We generally seek to maintain sufficient control of our partnerships, limited liability companies and joint ventures to permit us to achieve our business objectives; however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flows and ability to pay dividends on, and/or the market price of our common stock.

If we invest in a limited partnership as a general partner we could be responsible for all liabilities of such partnership.

If the entity in which we invest is a limited partnership, we may acquire all or a portion of our interest in such partnership as a general partner. As a general partner, we could be liable for all the liabilities of such partnership. Additionally, we may be required to take our interests in other investments as a non-managing general partner. Consequently, we would be potentially liable for all such liabilities without having the same rights of management or control over the operation of the partnership as the managing general partner or partners may have. Therefore, we may be held responsible for all of the liabilities of an entity in which we do not have full management rights or control, and our liability may far exceed the amount or value of the investment we initially made or then had in the partnership.

 

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Investment in us may be subject to additional risks relating to our international investments.

We have operations in Mexico. Our foreign operations could be affected by factors peculiar to the laws and business practices of the jurisdictions in which the properties are located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign operations could be subject to the following risks:

 

   

changing governmental rules and policies, including changes in land use and zoning laws;

 

   

enactment of laws relating to the foreign ownership of real property or mortgages and/or laws restricting the ability of foreign persons or companies to remove profits earned from activities within the country to the person’s or company’s country of origin;

 

   

variations in currency exchange rates;

 

   

adverse market conditions caused by terrorism, civil unrest and changes in national or local governmental or economic conditions;

 

   

the willingness of domestic or foreign lenders to make mortgage loans in certain countries and changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies;

 

   

the imposition of income and other taxes in those jurisdictions and changes in real estate and other tax rates and other operating expenses in particular countries;

 

   

general political and economic instability;

 

   

our limited experience and expertise in Mexico relative to our experience and expertise in the United States; and

 

   

more stringent environmental laws or changes in such laws, or environmental consequences of less stringent environmental management practices in foreign countries relative to the United States.

The availability and timing of cash distributions is uncertain.

We expect to continue to pay quarterly distributions to our stockholders. However, we bear all expenses incurred by our operations, and our funds generated by operations, after payment of these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. In addition, our board of directors, in its discretion, may retain any portion of such cash for working capital. We cannot assure our stockholders that sufficient funds will be available to pay distributions.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

The recent economic downturn has required us to recognize real estate impairment charges on some of our assets and equity investments. We conduct a comprehensive review of all our real estate assets in accordance with our policy of accounting for impairments (see further discussion of our accounting policies in “Notes to the Consolidated Financial Statements, Note 2—Summary of Significant Accounting Policies” and “Item 7—Critical Accounting Estimates”). The principal factor which has led to impairment charges in the recent past was the severe economic deterioration in many markets resulting in a decrease in leasing demand, rental rates, rising vacancies and an increase in capitalization rates.

There can be no assurance that the estimates and assumptions we use to assess impairments are accurate and will reflect actual results. A worsening real estate market or the failure for that market to continue to improve may cause us to reevaluate the assumptions used in our impairment analysis and our intent to hold, sell, develop or contribute properties. Changes in these assumptions may result in impairment charges that could adversely affect our financial condition, results of operations and our ability to pay cash dividends to our stockholders and distributions to the OP unitholders and/or the market price of our stock.

 

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Our decision to dispose of real estate assets would change the holding period assumption in our valuation analyses, which could result in material impairment losses and adversely affect our financial results.

We evaluate real estate assets for impairment based on the projected cash flow of the asset over our anticipated holding period. If we change our intended holding period, due to our intention to sell or otherwise dispose of an asset, then we must reevaluate whether that asset is impaired. Depending on the carrying value of the property at the time we change our intention and the amount that we estimate we would receive on disposal, we may record an impairment loss that would adversely affect our financial results. This loss could be material to our results of operations in the period that it is recognized.

Events or occurrences that affect areas in which our properties are geographically concentrated may impact financial results.

In addition to general, regional, national and international economic conditions, our operating performance is impacted by the economic conditions of the specific markets in which we have concentrations of properties. We have significant holdings in the following markets of our consolidated portfolio: Atlanta, Baltimore/Washington D.C., Chicago, Cincinnati, Columbus, Dallas, Houston, Memphis, Nashville, Northern California and Southern California. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties.

Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.

The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies including any material weakness in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.

RISKS RELATED TO CONFLICTS OF INTEREST

Our UPREIT structure may result in potential conflicts of interest.

As of December 31, 2012, we owned 93.3% of the units of limited partnership interest in our operating partnership, or OP Units, certain unaffiliated limited partners owned 5.0% of the OP Units and certain of our officers and directors, owned the remaining 1.7% of the OP Units. Persons holding OP Units in our operating partnership have the right to vote on certain amendments to the limited partnership agreement of our operating partnership, as well as on certain other matters. Persons holding such voting rights may exercise them in a manner that conflicts with the interests of our stockholders. Furthermore, circumstances may arise in the future when the interest of limited partners in our operating partnership may conflict with the interests of our stockholders. For example, the timing and terms of dispositions of properties held by our operating partnership may result in tax consequences to certain limited partners and not to our stockholders.

GENERAL REAL ESTATE RISKS

Our performance and value are subject to general economic conditions and risks associated with our real estate assets.

The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to pay distributions to our stockholders could be adversely affected. In

 

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addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from, and the value of, our properties may be adversely affected by:

 

   

changes in general or local economic climate;

 

   

the attractiveness of our properties to potential customers;

 

   

changes in supply of or demand for similar or competing properties in an area;

 

   

bankruptcies, financial difficulties or lease defaults by our customers;

 

   

changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive or otherwise reduce returns to stockholders;

 

   

changes in operating costs and expenses and our ability to control rents;

 

   

changes in or increased costs of compliance with governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder;

 

   

our ability to provide adequate maintenance and insurance;

 

   

changes in the cost or availability of insurance, including earthquake and environmental;

 

   

unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;

 

   

periods of high interest rates and tight money supply;

 

   

customer turnover;

 

   

general overbuilding or excess supply in the market areas; and

 

   

disruptions in the global supply chain caused by political, regulatory or other factors including terrorism.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. Future terrorist attacks may result in declining economic activity, which could reduce the demand for, and the value of, our properties. To the extent that future attacks impact our customers, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.

For these and other reasons, we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.

Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties.

We compete with other developers, owners and operators of real estate, some of which own properties similar to ours in the same markets and submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers’ leases expire. As a result, our financial condition, cash flows, cash available for distribution, trading price of our common stock and ability to satisfy our debt service obligations could be materially adversely affected.

 

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We are dependent on customers for our revenues.

Our operating results and distributable cash flows would be adversely affected if a significant number of our customers were unable to meet their lease obligations. In addition, certain of our properties are occupied by a single customer. As a result, the success of those properties will depend on the financial stability of a single customer. Lease payment defaults by customers could cause us to reduce the amount of distributions to stockholders. A default by a customer on its lease payments could force us to find an alternative source of revenues to pay any mortgage loan on the property. In the event of a customer default, we may experience delays in enforcing our rights as landlord and may incur substantial costs, including litigation and related expenses, in protecting our investment and re-leasing our property. If a lease is terminated, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss.

Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our business.

Our results of operations, distributable cash flows and the value of our common stock would be adversely affected if we are unable to lease, on economically favorable terms, a significant amount of space in our operating properties. The number of vacant or partially vacant industrial properties in a market or submarket could adversely affect both our ability to re-lease the space and the rental rates that can be obtained.

A property that incurs a vacancy could be difficult to sell or re-lease.

A property may incur a vacancy either by the continued default of a customer under its lease or the expiration of one of our leases. We have significant lease expirations in 2012, as outlined in “Item 2, Properties—Lease Expirations.” In addition, certain of the properties we acquire may have some level of vacancy at the time of closing. Certain of our properties may be specifically suited to the particular needs of a customer. We may have difficulty obtaining a new customer for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to stockholders. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

We may not have funding for future tenant improvements.

When a customer at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that we will be required to expend funds to construct new tenant improvements in the vacated space in order to attract one or more new customers. Although we intend to manage our cash position or financing availability to pay for any improvements required for re-leasing, we cannot assure our stockholders that we will have adequate sources of funding available to us for such purposes in the future.

If our customers are highly leveraged, they may have a higher possibility of filing for bankruptcy or insolvency.

Of our customers that experience downturns in their operating results due to adverse changes to their business or economic conditions, those that are highly leveraged may have a higher possibility of filing for bankruptcy or insolvency. In bankruptcy or insolvency, a customer may have the option of vacating a property instead of paying rent. Until such a property is released from bankruptcy, our revenues would be reduced and could cause us to reduce distributions to stockholders. We may have highly leveraged customers in the future.

The fact that real estate investments are not as liquid as other types of assets may reduce economic returns to investors.

Real estate investments are not as liquid as other types of investments, and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. In addition, our ability at any time to sell assets or contribute assets to property funds or other entities in which we have an ownership interest may be restricted by the potential for the imposition of the 100% “prohibited transactions” tax on gains from certain

 

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dispositions of property by REIT’s unless a safe harbor exception applies. This lack of liquidity may limit our ability to change our portfolio composition promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the market price of, our common stock.

Delays in acquisition and development of properties may have adverse effects.

Delays we encounter in the selection, acquisition and development of properties could adversely affect our returns. Where land is acquired for purposes of developing a new property prior to the start of construction, it will typically take 12 to 18 months to complete construction and lease up the newly completed building. Therefore, there could be delays in the payment of cash distributions attributable to those particular properties.

Acquired properties may be located in new markets where we may face risks associated with investing in an unfamiliar market.

We have acquired, and may continue to acquire, properties in markets that are new to us. When we acquire properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. We work to mitigate such risks through extensive diligence and research and associations with experienced partners; however, there can be no guarantee that all such risks will be eliminated.

Uninsured losses relating to real property may adversely affect our returns.

We attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Moreover, as the general partner of our operating partnership, we generally will be liable for all of our operating partnership’s unsatisfied recourse obligations, including any obligations incurred by our operating partnership as the general partner of joint ventures. Any such losses could adversely affect our financial condition, results of operations, cash flows and ability to pay dividends, and/or the market price of our common stock. In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure that any such sources of funding will be available to us for such purposes in the future.

A number of our consolidated operating properties are located in areas that are known to be subject to earthquake activity. Properties located in active seismic areas include properties in Northern California, Southern California, Memphis, Seattle and Mexico. We carry replacement-cost earthquake insurance on all of our properties located in areas historically subject to seismic activity with coverage limitations and deductibles that we believe are commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.

A number of our properties are located in Houston, Miami and Orlando, which are areas that are known to be subject to hurricane and/or flood risk. We carry replacement-cost hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity with coverage limitations and deductibles that we believe are commercially reasonable. We evaluate our hurricane and flood damage insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.

 

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Contingent or unknown liabilities could adversely affect our financial condition.

We have acquired and may in the future acquire properties without any recourse, or with only limited recourse, with respect to unknown or contingent liabilities. As a result, if a claim was asserted against us based upon current or previous ownership of any of these properties or related entities, we might have to pay substantial sums to settle it which could adversely affect our cash flows. Unknown liabilities with respect to entities or properties acquired might include:

 

   

liabilities for clean-up or remediation of adverse environmental conditions;

 

   

accrued but unpaid liabilities incurred in the ordinary course of business;

 

   

tax liabilities; and

 

   

claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of the properties.

Environmentally hazardous conditions may adversely affect our operating results.

Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, a single person may be held responsible for all of the clean-up costs incurred. In addition, third-parties may sue the owner or operator of a site for damages based on personal injury, natural resources, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of a government entity for costs it may incur to address the contamination, or otherwise could adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which a property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions enforceable by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending environmental claims, of complying with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.

Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third-parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties may contain asbestos-containing building materials.

We invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties are adjacent to or near other properties that may have contained or currently contain underground storage tanks used to store petroleum products, or other hazardous or toxic substances. In addition, previous or current occupants of our properties and adjacent properties may have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.

We maintain a portfolio environmental insurance policy that provides coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations, for most of our properties. From time to

 

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time, we may acquire properties or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we underwrite the costs of environmental investigation, clean-up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.

All of our properties were subject to a Phase I or similar environmental assessment by independent environmental consultants at the time of acquisition. Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. While some of these assessments have led to further investigation and sampling, none of our environmental assessments of our properties have revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations taken as a whole. However, we cannot give any assurance that such conditions do not exist or may not arise in the future. Material environmental conditions, liabilities or compliance concerns may arise after the environmental assessment has been completed. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of our properties will not be affected by customers, by the condition of land or operations in the vicinity of our properties (such as releases from underground storage tanks), or by third-parties unrelated to us.

Costs of complying with governmental laws and regulations may adversely affect our income and the cash available for any distributions.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Customers’ ability to operate and to generate income to pay their lease obligations may be affected by permitting and compliance obligations arising under such laws and regulations. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Leasing properties to customers that engage in industrial, manufacturing, and commercial activities will cause us to be subject to the risk of liabilities under environmental laws and regulations. In addition, the presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.

Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our customers’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third-parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines or damages we must pay will reduce our ability to make distributions and may reduce the value of our common stock.

In addition, changes in these laws and governmental regulations, or their interpretation by agencies or the courts, could occur.

 

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Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs.

Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flows and the amounts available for distributions to our stockholders may be adversely affected. While we believe that our properties are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us that will affect our cash flows and results of operations.

We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions, which could adversely affect the return on an investment in our common stock.

We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment objectives. Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure our stockholders that we will be able to sell our properties at a profit in the future. Accordingly, the extent to which our stockholders will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.

Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements.

In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.

If we sell properties and provide financing to purchasers, defaults by the purchasers would adversely affect our cash flows.

If we decide to sell any of our properties, we presently intend to use our best efforts to sell them for cash. However, in some instances we may sell our properties by providing financing to purchasers. If we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders and result in litigation and related expenses. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed of.

We may acquire properties with “lock-out” provisions which may affect our ability to dispose of the properties.

We may acquire properties through contracts that could restrict our ability to dispose of the property for a period of time. These “lock-out” provisions could affect our ability to turn our investments into cash and could affect cash available for distributions to our stockholders. Lock-out provisions could also impair our ability to take actions during the lock-out period that would otherwise be in the best interest of our stockholders and, therefore, may have an adverse impact on the value of our common stock relative to the value that would result if the lock-out provisions did not exist.

 

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RISKS RELATED TO OUR DEBT FINANCINGS

Our operating results and financial condition could be adversely affected if we are unable to make required payments on our debt.

Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur, and we are subject to risks normally associated with debt financing, including the risk that our cash flows will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness.

In particular, loans obtained to fund property acquisitions may be secured by first mortgages on such properties. If we are unable to make our debt service payments as required, a lender could foreclose on the property or properties securing its debt. This could cause us to lose part or all of our investment, which in turn could cause the value of our common stock and distributions payable to stockholders to be reduced. Certain of our existing and future indebtedness is and may be cross-collateralized and, consequently, a default on this indebtedness could cause us to lose part or all of our investment in multiple properties.

Increases in interest rates could increase the amount of our debt payments or make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and adversely affect our ability to make distributions to our stockholders.

We have incurred and may continue to incur variable rate debt whereby increases in interest rates raise our interest costs, which reduces our cash flows and our ability to make distributions to our stockholders. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected, and the property securing such indebtedness may be sold on terms that are not advantageous to us or lost through foreclosure. Similarly, if debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.

The terms of our senior credit facility and other indebtedness require us to comply with a number of customary financial and other covenants, such as covenants with respect to consolidated leverage, net worth and unencumbered assets. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations. As of December 31, 2012, we had certain non-recourse, secured loans which are cross-collateralized by multiple properties. If we default on any of these loans we may then be required to repay such indebtedness, together with applicable prepayment charges, to avoid foreclosure on all cross-collateralized properties within the applicable pool. In addition, our senior credit facility contains certain cross-default provisions which are triggered in the event that our other material indebtedness is in default. These cross-default provisions may require us to repay or restructure the senior credit facility in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.

If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions.

Some of our financing arrangements require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as favorable as the original loan or sell the property at a price sufficient

 

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to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.

RISKS RELATED TO OUR CORPORATE STRUCTURE

Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

Our charter contains a 9.8% ownership limit.

Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than 9.8% by value or number of shares, whichever is more restrictive, of any class or series of our outstanding shares of our capital stock. Our board of directors, in its sole discretion, may exempt, subject to the satisfaction of certain conditions, any person from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any person whose ownership, direct or indirect, in excess of 9.8% by value or number of shares of any class or series of our outstanding shares of our capital stock could jeopardize our status as a REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. The ownership limit may delay or impede a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

We could authorize and issue stock without stockholder approval.

Our board of directors could, without stockholder approval, issue authorized but unissued shares of our common stock or preferred stock and amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. In addition, our board of directors could, without stockholder approval, classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares. Our board of directors could establish a series of stock that could, depending on the terms of such series, delay, defer or prevent a transaction or change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Majority stockholder vote may discourage changes of control.

If declared advisable by our board of directors, our stockholders may take some actions, including approving amendments to our charter, by a vote of a majority or, in certain circumstances, two thirds of the shares outstanding and entitled to vote. If approved by the holders of the appropriate number of shares, all actions taken would be binding on all of our stockholders. Some of these provisions may discourage or make it more difficult for another party to acquire control of us or to effect a change in our operations.

Provisions of Maryland law may limit the ability of a third-party to acquire control of our company.

Certain provisions of Maryland law may have the effect of inhibiting a third-party from making a proposal to acquire us or of impeding a change of control under certain circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares, including:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter would require the recommendation of our board of directors and would impose special appraisal rights and special stockholder voting requirements on these combinations; and

 

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“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We have opted out of these provisions of Maryland law with respect to any person, provided, in the case of business combinations, that the business combination is first approved by our board of directors. However, our board of directors may opt in to the business combination provisions and the control share provisions of Maryland law in the future.

Additionally, Title 8, Subtitle 3 of the Maryland General Corporation Law, or MGCL, permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently have. These provisions may have the effect of inhibiting a third-party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.

Our charter, our bylaws, the limited partnership agreement of our operating partnership and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Our board of directors can take many actions without stockholder approval.

Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our board of directors can do the following:

 

   

within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;

 

   

issue additional shares without obtaining stockholder approval, which could dilute the ownership of our then-current stockholders;

 

   

amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series, without obtaining stockholder approval;

 

   

classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval;

 

   

employ and compensate affiliates;

 

   

direct our resources toward investments that do not ultimately appreciate over time;

 

   

change creditworthiness standards with respect to third-party customers; and

 

   

determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving our stockholders the right to vote.

 

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We may change our investment and financing strategies and enter into new lines of business without stockholder consent, which may result in riskier investments than our current investments.

We may change our investment and financing strategies and enter into new lines of business at any time without the consent of our stockholders, which could result in our making investments and engaging in business activities that are different from, and possibly riskier than, the investments and businesses described in this prospectus. A change in our investment strategy or our entry into new lines of business may increase our exposure to interest rate and other risks of real estate market fluctuations.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty; the director or officer actually received an improper personal benefit in money, property or services; or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

FEDERAL INCOME TAX RISKS

Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.

We operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our qualification as a REIT will depend on our satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. The fact that we hold substantially all of our assets through our operating partnership and its subsidiaries further complicates the application of the REIT requirements for us. No assurance can be given that we will qualify as a REIT for any particular year. If we were to fail to qualify as a REIT in any taxable year for which a REIT election has been made, we would not be allowed a deduction for dividends paid to our stockholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates unless certain relief provision apply. As a consequence, we would not be compelled to make distributions under the Code. Moreover, unless we were to obtain relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce our net earnings available for investment or distribution to our stockholders because of the additional tax liability to us for the years involved. As a result of the additional tax liability, we might need to borrow funds or liquidate certain investments on terms that may be disadvantageous to us in order to pay the applicable tax. If we fail to qualify as a REIT but are eligible for certain relief provisions, then we may retain our status as a REIT but may be required to pay a penalty tax, which could be substantial.

To qualify as a REIT, we must meet annual distribution requirements.

To obtain the favorable tax treatment accorded to REITs, among other requirements, we normally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. We will be subject to federal

 

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income tax on our undistributed taxable income and net capital gain. In addition, if we fail to distribute during each calendar year at least the sum of (a) 85% of our ordinary income for such year, (b) 95% of our capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the sum of (i) the amounts actually distributed by us, plus (ii) retained amounts on which we pay income tax at the corporate level. We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation. However, differences between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis or partially pay dividends in shares of our common stock to meet the distribution requirements of the Code. Certain types of assets generate substantial mismatches between taxable income and available cash. Such assets include rental real estate that has been financed through financing structures which require some or all of available cash flows to be used to service borrowings. As a result, the requirement to distribute a substantial portion of our taxable income could cause us to: (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with REIT requirements. Further, amounts distributed will not be available to fund our operations.

Legislative or regulatory action could adversely affect our stockholders.

In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our common stock. All stockholders are urged to consult with their tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in common stock.

Distributions payable by REITs do not qualify for the reduced tax rates that apply to certain other corporate distributions.

Certain distributions payable by corporations to individuals subject to tax as “qualified dividend income” are subject to reduced tax rates applicable to long-term capital gain. Distributions payable by REITs, however, generally continue to be taxed at the normal rate applicable to the individual recipient rather than the preferential long-term capital gain rate. Although this preferential tax rate on certain corporate distributions does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate distributions could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay distributions, which could adversely affect the value of the stock of REITs, including our common stock.

Recharacterization of transactions under our operating partnership’s private placement may result in a 100% tax on income from prohibited transactions, which would diminish our cash distributions to our stockholders.

The IRS could recharacterize transactions under our operating partnership’s private placement such that our operating partnership is treated as the bona fide owner, for tax purposes, of properties acquired and resold by the entity established to facilitate the transaction. Such recharacterization could result in the income realized on these transactions by our operating partnership being treated as gain on the sale of property that is held as inventory or otherwise held primarily for the sale to customers in the ordinary course of business. In such event, such gain would constitute income from a prohibited transaction and would be subject to a 100% tax. If this occurs, our ability to pay cash distributions to our stockholders will be adversely affected.

In certain circumstances, we may be subject to federal and state income taxes, which would reduce our cash available for distribution to our stockholders.

Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes in various circumstances. For example, net income from a “prohibited transaction” will be subject to a 100% tax. In

 

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addition, we may not be able to distribute all of our income in any given year, which would result in corporate level taxes, and we may not make sufficient distributions to avoid excise taxes. We may also decide to retain certain gains from the sale or other disposition of our property and pay income tax directly on such gains. In that event, our stockholders would be required to include such gains in income and would receive a corresponding credit for their share of taxes paid by us. We may also be subject to U.S. state and local and non-U.S. taxes on our income or property, either directly or at the level of our operating partnership or at the level of the other entities through which we indirectly own our assets. In addition, any net taxable income earned directly by any of our taxable REIT subsidiaries, which we refer to as TRSs, will be subject to federal and state corporate income tax. In addition, we may be subject to federal or state taxes in other various circumstances. Any taxes we pay will reduce our cash available for distribution to our stockholders.

If our operating partnership was classified as a “publicly traded partnership” under the Code, our status as a REIT and our ability to pay distributions to our stockholders could be adversely affected.

