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, 2013
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) |
Registrants 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 registrants 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, 2013, the aggregate market value of the 288.1 million shares of voting and non-voting common stock held by non-affiliates of the registrant was $2.1 billion based on the closing sale price of $7.15 as reported on the New York Stock Exchange on June 30, 2013. (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 14, 2014 there were 324,266,885 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the registrants definitive proxy statement to be issued in conjunction with the registrants annual meeting of stockholders to be held April 30, 2014 are incorporated by reference into Part III of this Annual Report.
DCT INDUSTRIAL TRUST INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2013
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 global economic recovery; |
| 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 specializing in the acquisition, development, leasing and management of bulk distribution and light industrial properties located in high-volume distribution markets in the United States. 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, 2013, we owned approximately 94.8% 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, 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 focusing 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, 2013, the Company owned interests in approximately 75.5 million square feet of properties leased to approximately 900 customers, including:
| 62.1 million square feet comprising 396 consolidated operating properties, including 0.2 million square feet comprising one consolidated building classified as held for sale, which were 93.3% occupied; |
| 12.3 million square feet comprising 38 unconsolidated properties which were 94.1% occupied and operated on behalf of four institutional capital management partners; |
| 0.2 million square feet comprising two consolidated properties under redevelopment; and |
| 0.9 million square feet comprising two consolidated buildings which are shell-complete and in lease-up and eight land sites under construction. |
As of December 31, 2013, our total consolidated portfolio consisted of 400 properties with an average size of 158,000 square feet and an average age of 21 years.
During the year ended December 31, 2013, we acquired 38 buildings. These properties were acquired for a total purchase price of $359.5 million.
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During the year ended December 31, 2013, we sold 51 operating properties to third-parties for gross proceeds of approximately $265.8 million. We recognized gains of approximately $33.6 million on the disposition of 36 operating properties and recognized an impairment loss of approximately $13.3 million on the disposition of a portfolio of 15 properties in Dallas.
We have a broadly diversified customer base. As of December 31, 2013, our consolidated properties had leases with approximately 900 customers with no single customer accounting for more than 2.3% of the total annualized base rent of our properties. Our ten largest customers occupy approximately 10.0% of our consolidated properties based on square footage and account for approximately 12.1% 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; 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), 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. |
| Selectively Pursuing New Development. To meet current tenant demand, we continue to develop new assets in select markets where rents and vacancy levels demonstrate the need for new construction. During 2013, we acquired five land parcels for future development totaling approximately 128.6 acres. Also during 2013, we stabilized six development buildings totaling 1.6 million square feet and have seven buildings under construction, which are partially leased, totaling approximately 2.7 million square feet. As of December 31, 2013, we also had one build-to-suit for sale building under contract. The buildings under construction, as well as the build-to-suit for sale building, are all projected to be completed in 2014. |
| Recycling Capital. We intend to selectively dispose of non-strategic assets and redeploy the proceeds into higher growth acquisition and development opportunities. In