Our operating partnership is organized as a partnership for U.S. federal income tax purposes. Even though our operating partnership will not elect to be treated as an association taxable as a corporation, it may be taxed as a corporation if it is deemed to be a “publicly traded partnership.” A publicly traded partnership is a partnership whose interests are traded on an established securities market or are considered readily tradable on a secondary market or the substantial equivalent thereof. We believe and currently take the position that our operating partnership should not be classified as a publicly traded partnership because interests in our operating partnership are not traded on an established securities market, and our operating partnership should satisfy certain safe harbors which prevent a partnership’s interests from being treated as readily tradable on an established securities market or substantial equivalent thereof. No assurance can be given, however, that the IRS would not assert that our operating partnership constitutes a publicly traded partnership or that facts and circumstances will not develop which could result in our operating partnership being treated as a publicly traded partnership. If the IRS were to assert successfully that our operating partnership is a publicly traded partnership, and substantially all of our operating partnership’s gross income did not consist of the specified types of passive income, our operating partnership would be treated as an association taxable as a corporation and would be subject to corporate tax at the entity level. In such event, the character of our assets and items of gross income would change and would result in a termination of our status as a REIT. In addition, the imposition of a corporate tax on our operating partnership would reduce the amount of cash available for distribution to our stockholders.

Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.

From time to time, we may transfer or otherwise dispose of some of our properties, including the contribution of properties to our joint venture funds or other commingled investment vehicles. Under the Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100% penalty tax, unless a safe harbor exception applies. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property or our contributions of properties into our joint venture funds, or commingled investment vehicles, are properly treated as prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The IRS may contend that certain transfers or disposals of properties by us or contributions of properties into our joint venture funds are prohibited transactions if they do not meet the safe harbor requirements. While we believe that the IRS would not prevail in any such dispute, if the IRS were to argue successfully that a transfer or disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a real estate investment trust for federal income tax purposes.

 

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Foreign investors may be subject to the Foreign Investment Real Property Tax Act, or FIRPTA, which would impose tax on certain distributions and on the sale of common stock if we are unable to qualify as a “domestically controlled” REIT or if our stock is not considered to be regularly traded on an established securities market.

A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests or USRPIs is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT in which, at all times during a specified testing period, less than 50% of the value of its shares is held directly or indirectly by non-U.S. holders. In the event that we do not constitute a domestically controlled qualified investment entity, a person’s sale of stock nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (1) the stock owned is of a class that is “regularly traded” as defined by applicable Treasury regulations, on an established securities market, and (2) the selling non-U.S. holder held 5% or less of our outstanding stock of that class at all times during a specified testing period. If we were to fail to so qualify as a domestically controlled qualified investment entity and our common stock were to fail to be “regularly traded,” gain realized by a foreign investor on a sale of our common stock would be subject to FIRPTA tax and applicable withholding. No assurance can be given that we will be a domestically controlled qualified investment entity. Additionally, any distributions we make to our non-U.S. stockholders that are attributable to gain from the sale of any USRPI will also generally be subject to FIRPTA tax and applicable withholdings, unless the recipient non-U.S. stockholder has not owned more than 5% of our common stock at any time during the year preceding the distribution.

Congress has introduced legislation that, if enacted, could cause our operating partnership to be taxable as a corporation for U.S. federal income tax purposes under the publicly traded partnership rules.

Congress has considered and the Obama administration has indicated its support for legislative proposals to treat all or part of certain income allocated to a partner by a partnership in respect of certain services provided to or for the benefit of the partnership (“carried interest revenue”) as ordinary income for U.S. federal income tax purposes. While more recent proposals would not adversely affect the character of the income for purposes of the REIT qualification tests, it is not clear what form any such final legislation would take. Additionally, while the more recent proposals purport to treat carried interest revenue as qualifying income of certain operating partnerships of publicly-traded REITs for purposes of the “qualifying income” exception to the publicly-traded partnership rules, our operating partnership may not qualify under this exception in the proposed legislation. As a result, the proposed legislation, if enacted, could cause our operating partnership to be taxable as a corporation for U.S. federal income tax purposes if it is a publicly-traded partnership and the amount of any such carried interest revenue plus any other non-qualifying income earned by our operating partnership exceeds 10% of its gross income in any taxable year.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

Geographic Distribution

The following table describes the geographic diversification of our consolidated properties as of December 31, 2012.

 

Markets

   Number
of
Buildings
     Percent
Owned  (1)
    Square
Feet
     Occupancy
Percentage  (2)
    Annualized
Base

Rent (3)
     Percent
of Total
Annualized
Base Rent
 
                  (in thousands)            (in thousands)         

CONSOLIDATED OPERATING PROPERTIES:

               

Atlanta

     37        100.0     5,909        89.1   $ 17,011        7.8

Baltimore/Washington D.C. (4)

     18        100.0     2,160        90.3     9,975        4.6

Central Pennsylvania

     9        100.0     1,553        85.6     5,386        2.5

Memphis

     8        100.0     3,712        77.4     7,981        3.7

Miami

     7        100.0     812        97.6     6,455        3.0

Nashville

     4        100.0     1,839        89.2     4,029        1.8

New Jersey

     12        100.0     1,619        92.3     8,429        3.9

Orlando

     20        100.0     1,864        83.6     5,872        2.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

East Segment Subtotal

     115        100.0     19,468        86.8     65,138        30.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Chicago (4)

     25        100.0     4,655        99.7     16,310        7.5

Cincinnati

     32        100.0     4,492        91.6     13,571        6.2

Columbus

     12        100.0     3,480        85.9     7,154        3.3

Dallas (4)

     47        100.0     5,294        91.8     14,950        6.8

Houston

     41        100.0     2,931        100.0     16,826        7.7

Indianapolis

     7        100.0     2,299        97.5     7,595        3.5

Louisville

     4        100.0     1,330        99.3     4,205        1.9

Mexico

     15        100.0     1,653        98.5     7,031        3.2

San Antonio

     13        100.0     1,176        97.3     3,791        1.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Central Segment Subtotal

     196        100.0     27,310        94.7     91,433        41.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Denver

     2        100.0     278        100.0     891        0.4

Northern California

     26        100.0     3,121        98.1     17,201         7.9

Phoenix

     14        100.0     1,717        91.6     5,123        2.3

Seattle

     10        100.0     1,534        100.0     6,952        3.2

Southern California

     36        91.0     4,704        99.7     26,968         12.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

West Segment Subtotal

     88        96.3     11,354        98.1     57,135        26.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—operating properties

     399        99.3     58,132        92.7     213,706        97.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

REDEVELOPMENT PROPERTIES:

               

Chicago

     1        100.0     105        0.0             0.0

New Jersey

     1        100.0     107        0.0             0.0

Phoenix

     1        100.0     76        0.0             0.0

Seattle

     1        100.0     26        0.0             0.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—redevelopment properties

     4        100.0     314        0.0             0.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

DEVELOPMENT PROPERTIES:

               

Chicago

     1        100.0     604        0.0             0.0

Baltimore/Washington D.C.

     1        100.0     76        0.0             0.0

Houston

     1        100.0     267        0.0             0.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—development properties

     3        100.0     947        0.0             0.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

HELD FOR SALE PROPERTIES:

               

Memphis

     2        100.0     1,439        81.3     3,499        1.6

Atlanta

     1        100.0     578        76.2     1,034        0.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—held for sale properties

     3        100.0     2,017        79.8     4,533        2.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—consolidated properties

     409        99.3     61,410        90.4   $ 218,239        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

(See footnote definitions on next page)

 

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  (1) 

Percent owned is based on ownership weighted by square footage.

  (2) 

Based on leases commenced as of December 31, 2012.

  (3) 

Annualized Base Rent is calculated as monthly contractual base rent (cash basis) per the terms of the lease, as of December 31, 2012, multiplied by 12.

  (4) 

Three of our buildings in Dallas, one building in Baltimore/Washington DC and one building in Chicago, together totaling approximately 1.4 million square feet, are subject to ground leases.

The following table describes the geographic diversification of our investments in unconsolidated properties as of December 31, 2012.

 

Markets

   Number
of
Buildings
     Percent
Owned
 (1)
    Square
Feet
     Occupancy
Percentage
 (2)
    Annualized
Base Rent
 (3)
     Percent
of Total
Annualized
Base Rent
 
                  (in thousands)            (in thousands)         

UNCONSOLIDATED OPERATING PROPERTIES:

               

IDI (Chicago, Nashville, Savannah)

     3         50.0     1,423         44.8   $ 1,533        3.8

Southern California Logistics Airport (4)

     6         50.0     2,160         98.1     6,915        16.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—unconsolidated operating properties

     9         50.0     3,583         76.9     8,448        20.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

OPERATING PROPERTIES IN CO-INVESTMENT VENTURES:

               

Atlanta

     2         3.6     616        100.0     2,128        5.2

Central Pennsylvania

     3         7.1     1,110        51.0     2,244        5.5

Charlotte

     1         3.6     472        100.0     1,604        3.9

Chicago

     3         17.5     1,222        74.8     3,525        8.6

Cincinnati

     3         13.6     892        97.3     2,833        6.9

Columbus

     2         5.7     451        100.0     1,326        3.2

Dallas

     3         15.3     1,186        62.7     2,525        6.2

Denver

     5         20.0     772        95.9     3,481        8.5

Indianapolis

     1         11.4     475        96.2     1,788        4.4

Louisville

     4         10.0     736        100.0     2,196        5.4

Minneapolis

     3         3.6     472        50.7     1,404        3.4

Nashville

     2         20.0     1,020        100.0     2,671        6.5

New Jersey

     1         3.6     129        93.8     369        0.9

Northern California

     1         3.6     396        100.0     1,188        2.9

Orlando

     2         20.0     696        100.0     3,168        7.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—
co-investment operating properties

     36         12.4     10,645        84.9     32,450        79.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total/weighted average—unconsolidated properties

     45         21.9     14,228         82.9   $ 40,898        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

  (1) 

Percentage owned is based on ownership weighted by square footage, if applicable.

  (2) 

Based on leases commenced as of December 31, 2012.

  (3) 

Annualized Base Rent is calculated as monthly contractual base rent (cash basis) per the terms of the lease, as of December 31, 2012, multiplied by 12.

  (4) 

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.

 

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Table of Contents

Leasing Activity

The following table provides a summary of our leasing activity for the year ended December 31, 2012.

 

     Number
of
Leases
Signed
     Square Feet
Signed (1)
     Net Effective
Rent Per
Square Foot (2)
     GAAP
Basis
Rent
Growth  (3)
    Weighted
Average
Lease
Term (4)
     Turnover Costs
Per Square
Foot (5)
     Weighted
Average
Retention  (6)
 
            (in thousands)                                    

Year to date 2012

     305         15,492       $ 3.81        4.6     56       $ 1.83        73.4

 

  (1) 

Does not include month to month leases.

  (2) 

Net effective rent is the average base rent calculated in accordance with GAAP, over the term of the lease.

  (3) 

GAAP basis rent growth is a ratio of the change in monthly Net Effective Rent (on a GAAP basis, including straight-line rent adjustments as required by GAAP) compared to the Net Effective Rent (on a GAAP basis) of the comparable lease. New leases where there were no prior comparable leases, due to extended downtime or materially different lease structures, are excluded.

  (4) 

The lease term is in months. Assumes no exercise of lease renewal options, if any.

  (5) 

Turnover costs are comprised of the costs incurred or capitalized for improvements of vacant and renewal spaces, as well as the commissions paid and costs capitalized for leasing transactions. Turnover costs per square foot represent the total turnover costs expected to be incurred on the leases signed during the period and does not reflect actual expenditures for the period.

  (6) 

Represents the weighted average square feet of customers renewing their respective leases.

During the year ended December 31, 2012, we signed 143 leases with free rent, which were for 7.4 million square feet of property with total concessions of $8.0 million.

Lease Expirations

Our industrial properties are typically leased to customers for terms ranging from 3 to 10 years with a weighted average remaining term of approximately 3.0 years as of December 31, 2012. Following is a schedule of expiring leases for our consolidated properties by square feet and by annualized minimum base rent as of December 31, 2012, assuming no exercise of lease renewal options.

 

Year

   Number of
leases expiring
     Square Feet
Related to
Expiring
Leases
     Percentage
of Total
Square Feet
    Annualized
Base Rent
of Expiring
Leases
(1)
     Percentage
of Total
Annualized
Base Rent
 
            (in thousands)            (in thousands)         

2013 (2)

     241         8,136        14.7   $ 37,139        15.1

2014

     195         9,923        17.9     40,284        16.4

2015

     162         9,004        16.2     36,681        14.9

2016

     152         8,292        14.9     37,080        15.1

2017

     134         7,938        14.3     32,798        13.3

Thereafter

     155         12,231        22.0     62,183        25.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     1,039        55,524        100.0   $ 246,165        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Vacant or leased but not occupied

        5,886          
     

 

 

         

Total consolidated properties

        61,410          
     

 

 

         

 

  (1) 

Includes contractual rent changes.

  (2) 

Includes leases that are on month-to-month terms.

 

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Table of Contents

Customer Diversification

As of December 31, 2012, there were no customers that occupied more than 1.6% of our properties based on annualized base rent. The following table reflects our ten largest customers, based on annualized base rent as of December 31, 2012. These ten customers occupy a combined 5.3 million square feet or 8.6% of our consolidated properties.

 

Customer

   Percentage of
Annualized
Base Rent
 

Deutsche Post World Net (DHL & Excel)

     1.6

United Parcel Service (UPS)

     1.2

The Glidden Company

     1.2

YRC, LLC

     1.1

Schenker, Inc.

     1.1

Crayola LLC

     1.1

Iron Mountain

     1.0

CEVA Logistics

     0.9

United Stationers Supply Company

     0.9

The Dial Corporation

     0.8
  

 

 

 

Total

     10.9
  

 

 

 

Although base rent is supported by long-term lease contracts, customers who file bankruptcy have the legal right to reject any or all of their leases. In the event that a customer with a significant number of leases in our properties files bankruptcy and cancels its leases, we could experience a reduction in our revenues and an increase in allowance for doubtful accounts receivable.

Reports have indicated that the parent company, YRC Worldwide, Inc., of one of our top ten customers, has encountered financial difficulties and therefore has the potential to file for bankruptcy. Their subsidiary, YRC, LLC currently leases three truck terminals in infill locations of Los Angeles. As of December 31, 2012, included in our intangible lease liability was $13.4 million, net of accumulated amortization, related to YRC, LLC. YRC, LLC has paid all rents due and has no balances outstanding through December 31, 2012.

We continuously monitor the financial condition of our customers. We communicate often with those customers who have been late on payments or filed bankruptcy. We are not currently aware of the pending bankruptcy of any other customers beyond those described above that would individually cause a material reduction in our revenues, and no customer represents more than 5% of our annual base rent.

 

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Table of Contents

Industry Diversification

The table below illustrates the diversification of our consolidated portfolio by the industry classification of our customers based upon their NAICS code as of December 31, 2012, (dollar amounts in thousands).

 

     Number
of
Leases
     Annualized
Base Rent
     Percentage
of Total
Annualized
Base Rent
    Occupied
Square Feet
(in thousands)
     Percentage
of Total
Occupied
Square Feet
 

Manufacturing

     277       $ 67,104         30.7     17,136         30.9

Wholesale Trade

     252         49,493         22.7     13,058         23.5

Transportation and Warehousing

     151         37,310         17.1     9,964         17.9

Retail Trade

     95         21,088         9.6     5,943         10.7

Administrative Support and Waste Management Services

     59         9,938         4.6     1,711         3.1

Professional, Scientific and Technical Services

     51         8,526         3.9     2,599         4.7

Media and Information

     21         4,981         2.3     976         1.8

Rental Companies

     17         3,875         1.8     1004         1.8

Health Care and Social Assistance

     13         3,846         1.8     622         1.1

Other

     103         12,078         5.5     2,511         4.5
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     1,039       $ 218,239         100.0     55,524         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Indebtedness

As of December 31, 2012, 72 of our 409 consolidated properties, with a combined gross book value of $719.0 million were encumbered by mortgage indebtedness totaling $308.7 million (excluding net premiums). See “Notes to Consolidated Financial Statements, Note 5—Outstanding Indebtedness” and the accompanying Schedule III beginning on page F-45 for additional information.

 

ITEM 3. LEGAL PROCEEDINGS

We are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which may be covered by liability insurance, and none of which we expect to have a material adverse effect on our consolidated financial condition or results of operations.

 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

 

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Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is listed on the New York Stock Exchange, or the NYSE, under the symbol “DCT”. The following table illustrates the high and low sales prices during periods presented.

 

Quarter ended in 2012:

   High      Low  

December 31

   $ 6.61       $ 5.98   

September 30

   $ 6.89       $ 5.92   

June 30

   $ 6.39       $ 5.50   

March 31

   $ 5.93       $ 4.96   

Quarter ended in 2011:

   High      Low  

December 31

   $ 5.22       $ 3.88   

September 30

   $ 5.61       $ 3.96   

June 30

   $ 5.89       $ 4.88   

March 31

   $ 5.89       $ 5.02   

On February 15, 2013 the closing price of our Common Stock was $7.32 per share, as reported on the NYSE and there were 280,952,517 shares of Common Stock outstanding, held by approximately 2,309 stockholders of record. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.

Distribution Policy

We intend to continue to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes. U.S. federal income tax law requires that a REIT distribute with respect to each year at least 90% of its annual REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will not be required to make distributions with respect to income derived from the activities conducted through our taxable REIT subsidiaries that is not distributed to us. To the extent our taxable REIT subsidiaries’ income is not distributed and is instead reinvested in the operations of these entities, the value of our equity interest in our taxable REIT subsidiaries will increase. The aggregate value of the securities that we hold in our taxable REIT subsidiaries may not exceed 25% of the total value of our gross assets. Distributions from our taxable REIT subsidiaries to us will qualify for the 95% gross income test but will not qualify for the 75% gross income test.

To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of our taxable net income to holders of our Common Stock out of legally available assets. Any future distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, maintenance of REIT qualification, applicable provisions of the MGCL and such other factors as our board of directors deems relevant.

We anticipate that, for U.S. federal income tax purposes, distributions (including certain part cash, part stock distributions) generally will be taxable to our stockholders as ordinary income, although some portion of our distributions may constitute qualified dividend income, capital gains or a return of capital.

 

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Table of Contents

The following table sets forth the distributions that have been declared by our board of directors on our Common Stock during the fiscal years ended December 31, 2012 and 2011.

 

Amount Declared During Quarter Ended in 2012:

   Per Share      Date Paid  

December 31,

   $ 0.07         January 10, 2013   

September 30,

     0.07         October 17, 2012   

June 30,

     0.07         July 18, 2012   

March 31,

     0.07         April 18, 2012   
  

 

 

    

Total 2012

   $ 0.28      
  

 

 

    

 

Amount Declared During Quarter Ended in 2011:

   Per Share      Date Paid  

December 31,

   $ 0.07         January 12, 2012   

September 30,

     0.07         October 18, 2011   

June 30,

     0.07         July 19, 2011   

March 31,

     0.07         April 19, 2011   
  

 

 

    

Total 2011

   $ 0.28      
  

 

 

    

 

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Table of Contents

Performance Graph

The graph below shows a comparison of cumulative total stockholder returns for DCT Industrial Trust Inc. Common Stock with the cumulative total return on the Standard and Poor’s 500 Index, the MSCI US REIT Index, and the FTSE NAREIT Equity Industrial Index. The MSCI US REIT Index represents performance of publicly traded REITs while the FTSE NAREIT Equity Industrial Index represents only the performance of our publicly traded industrial REIT peers. Stockholders’ returns over the indicated period are based on historical data and should not be considered indicative of future stockholder returns.

 

LOGO

 

    December 31,
2007
    December 31,
2008
    December 31,
2009
    December 31,
2010
    December 31,
2011
    December 31,
2012
 

DCT Industrial Trust Inc.

  $ 100.00      $ 58.54      $ 62.19      $ 69.64      $ 70.98      $ 94.07   

S&P 500®

  $ 100.00      $ 63.00      $ 79.68      $ 91.68      $ 93.61      $ 108.59   

MSCI US REIT Index

  $ 100.00      $ 62.03      $ 79.78      $ 102.50      $ 111.41      $ 131.20   

FTSE NAREIT Equity Industrial Index

  $ 100.00      $ 32.53      $ 36.49      $ 43.39      $ 41.15      $ 54.02   

 

  Note: The graph covers the period from December 31, 2007 to December 31, 2012 and assumes that $100 was invested in DCT Industrial Trust Inc. Common Stock and in each index on December 31, 2007 and that all dividends were reinvested.

 

33


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data relating to our historical financial condition and results of operations for the years ended December 31, 2012, 2011, 2010, 2009 and 2008. Certain amounts presented for the periods ended December 31, 2011, 2010, 2009 and 2008 have been reclassified to conform to the 2012 presentation. The financial data in the table should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data.”

 

    For the Years Ended December 31,  
    2012     2011     2010     2009     2008  
    (amounts in thousands, except per share data and building count)  

Operating Data:

         

Rental revenues

  $ 256,720     $ 231,463     $ 208,716     $ 210,924     $ 213,514  

Total revenues

  $ 260,779     $ 235,754     $ 212,849     $ 213,625     $ 216,437  

Rental expenses and real estate taxes

  $ (70,826   $ (65,670   $ (62,618   $ (59,907   $ (57,410

Property net operating income (5)

  $ 185,894      $ 165,793      $ 146,098      $ 151,017      $ 156,104   

Total operating expenses

  $ (215,383   $ (205,032   $ (192,396   $ (184,373   $ (178,887

Loss from continuing operations

  $ (22,909   $ (37,886   $ (39,947   $ (30,218   $ (20,639

Income (loss) from discontinued operations

  $ 6,169     $ 9,043     $ (3,119   $ 8,504     $ 36,953  

Gain on dispositions of real estate interests

  $      $      $ 13     $ 5     $ 504  

Net income (loss) attributable to common stockholders

  $ (15,086   $ (25,250   $ (37,830   $ (18,585   $ 9,486  

Earnings per Common Share—Basic and Diluted:

         

Income (loss) from continuing operations

  $ (0.08   $ (0.14   $ (0.17   $ (0.14   $ (0.13

Income (loss) from discontinued operations

    0.02       0.03       (0.01     0.04       0.18  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (0.06   $ (0.11   $ (0.18   $ (0.10   $ 0.05  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

    254,831       242,591       212,412       192,900       171,695  

Amounts Attributable to Common Stockholders:

         

Income (loss) from continuing operations (1)

  $ (20,737   $ (33,440   $ (35,057   $ (25,991   $ (22,090

Income (loss) from discontinued operations

    5,651       8,190       (2,773     7,406       31,576  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

    (15,086     (25,250     (37,830     (18,585     9,486  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributed and undistributed earnings allocated to participating securities

    (524     (443     (480     (436     (651
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ (15,610   $ (25,693   $ (38,310   $ (19,021   $ 8,835   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common Share Distributions:

         

Common share cash distributions, declared

  $ 73,200     $ 68,789     $ 60,110     $ 59,364     $ 96,223  

Common share cash distributions, declared per share

  $ 0.28     $ 0.28     $ 0.28     $ 0.30     $ 0.56  

Other Data:

         

Consolidated operating square feet

    58,132       58,099       56,652       52,910       51,209  

Consolidated operating buildings

    399       408       390       375       370  

Total consolidated buildings square feet

    61,410        58,255        57,777        56,847        55,960   

Total consolidated buildings

    409       409       398       394       391  

(See footnote definitions on page 36)

 

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Table of Contents
    For the Years Ended December 31,  
    2012     2011     2010     2009     2008  
    (amounts in thousands, except per share data and building count)  

Balance Sheet Data:

         

Net investment in real estate

  $ 2,910,613     $ 2,711,027     $ 2,647,186     $ 2,576,410     $ 2,605,909  

Total assets

  $ 3,057,199     $ 2,793,298     $ 2,719,889     $ 2,664,292     $ 2,703,843  

Senior unsecured notes

  $ 1,025,000     $ 935,000     $ 786,000     $ 625,000     $ 625,000  

Mortgage notes

  $ 317,314     $ 317,783     $ 425,359     $ 511,715     $ 574,634  

Total liabilities

  $ 1,583,640     $ 1,389,183     $ 1,319,051     $ 1,220,659     $ 1,302,343  

Cash Flow Data:

         

Net cash provided by operating activities

  $ 119,683     $ 106,966     $ 91,002     $ 109,749     $ 128,349  

Net cash used in investing activities

  $ (299,865   $ (178,307   $ (138,334   $ (17,673   $ (42,317

Net cash provided by (used in) financing activities

  $ 180,044     $ 66,845     $ 45,542     $ (92,637   $ (96,832

Funds From Operations: (2)

         

Net income (loss) attributable to common stockholders

  $ (15,086   $ (25,250   $ (37,830   $ (18,585   $ 9,486  

Adjustments:

         

Real estate related depreciation and amortization

    126,687       128,989       115,904       111,250       119,604  

Equity in (earnings) loss of unconsolidated joint ventures, net

    (1,087     2,556       2,986       (2,698     (2,267

Equity in FFO of unconsolidated joint ventures

    10,312       4,732       4,001       11,807       6,806  

Loss on business combinations

                  395       10,325         

Impairment losses on depreciable real estate

    11,422       10,160       8,012       681       6,014  

Gain on dispositions of real estate interests

    (13,383     (12,030     (2,091     (1,354     (21,991

Gain on dispositions of non-depreciable real estate

                  13       783       219  

Noncontrolling interest in the operating partnership’s share of the above adjustments

    (12,522     (14,252     (13,426     (17,907     (17,664

FFO attributable to unitholders

    9,743       9,901       8,678       14,881       19,795  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO attributable to common stockholders and unitholders—basic and diluted

    116,086       104,806       86,642       109,183       120,002  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments:

         

Impairment losses on non-depreciable real estate (3)

                  3,992       300       4,732  

Debt modification costs

                  1,136                

Acquisition costs (3)

    1,975       1,902       1,228                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO, as adjusted, attributable to common stockholders and unitholders, basic and diluted (2)::

  $ 118,061     $ 106,708     $ 92,998     $ 109,483     $ 124,734  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO per common share and unit—basic and diluted

  $ 0.41     $ 0.39     $ 0.36     $ 0.48     $ 0.58  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO as adjusted, per common share and unit—basic and diluted (2)(4)::

  $ 0.42     $ 0.40     $ 0.39     $ 0.49     $ 0.60  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO weighted average common shares and units outstanding:

         

Common shares

    254,831       242,591       212,412       192,900       171,695  

Participating securities

    1,896       1,601       1,689       1,535       1,106  

Units

    23,358       25,310       26,351       30,660       35,868  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO weighted average common shares, participating securities and units outstanding—basic:

    280,085       269,502       240,452       225,095       208,669  

Dilutive common stock equivalents

    623       449       357       189       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO weighted average common shares and units outstanding—diluted:

    280,708       269,951       240,809       225,284       208,672  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(See footnote definitions on page 36)

 

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Table of Contents

The following table is a reconciliation of our property net operating income, or NOI, to our reported “Loss From Continuing Operations” for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 (in thousands):

 

     For the Years Ended December 31,  
     2012     2011     2010     2009     2008  

Property NOI (5)

   $ 185,894      $ 165,793      $ 146,098      $ 151,017      $ 156,104   

Institutional capital management and other fees

     4,059        4,291        4,133        2,701        2,924   

Impairment losses

                   (4,100            (4,314

Real estate related depreciation and amortization

     (120,047     (113,470     (100,416     (95,242     (99,679

Casualty gains

     1,554        33                        

Development profits, net of tax

     307                               

General and administrative

     (26,064     (25,925     (25,262     (29,224     (21,799

Impairment losses on investments in unconsolidated joint ventures

            (1,953     (216     (300     (4,733

Loss on business combinations

                   (395     (10,325       

Equity in earnings (loss) of unconsolidated joint ventures, net

     1,087        (2,556     (2,986     2,698        2,267   

Interest expense

     (69,274     (63,645     (56,241     (52,022     (52,093

Interest and other income (expense)

     291        (310     356        1,916        1,258   

Income tax expense and other taxes

     (716     (144     (918     (1,437     (574
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

   $ (22,909   $ (37,886   $ (39,947   $ (30,218   $ (20,639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

Includes gain on dispositions of real estate interests

  (2) 

We believe that net income attributable to common stockholders, as defined by GAAP, is the most appropriate earnings measure. However, we consider funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), to be a useful supplemental non-GAAP measure of DCT Industrial’s operating performance. NAREIT developed FFO as a relative measure of performance of an equity REIT in order to recognize that the value of income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is generally defined as net income attributable to common stockholders, calculated in accordance with GAAP, plus real estate-related depreciation and amortization, less gains from dispositions of operating real estate held for investment purposes, plus impairment losses on depreciable real estate and impairments of in substance real estate investments in investees that are driven by measureable decreases in the fair value of the depreciable real estate held by the unconsolidated joint ventures and adjustments to derive our pro rata share of FFO of unconsolidated joint ventures. We exclude gains and losses on business combinations and include the gains or losses from dispositions of properties which were acquired or developed with the intention to sell or contribute to an investment fund in our definition of FFO. Although the NAREIT definition of FFO predates the guidance for accounting for gains and losses on business combinations, we believe that excluding such gains and losses is consistent with the key objective of FFO as a performance measure. We also present FFO excluding acquisition costs, debt modification costs and impairment losses on properties which are not depreciable. We believe that FFO excluding acquisition costs, debt modification costs and impairment losses on non-depreciable real estate is useful supplemental information regarding our operating performance as it provides a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our operating results. Readers should note that FFO captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. NAREIT’s definition of FFO is subject to interpretation, and modifications to the NAREIT definition of FFO are common. Accordingly, our FFO may not be comparable to other REITs’ FFO and FFO should be considered only as a supplement to net income as a measure of our performance.

 

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  (3) 

Excluding amounts attributable to noncontrolling interests.

  (4) 

Under NAREIT’s definition of FFO, impairment write-downs of depreciable real estate should be excluded in calculating NAREIT FFO. In addition, impairments of in substance real estate investments in investees that are driven by measureable decreases in the fair value of the depreciable real estate held by the unconsolidated joint ventures should be excluded in determining NAREIT FFO.

  (5) 

Property net operating income, or property NOI, is defined as rental revenues, including reimbursements, less rental expenses and real estate taxes, which excludes depreciation, amortization, impairment, casualty gains, general and administrative expenses, loss on business combinations and interest expense. We consider property NOI to be an appropriate supplemental performance measure because property NOI reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the property such as depreciation, amortization, impairment, general and administrative expenses, interest income and interest expense. However, property NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially impact our results of operations. Further, our property NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating property NOI. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of results of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

DCT Industrial Trust Inc. is a leading industrial real estate company that owns, operates and develops high-quality bulk distribution and light industrial properties in high-volume distribution markets in the U.S. and Mexico. DCT is the sole general partner of, and as of December 31, 2012 owned an approximate 93.3% ownership interest in DCT Industrial Operating Partnership L.P., a Delaware limited partnership.

Our primary business objectives are to maximize long-term growth in Funds From Operations, or FFO, as defined on page 38, the net asset value of our portfolio and total shareholder returns. In our pursuit of these long-term objectives, we seek to:

 

   

maximize cash flows from existing properties;

 

   

deploy capital into high quality acquisitions and development opportunities which meet our asset location and financial criteria; and

 

   

recycle capital by selling assets that no longer fit our investment criteria and reinvesting the proceeds into higher growth opportunities.

Outlook

We seek to maximize long-term earnings growth and value within the context of overall economic conditions, primarily through increasing rents and operating income at existing properties and acquiring and developing high-quality properties in major distribution markets.

Fundamentals for industrial real estate continue to modestly improve in response to general improvement in the economy. According to national statistics, net absorption (the net change in total occupied space) of industrial real estate turned positive in the second quarter of 2010 and national occupancy rates have increased each quarter since then. We expect moderate economic growth to continue throughout 2013, which should result in continued positive demand for warehouse space as companies expand their distribution and production platforms. Rental rates in our markets appeared to have bottomed and in a number of markets have begun to increase, although they do generally remain below peak levels. Rental concessions, such as free rent, have also begun to decline in most markets. Consistent with recent experience and based on current market conditions, we expect average net effective rental rates on new leases signed in 2013 to be slightly higher than the rates on expiring leases. As positive net absorption of warehouse space continues, we expect the rental rate environment to continue to improve. According to a national research company, average market rental rates nationally are expected to continue to increase moderately in 2013 as vacancy rates drop below 10% of available supply.

New development has begun to increase modestly in certain markets where fundamentals have improved more rapidly, however construction levels are still very modest in absolute terms and well below peak levels and we expect they will remain so until rental rates, other leasing fundamentals and the availability of financing improve sufficiently to justify new construction on a larger scale. With limited new supply in the near term, we expect that the operating environment will become increasingly favorable for landlords with meaningful improvement of rental and occupancy rates.

For DCT Industrial, we expect same store net operating income to be higher in 2013 than it was in 2012, primarily as a result of higher occupancy in 2013, which is expected to be somewhat offset by the impact of declining rental rates on leases signed in 2012 compared to expiring leases, most of which were signed prior to the market downturn.

 

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In terms of capital investment, we will continue to pursue acquisitions of well-located distribution facilities at prices where we can apply our leasing experience and market knowledge to generate attractive returns. Going forward, we will pursue the acquisition of buildings and land and consider selective development of new buildings in markets where we perceive demand and market rental rates will provide attractive financial returns.

We anticipate having sufficient liquidity to fund our operating expenses, including costs to maintain our properties and distributions, though we may finance investments, including acquisitions and developments, with the issuance of new shares, proceeds from asset sales or through additional borrowings. Please see “Liquidity and Capital Resources” for additional discussion.

Inflation

Although the U.S. economy has recently experienced a slight decrease in inflation rates, and a wide variety of industries and sectors are affected differently by changing commodity prices, inflation has not had a significant impact on us in our markets. Most of our leases require the customers to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. In addition, most of our leases expire within five years which enables us to replace existing leases with new leases at then-existing market rates.

Summary of Significant Transactions

Significant transactions for the year ended December 31, 2012

 

   

Acquisitions

 

   

During the year ended December 31, 2012, we acquired 32 buildings totaling approximately 6.2 million square feet. These properties were acquired for a total purchase price of $338.4 million, excluding our existing ownership of 20% in the six properties previously held by DCT Fund I (see “Notes to the Consolidated Financial Statements, Note 4—Investments in and Advances to Unconsolidated Joint Ventures” for further detail related to the buyout of our joint venture partner’s interest).

 

   

During the year ended December 31, 2012, we acquired seven land parcels for future development which total approximately 216.4 acres located in the Chicago, Southern California, Seattle, Atlanta and Houston markets and one shell complete building totaling approximately 0.3 million square feet located in Houston. The land parcels and shell complete building were acquired from unrelated third-parties for a total purchase price of $72.1 million.

 

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Development Activities

During 2012, we continued to expand our development activities. The table below represents a summary of our consolidated development activity as of December 31, 2012.

 

Project

  Market         Acres     Number
of
Buildings
    Square Feet     Percent
Owned
    Costs
Incurred
through
12/31/12
    Total
Projected
Investment
    Completion
Date
    Percentage
Leased
 
                          (in thousands)           (in thousands)     (in thousands)              

Consolidated Development Activities:

                   

Stabilized Developments

                   

Dulles Summit Distribution Building C

 

 

 
 

 

Baltimore/
Wash D.C.

 

  
  

                 
        7        1        103        100   $ 8,414     $ 9,527       Q3-2012  (1)      100
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    Total          7        1        103       100     8,414       9,527         100
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

In Lease Up

                   

Northwest 8 Distribution Center

    Houston          16        1        267        100     11,785       13,238       Q3-2012  (2)      100

Dulles Summit Distribution Building E

 

 

 
 

 

Baltimore/
Wash D.C

 

  
  

                 
        6        1        76        100     6,409       7,123       Q3-2012  (2)      100

DCT 55

    Chicago          33        1        604        100     23,392       27,917       Q4-2012  (2)      0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    Total          55        3        947       100     41,586       48,278         36
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Under Construction

                   

DCT Commerce Center at Pan American West (Building A)

    Miami          7        1        167        100     13,251       14,354       Q1-2013  (2)      90

DCT Commerce Center at Pan American West (Building B)

    Miami          7        1        167       100     7,771       13,001       Q2-2013  (2)      74

Slover Logistics Center I

 

 

So. California

  

                 
        28        1        652       100     16,291       36,725       Q2-2013  (2)      100
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    Total          42        3        986       100     37,313       64,080         94
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total Development Activities

  

      104       7       2,036       100   $ 87,313     $ 121,885         67
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

  (1) 

This is the projected stabilization date.

  (2) 

The completion date represents the date of building shell-completion.

As of December 31, 2012, we also had two build-to-suit under contract for sale projects underway. During the year ended December 31, 2012, we recognized development profits, net of tax of approximately $0.3 million related to the development of one 61,000 square foot project which is under contract to be sold to a third-party for a total of $8.0 million. The other project was under contract, but as development activities recently commenced, no profit was earned and recognized.

 

   

Dispositions

 

   

During the year ended December 31, 2012, we sold 36 operating properties, totaling approximately 4.1 million square feet, to third-parties for gross proceeds of approximately $155.0 million. We recognized gains of approximately $13.4 million on the disposition of 23 operating properties and recognized an impairment loss of approximately $11.4 million on the disposition of a portfolio of 13 properties in Atlanta.

 

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Significant Activity with Joint Ventures

 

   

At the end of December 2012, we obtained a controlling interest in DCT Fund I, LLC in connection with the wind down of activities with our joint venture partner that resulted in dissolution of the joint venture and acquisition of our joint venture partner’s 80% interest in the real estate. In connection with the acquisition, our consideration totaled $97.5 million comprised of the repayment of all the ventures underlying debt, assumption of the net liabilities of the venture and a payment to our joint venture partner. The transaction was accounted for as a business combination, and as the fair value of the assets acquired was equivalent to the total consideration paid, our investment in basis and the net liabilities assumed, no gain or loss was recognized.

 

   

Debt Activity

 

   

In September 2012, we issued $90.0 million of fixed rate, senior unsecured notes through a private placement offering. These senior unsecured notes mature in September 2022 and have a fixed interest rate of 4.21%. The notes require semi-annual interest payments.

 

   

During the year ended December 31, 2012, we retired mortgage notes totaling approximately $64.7 million previously scheduled to mature in September 2012, October 2012, November 2012, January 2013 and January 2015, using proceeds from the our senior unsecured revolving credit facility and with proceeds from our equity offerings.

 

   

During the year ended December 31, 2012, we assumed four mortgage notes with outstanding balances totaling $67.1 million in connection with property acquisitions. The assumed notes bear interest at rates ranging from 5.77% to 6.25% and require monthly payments of principal and interest. The notes mature at various dates from February 2016 to July 2020. We recorded approximately $5.8 million of premiums in connection with the assumption of these notes.

 

   

On February 20, 2013, we entered into an amendment with our syndicated bank group whereby we extended and increased our existing $175.0 million senior unsecured term loan to $225.0 million for a period of 5 years, extended our existing $300.0 million senior unsecured line of credit for a period of 4 years and received a commitment for an additional $175.0 million senior unsecured term loan with a term of 2 years. We intend to borrow on this additional term loan to refinance near term scheduled maturities.

 

   

Equity activity

 

   

On September 12, 2012, we issued approximately 19.0 million shares of common stock in a public offering at a price of $6.20 per share for net proceeds of $112.6 million before offering expenses used for acquisitions and other general corporate purposes.

 

   

On November 20, 2012, we registered a second “continuous equity” offering program, to replace our continuous equity offering program previously registered on March 23, 2010. Pursuant to this offering, we may sell up to 20 million shares of common stock from time-to-time through November 20, 2015 in “at-the-market” offerings or certain other transactions. We intend to use the proceeds from any sale of shares for general corporate purposes, which may include funding acquisitions and repaying debt. During the year ended December 31, 2012, we issued approximately 9.5 million shares through this offering, at an average price of $6.33 per share before expenses, for net proceeds of $59.2 million before offering expenses. As of December 31, 2012, 10.5 million shares remain available to be issued under this program.

Critical Accounting Estimates

General

Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments

 

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that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following discussion pertains to accounting policies management believes are most critical to the portrayal of our financial condition and results of operations that require management’s most difficult, subjective or complex estimates.

Revenue Recognition

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 customer occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, we record receivables from customers that we expect to collect over the remaining lease term, which are recorded as a straight-line rent receivable. When we acquire a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation.

Tenant recovery income includes payments and amounts due from customers pursuant to their leases for real estate taxes, insurance and other recoverable property operating expenses and is recognized as “Rental revenues” during the same period the related expenses are incurred.

We maintain an allowance for estimated losses that may result from the inability of our customers to make required payments. This estimate requires significant judgment related to the lessees ability to fulfill their obligations under the leases. If a customer is insolvent or files for bankruptcy protection and fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances, which include amounts recognized as straight-line revenue not realizable until future periods.

In connection with property acquisitions qualifying as 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. 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 over the shorter of the expected life of such assets and liabilities or the remaining lease term.

Capitalization of Costs

We capitalize costs directly related to the development, predevelopment, redevelopment or improvement of our investment in real estate, referred to as capital projects and other activities included within this paragraph. Costs associated with our capital projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and insurance, if appropriate. We capitalize indirect costs such as personnel, office, and administrative expenses that are directly related to our development projects based on an estimate of the time spent on the construction and development activities. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. We determine when the capitalization period begins and ends through communication with project and other managers responsible for the tracking and oversight of individual projects. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. In addition, we capitalize initial direct costs incurred for successful origination of new leases. Costs incurred for maintaining and repairing our properties, which do not extend their useful lives, are expensed as incurred.

 

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Interest is capitalized based on actual capital expenditures from the period when development or redevelopment commences until the asset is ready for its intended use, at the weighted average borrowing rates in effect during the period. We also capitalize interest on our qualifying investments in unconsolidated joint ventures based on the average capital invested in a venture during the period when the venture has activities in progress necessary to commence its planned principle operations, at our weighted average borrowing rate during the period. A “qualifying investment” is an investment in an unconsolidated joint venture provided that our investee’s activities include the use of funds to acquire qualifying assets, such as development or predevelopment activities, and planned principle operations have not commenced.

Fair Value

Fair value is defined as the exit price or price at which an asset (in its highest and best use) would be sold or liability assumed by an informed market participant in a transaction that is not distressed and is executed in the most advantageous market. Our fair value measurement is determined based on the assumptions that market participants would use to price the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy was established that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). See “Notes to the Consolidated Financial Statements—Note 2, Summary of Significant Accounting Policies” for further details of our accounting policy as it relates to the fair value hierarchy.

Investment in Properties

We record the assets, liabilities and noncontrolling interests associated with property acquisitions which qualify as business combinations at their respective acquisition-date fair values which are derived using a market, income or replacement cost approach, or a combination thereof. Acquisition-related costs associated with business combinations are expensed as incurred. As defined by GAAP, a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. We generally do not consider acquisitions of land or unoccupied buildings to be business combinations. Rather, these transactions are treated as asset acquisitions and recorded at cost.

The fair value of identifiable tangible assets such as land, building, building and land improvements and tenant improvements is determined on an “as-if-vacant” basis which requires significant judgment by management. Management considers estimates such as the replacement cost of such assets, appraisals, property condition reports, comparable market rental data and other related information in determining the fair value of the tangible assets. The recorded fair value of intangible lease assets or liabilities includes the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property and lease commencement. An intangible asset or liability resulting from in-place leases that are above or below the market rental rates are valued based upon managements estimates of prevailing market rates for similar leases. Intangible lease assets or liabilities are amortized over the estimated, reasonably assured lease term of the remaining in-place leases as an adjustment to “Rental revenues” or “Real estate related depreciation and amortization” depending on the nature of the intangible. The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “Interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.

We have certain properties which we have acquired or removed from service with the intention to redevelop the property. Buildings under redevelopment require significant construction activities prior to being placed back into service. We generally do not depreciate properties classified as redevelopment until the date that the redevelopment properties are ready for their intended use.

 

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Real estate, including land, building, building and land improvements, and tenant improvements, leasehold improvements, leasing costs and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate a change in the useful life, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.

Impairment of Properties

Investments in properties classified as held for use are carried at cost and evaluated for impairment at least annually and when events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. As we selectively dispose of non-strategic assets and redeploy the proceeds into higher growth assets, our intended hold period may change due to our intention to sell or otherwise dispose of an asset. As a result, we would reevaluate whether that asset is impaired. Depending on the carrying value of the property at that time and the amount that we estimate we would receive on disposal, we may record an impairment loss. Other indicators include the point at which we deem a building to be held for sale or when a building remains vacant significantly longer than expected.

For investments in properties that we intend to hold long-term, the recoverability is based on the estimated future undiscounted cash flows. If the asset carrying value is not recoverable on an undiscounted cash flow basis, the amount of impairment is measured as the difference between the carrying value and the fair value of the asset and is reflected in “Impairment losses” on the Consolidated Statements of Operations. The determination of fair value of real estate assets to be held for use is derived using the discounted cash flow method and involves a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate. Such assumptions are management’s estimates and include, but are not limited to, projected vacancy rates, rental rates, property operating expenses and capital expenditures. The capitalization rate is also a significant driving factor in determining the property valuation and requires management’s judgment of factors such as market knowledge, market supply and demand factors, historical experience, lease terms, customer’s financial strength, economy, demographics, environment, property location, visibility, age, physical condition and expected return requirements, among other things. The aforementioned factors are taken as a whole by management in determining the valuation of investment property. The valuation is sensitive to the actual results of many of these uncertain factors, either individually or taken as a whole. Should the actual results differ from management’s estimates, the valuation could be negatively affected and may result in additional impairments recorded in the Consolidated Financial Statements.

Investments in properties classified as held for sale are measured at the lower of their carrying amount or fair value (typically, the contracted sales price) less costs to sell. Impairment of assets held for sale is a component of “Income (loss) from discontinued operations” in the Consolidated Statements of Operations and is further detailed in “Notes to Consolidated Financial Statements Note 15—Discontinued Operations and Assets Held for Sale.”

Impairment of Investments in and Advances to Unconsolidated Joint Ventures

We evaluate our investments in unconsolidated entities for impairment whenever events or changes in circumstances indicate that there may be an other-than-temporary decline in value. To do so, we calculate the estimated fair value of the investment using a market, income or replacement cost approach, or combination thereof. The amount of impairment recognized, if any, would be the excess of the investment’s carrying amount over its estimated fair value. We consider various factors to determine if a decline in the value of the investment is other-than-temporary, which include but are not limited to, the age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, expected term of the investment and the relationships with the other joint venture partners and its lenders. If we believe that the decline in the fair value is temporary, no impairment is recorded. The aforementioned factors are taken as a

 

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whole by management in determining the valuation of our investment property. Should the actual results differ from management’s estimates, the valuation could be negatively affected and may result in additional impairments in the Consolidated Financial Statements.

Results of Operations

Summary of the year ended December 31, 2012 compared to the year ended December 31, 2011

As of December 31, 2012, the Company owned interests in, managed or had under development approximately 75.6 million square feet of properties leased to approximately 870 customers, including 14.2 million square feet of unconsolidated properties on behalf of four institutional capital management joint venture partners and we consolidated 399 operating properties, four redevelopment properties, three development properties and three properties which were held for sale. As of December 31, 2011, we consolidated 408 operating properties and one redevelopment property.

 

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Comparison of the year ended December 31, 2012 to the year ended December 31, 2011

The following table illustrates the changes in rental revenues, rental expenses and real estate taxes, property net operating income, other revenue and other income (loss) and other expenses for the year ended December 31, 2012 compared to the year ended December 31, 2011. Our same store portfolio includes all operating properties that we owned for the entirety of both the current and prior year reporting periods for which the operations had been stabilized. Non-same store operating properties include properties not meeting the same-store criteria and exclude development and redevelopment properties. The same store portfolio for the periods presented totaled 337 operating properties and was comprised of 49.5 million square feet. A discussion of these changes follows the table (in thousands).

 

     Year Ended
December 31,
    $ Change     Percent
Change
 
     2012     2011      

Rental Revenues

        

Same store, excluding revenues related to early lease terminations

   $ 223,611      $ 218,950      $ 4,661        2.1

Non-same store operating properties

     32,370        11,664        20,706        177.5

Development and redevelopment

     185        235        (50     -21.3

Revenues related to early lease terminations

     554        614        (60     -9.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total rental revenues

     256,720        231,463        25,257        10.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Rental Expenses and Real Estate Taxes

        

Same store

     61,859        61,583        276        0.4

Non-same store operating properties

     8,735        3,830        4,905        128.1

Development and redevelopment

     232        257        (25     -9.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total rental expenses and real estate taxes

     70,826        65,670        5,156        7.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Property Net Operating Income (1)

        

Same store, excluding revenues related to early lease terminations

     161,752        157,367        4,385        2.8

Non-same store operating properties

     23,635        7,834        15,801        201.7

Development and redevelopment

     (47     (22     (25     -113.6

Revenues related to early lease terminations

     554        614        (60     -9.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property net operating income

     185,894        165,793        20,101        12.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Revenue and Other Income (Loss)

        

Development profits, net of tax

     307               307        100.0

Institutional capital management and other fees

     4,059        4,291        (232     -5.4

Equity in earnings (loss) of unconsolidated joint ventures, net

     1,087        (2,556     3,643        142.5

Interest and other income (expense)

     291        (310     601        193.9

Casualty gains

     1,554        33        1,521        4609.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other revenue and other income

     7,298        1,458        5,840        400.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Expenses

        

Real estate related depreciation and amortization

     120,047        113,470        6,577        5.8

Interest expense

     69,274        63,645        5,629        8.8

General and administrative

     26,064        25,925        139        0.5

Impairment losses on investments in unconsolidated joint ventures

            1,953        (1,953     -100.0

Income tax expense and other taxes

     716        144        572        397.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     216,101        205,137        10,964        5.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     6,169        9,043        (2,874     -31.8

Net loss attributable to noncontrolling interests

     1,654        3,593        (1,939     -54.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (15,086   $ (25,250   $ 10,164        40.3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

For a discussion as to why we view property net operating income to be an appropriate supplemental performance measure and a reconciliation of our property net operating income to our reported “Loss from Continuing Operations,” see Page 39, above.

 

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Rental Revenues

Rental revenues, which are comprised of base rent, straight-line rent, amortization of above and below market rent intangibles, tenant recovery income, early lease termination fees and other rental revenues, increased by $25.3 million, or 10.9%, for the year ended December 31, 2012 compared to the same period in 2011, primarily due to the following changes:

 

   

$20.7 million increase in our non-same store rental revenues including development and redevelopment properties, primarily as a result of an increase in the number of properties and an increase in average occupancy year over year. The average occupancy of the non-same store properties increased to 78.0% for the year ended December 31, 2012 from 65.5% for the same period in 2011. Since December 31, 2011, we acquired 29 operating properties, four redevelopment properties and completed development or redevelopment of three properties; and

 

   

$4.7 million increase in total revenue in our same store portfolio due primarily to the following:

 

   

$1.3 million increase in rental revenues, including a $5.3 million increase in base rent primarily resulting from increased rental rates and a 130 basis point increase in average occupancy year over year, partially offset by a $4.0 million decrease in revenues related to straight-line rental adjustments; and

 

   

$3.7 million increase in operating expense recoveries resulting from higher average occupancy.

The following table illustrates the components of our consolidated rental revenues for the years ended December 31, 2012 and 2011 (in thousands).

 

     Year Ended
December 31,
        
     2012      2011      $ Change  

Base rent

   $ 193,759       $ 174,216       $ 19,543   

Straight-line rent

     5,922         8,758         (2,836

Amortization of above and below market rent intangibles

     842         429         413   

Tenant recovery income

     54,868         46,601         8,267   

Other

     775         845         (70

Revenues related to early lease terminations

     554         614         (60
  

 

 

    

 

 

    

 

 

 

Total rental revenues

   $ 256,720       $ 231,463       $ 25,257   
  

 

 

    

 

 

    

 

 

 

Rental Expenses and Real Estate Taxes

Rental expenses and real estate taxes increased by approximately $5.2 million, or 7.9%, for the year ended December 31, 2012 compared to the same period in 2011, primarily due to:

 

   

$4.9 million increase in rental expenses and real estate taxes related to the properties acquired and development and redevelopment properties placed into operation during the period ended December 31, 2012; and

 

   

$0.3 million increase in rental expenses and real estate taxes year over year in our same store portfolio, which was primarily driven by increases in insurance, utilities and property taxes, partially offset by decreases in repairs, maintenance and non-recoverable expenses.

Other Revenue and Other Income (Loss)

Total other revenue and other income (loss) increased by approximately $5.8 million for the year ended December 31, 2012 as compared to the same period in 2011, primarily due to:

 

   

$3.6 million increase in equity in earnings (loss) of unconsolidated joint ventures primarily as a result of an increase in occupancy for two of our joint ventures, as well as gains recognized on the sale of two properties in our joint ventures;

 

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$1.5 million increase in casualty gains related to the amounts received from the insurance companies subsequent to December 31, 2012 for casualty events at certain properties;

 

   

$0.6 million increase in interest and other income (expense) primarily related to gains as a result of foreign currency re-measurement of peso denominated cash balances; and

 

   

$0.3 million increase in development profits, net of tax related to percentage of completion at our build-to-suit project under contract for sale; partially offset by

 

   

$0.2 million decrease in institutional capital management and other fees resulting from the disposition of assets from our joint ventures.

Other Expenses

Other expenses increased by approximately $11.0 million, or 5.3%, for the year ended December 31, 2012 as compared to the same period in 2011, primarily as a result of:

 

   

$6.6 million increase in depreciation and amortization expense, resulting from real estate acquisitions and capital additions;

 

   

$5.6 million increase in interest expense primarily due to higher average borrowings and $0.7 million related to hedge ineffectiveness recognized during the year ended December 31, 2012 related to our settled hedge liability (see “Notes to the Consolidated Financial Statements Note 6—Financial Instruments and Hedging Activities” for further detail related to the hedge activity); and

 

   

$0.6 million increase in income tax expense and other taxes; which were partially offset by

 

   

$2.0 million decrease in impairment losses on unconsolidated joint ventures related to an impairment recorded in 2011 on a property sold in an unconsolidated joint venture.

Income from Discontinued Operations

Income from discontinued operations decreased by approximately $2.9 million for the year ended December 31, 2012 as compared the same period in 2011. This change is primarily the result of a casualty gain recorded in 2011 on a property subsequently sold as well as higher net gains on properties sold in 2011.

Noncontrolling Interests

Net loss attributable to noncontrolling interests decreased by approximately $1.9 million due to a decrease of consolidated net loss, year over year, partially offset by an increase in our ownership of our operating partnership. We owned approximately 93% of our operating partnership as of December 31, 2012 compared to 90% as of December 31, 2011.

Summary of the year ended December 31, 2011 compared to the year ended December 31, 2010

As of December 31, 2011, we consolidated 408 operating properties and one redevelopment property. As of December 31, 2010, we consolidated 390 operating properties, seven development properties and one redevelopment properties.

 

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Comparison of the year ended December 31, 2011 to the year ended December 31, 2010

The following table illustrates the changes in rental revenues, rental expenses and real estate taxes, property net operating income, other revenue and other income (loss) and other expenses for the year ended December 31, 2011 compared to the year ended December 31, 2010. Our same store portfolio includes all operating properties that we owned for the entirety of both the current and prior year reporting periods. The same store portfolio for the periods presented totaled 315 buildings comprised of approximately 45.4 million square feet. A discussion of these changes follows the table (in thousands).

 

    Year Ended
December 31,
          $ Change     Percent
Change
 
    2011     2010      

Rental Revenues

       

Same store, excluding revenues related to early lease terminations

  $ 198,662      $ 200,624      $ (1,962     -1.0

Non-same store operating properties

    31,952        6,486        25,466        392.6

Development and redevelopment

    235        964        (729     -75.6

Revenues related to early lease terminations

    614        642        (28     -4.4
 

 

 

   

 

 

   

 

 

   

 

 

 

Total rental revenues

    231,463        208,716        22,747        10.9
 

 

 

   

 

 

   

 

 

   

 

 

 

Rental Expenses and Real Estate Taxes

       

Same store

    57,146        58,345        (1,199     -2.1

Non-same store operating properties

    8,267        2,796        5,471        195.7

Development and redevelopment

    257        1,477        (1,220     -82.6
 

 

 

   

 

 

   

 

 

   

 

 

 

Total rental expenses and real estate taxes

    65,670        62,618        3,052        4.9
 

 

 

   

 

 

   

 

 

   

 

 

 

Property Net Operating Income (1)

       

Same store, excluding revenues related to early lease terminations

    141,516        142,279        (763     -0.5

Non-same store operating properties

    23,685        3,690        19,995        541.9

Development and redevelopment

    (22     (513     491        95.7

Revenues related to early lease terminations

    614        642        (28     -4.4
 

 

 

   

 

 

   

 

 

   

 

 

 

Total property net operating income

    165,793        146,098        19,695        13.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Revenue and Other Income (Loss)

       

Institutional capital management and other fees

    4,291        4,133        158        3.8

Equity in loss of unconsolidated joint ventures, net

    (2,556     (2,986     430        14.4

Interest and other income (expense)

    (310     356        (666     -187.1

Casualty gains

    33               33        100.0

Gain on disposition of real estate interests

           13        (13     -100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other revenue and other income

    1,458        1,516        (58     -3.8
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Expenses

       

Real estate related depreciation and amortization

    113,470        100,416        13,054        13.0

Interest expense

    63,645        56,241        7,404        13.2

General and administrative

    25,925        25,262        663        2.6

Impairment losses

           4,100        (4,100     -100.0

Impairment losses on investments in unconsolidated joint ventures

    1,953        216        1,737        804.2

Income tax expense and other taxes

    144        918        (774     -84.3

Loss on business combinations

           395        (395     -100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

    205,137        187,548        17,589        9.4
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

    9,043        (3,119     12,162        389.9

Net loss attributable to noncontrolling interests

    3,593        5,223        (1,630     -31.2
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (25,250   $ (37,830   $ 12,580        33.3
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (1) 

For a discussion as to why we view property net operating income to be an appropriate supplemental performance measure and a reconciliation of our property net operating income to our reported “Loss from Continuing Operations,” see Page 39, above.

Rental Revenues

Rental revenues, which are comprised of base rent, straight-line rent, amortization of above and below market rent intangibles, tenant recovery income, early lease termination fees and other rental revenues, increased by $22.7 million, or 10.9%, for the year ended December 31, 2011 compared to the same period in 2010, primarily due to the following changes:

 

   

$24.7 million increase in our non-same store rental revenues including development and redevelopment properties, primarily as a result of an increase in the number of properties and an increase in average occupancy year over year. The average occupancy of the non-same store properties increased to 85.4% for the year ended December 31, 2011 from 41.9% for same period in 2010. Since December 31, 2010, we acquired 25 operating properties and two development properties; and

 

   

$2.0 million decrease in total revenue in our same store portfolio due primarily to the following:

 

   

$1.5 million decrease in revenue, including a $2.7 million decrease in base rent resulting from decreased rental rates which more than offset an increase in average occupancy of 220 basis points; partially offset by $1.2 million increase in revenues related to straight-line rental adjustments; and

 

   

$0.8 million decrease related to a settlement with a customer in liquidation which was recorded in 2010; which was partially offset by

 

   

$0.4 million increase in revenues related to lower above market rent adjustments.

The following table illustrates the components of our consolidated rental revenues for the years ended December 31, 2011 and 2010 (in thousands).

 

     Year Ended
December 31,
       
     2011      2010     $ Change  

Base rent

   $ 174,216       $ 159,117      $ 15,099   

Straight-line rent

     8,758         5,001        3,757   

Amortization of above and below market rent intangibles

     429         (37     466   

Tenant recovery income

     46,601         42,279        4,322   

Other

     845         1,713        (868

Revenues related to early lease terminations

     614         643        (29
  

 

 

    

 

 

   

 

 

 

Total rental revenues

   $ 231,463       $ 208,716      $ 22,747   
  

 

 

    

 

 

   

 

 

 

Rental Expenses and Real Estate Taxes

Rental expenses and real estate taxes increased by approximately $3.1 million, or 4.9%, for the year ended December 31, 2011 compared to the same period in 2010, primarily due to:

 

   

$4.3 million increase in rental expenses and real estate taxes related to the properties acquired and development and redevelopment properties placed into operation during the period; which was partially offset by

 

   

$1.2 million decrease in rental expenses and real estate taxes in our same store portfolio, which was primarily driven by decreases in property taxes, repairs, maintenance and non-recoverable expenses, partially offset by increases in property insurance and utilities.

 

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Other Revenue and Other Income (Loss)

Total other revenue and other income (loss) decreased by approximately $0.1 million for the year ended December 31, 2011 as compared to the same period in 2010, primarily due to:

 

   

$0.7 million decrease in interest and other income (expense), primarily as a result of an exchange rate loss from Mexico operations; partially offset by

 

   

$0.4 million decrease in equity in loss of unconsolidated joint ventures primarily as a result of an increase in occupancy at two of our joint ventures partially offset by an increase in depreciation of properties as development was completed; and

 

   

$0.2 million increase in institutional capital management and other fees as a result of a disposition fee earned on the sale of an unconsolidated joint venture property offset in part by lower asset management fees resulting from disposition of assets from our joint ventures.

Other Expenses

Other expenses increased by approximately $17.6 million, or 9.4%, for the year ended December 31, 2011 as compared to the same period in 2010, primarily as a result of:

 

   

$13.1 million increase in real estate depreciation and amortization expense resulting from real estate acquisitions and capital additions;

 

   

$7.4 million increase in interest expense primarily related to higher interest rates on debt which has been refinanced and issued since 2010, as well as higher average debt balances in 2011; and

 

   

$0.7 million increase in general and administrative expenses, primarily related to an increase in acquisition costs for the increased number of properties acquired during 2011; which are partially offset by

 

   

$2.4 million decrease in impairments from a $2.0 million impairment loss recorded on one of our investments in unconsolidated joint ventures in 2011 as compared to a $4.1 million impairment recorded on properties held for use and $0.2 million impairment loss on one of our investments in unconsolidated joint ventures recorded in 2010; and

 

   

$1.2 million decrease in expenses related to a $0.4 million loss on a business combination in 2010 and a $0.8 million decrease in income tax expense in 2011, related to tax benefits recognized in 2011.

Income (Loss) from Discontinued Operations

Income (loss) from discontinued operations increased by approximately $12.2 million for the year ended December 31, 2011 as compared the same period in 2010. This change is primarily related to the disposition of 16 properties during 2011, which had operating income of $5.2 million, and net gain on sales totaling $3.8 million, as compared to the sale of eight properties in 2010, which had operating income of $2.8 million and net impairment of $5.9 million.

Noncontrolling Interests

Net loss attributable to noncontrolling interests decreased by approximately $1.6 million, or 31.2%, during the year ended December 31, 2011 as compared to the same period in 2010, primarily related to a decrease of consolidated net loss year over year, partially offset by an increase in our ownership of our operating partnership. We owned approximately 90.4% and 89.8% of our operating partnership as of December 31, 2011 and 2010, respectively.

Segment Summary for the years ended December 31, 2012, 2011 and 2010

The Company’s segments are based on our internal reporting of operating results used to assess performance based on our properties’ geographical markets. Our markets are aggregated into three reportable regions or segments, East, Central and West, which are based on the geographical locations of our properties (see “Item 2: Properties” for a listing of our properties by market broken into our reportable segments). We consider rental

 

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revenues and property net operating income aggregated by segment to be the appropriate way to analyze performance. Certain reclassifications have been made to prior year results to conform to the current presentation related to discontinued operations. The following segment disclosures exclude the results from discontinued operations (see “Notes to the Consolidated Financial Statements, Note 15—Discontinued Operations and Assets Held for Sale” for additional information).

 

     As of December 31,      Year Ended
December 31,
 
     Number
of
buildings
     Square
feet
     Occupancy
at period
end
    Segment
assets
 (1)
     Rental
revenues
 (2)
     Property net
operating
income
 (3)
 

EAST:

                

2012

     117         19,651         86.0   $ 875,845       $ 82,909       $ 60,665   

2011

     131         21,534         89.2   $ 936,305       $ 79,920       $ 58,212   

2010

     134         22,469         87.8   $ 955,276       $ 71,134       $ 50,922   

CENTRAL:

                

2012

     199         28,286         91.5   $ 1,107,561       $ 109,918       $ 77,246   

2011

     200         26,678         91.3   $ 1,021,956       $ 96,303       $ 66,284   

2010

     196         26,716         90.7   $ 1,031,186       $ 94,059       $ 64,727   

WEST:

                

2012

     90         11,456         97.2   $ 863,003       $ 63,893       $ 47,983   

2011

     78         10,042         91.3   $ 669,591       $ 55,240       $ 41,297   

2010

     68         8,592         90.7   $ 568,147       $ 43,523       $ 30,449   

 

 

  (1) 

Segment assets include all assets held by operating properties included in a segment, less non-segment cash and cash equivalents. The prior year segment assets are not restated for current year discontinued operations.

  (2) 

Segment rental revenues include operating properties and development properties. Revenues from properties which were held for sale or sold and are included in discontinued operations during the period are not included in these results.

  (3) 

For a discussion as to why we view property net operating income to be an appropriate supplemental performance measure and a reconciliation of our property net operating income to our reported “Loss from Continuing Operations,” see Page 39, above.

The following table reflects our total assets, net of accumulated depreciation and amortization, by segment (in thousands).

 

     December 31,
2012
     December 31,
2011
     December 31,
2010
 

Segment assets:

        

East

   $ 875,845       $ 936,305       $ 955,276   

Central

     1,107,561         1,021,956         1,031,186   

West

     863,003         669,591         568,147   
  

 

 

    

 

 

    

 

 

 

Total segment assets

     2,846,409         2,627,852         2,554,609   

Non-segment assets:

        

Non-segment cash and cash equivalents

     8,653         11,624         14,071   

Other non-segment assets (1)

     149,285         153,822         151,209   

Assets held for sale

     52,852                   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,057,199       $ 2,793,298       $ 2,719,889   
  

 

 

    

 

 

    

 

 

 

 

  (1) 

Other non-segment assets primarily consists of investments in and advances to unconsolidated joint ventures, deferred loan costs, other receivables and other assets.

 

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East Segment

 

   

East Segment assets decreased by approximately $60.5 million to $875.8 million as of December 31, 2012 from $936.3 million as of December 31, 2011. This decrease is primarily the result of the disposition of 20 properties and three properties held for sale at December 31, 2012, partially offset by the acquisition of seven properties and the completion of development of two properties since December 31, 2011.

 

   

East Segment assets decreased by approximately $19.0 million to $936.3 million as of December 31, 2011 from $955.3 million as of December 31, 2010. This decrease is primarily the result of the disposition of 10 properties, partially offset by the acquisition of seven properties since December 31, 2010.

 

   

East Segment property NOI, after reclassification for discontinued operations, increased approximately $2.5 million, for the year ended December 31, 2012 as compared to the same period in 2011 primarily as a result of:

 

   

$3.0 million increase in rental revenues, of which $0.9 million is attributed to property acquisitions and $2.1 million is attributed to higher rental revenues at existing properties; which was partially offset by

 

   

$0.5 million increase in operating expenses primarily comprised of $0.6 million increase in property taxes, of which $0.1 million was related to property taxes on acquisitions and the remainder was related to increasing property tax expense on existing properties; partially offset by various other operating expenses.

 

   

East Segment property NOI, after reclassification for discontinued operations, increased approximately $7.3 million, for the year ended December 31, 2011 as compared to the same period in 2010 primarily as a result of:

 

   

$8.8 million increase in rental revenues, of which $3.7 million is attributed to property acquisitions and $5.1 million is attributed to increased occupancy and higher rental revenues at existing properties; which was partially offset by

 

   

$1.5 million increase in operating expenses primarily related to $0.9 million in operating expenses on acquisitions with the remainder related to increasing operating expenses on existing properties.

Central Segment

 

   

Central Segment assets increased by approximately $85.6 million to $1,107.6 million as of December 31, 2012 from $1,022.0 million as of December 31, 2011. This increase is primarily the result of the acquisition of 11 properties and the completion of development of one property, partially offset by the disposition of 16 properties since December 31, 2011.

 

   

Central Segment assets decreased by approximately $9.2 million to $1,022.0 million as of December 31, 2011 from $1,031.2 million as of December 31, 2010. This decrease is primarily the result of the disposition of six properties partially offset by the acquisition of 10 properties since December 31, 2010.

 

   

Central Segment property NOI, after reclassification for discontinued operations, increased approximately $11.0 million, for the year ended December 31, 2012 as compared to the same period in 2011 primarily as a result of:

 

   

$13.7 million increase in rental revenues, of which $3.7 million is attributed to property acquisitions and $10.0 million attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by

 

   

$2.7 million increase in operating expenses primarily comprised of a $2.6 million increase in property taxes, of which $0.6 million related to property taxes on acquisitions with the remainder related to an increase in recoverable property tax expense on existing properties and various other operating expenses.

 

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Central Segment property NOI, after reclassification for discontinued operations, increased approximately $1.6 million, for the year ended December 31, 2011 as compared to the same period in 2010 primarily as a result of:

 

   

$2.2 million increase in rental revenues, of which $1.9 million is attributed to property acquisitions and $0.3 million is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by

 

   

$0.7 million increase in operating expenses primarily comprised of a $0.8 million increase in property taxes, of which $0.3 million related to property taxes on acquisitions with the remainder related to increasing property tax expense on existing properties and various other operating expenses.

West Segment

 

   

West Segment assets increased by approximately $193.4 million to $863.0 million as of December 31, 2012 from $669.6 million as of December 31, 2011. This in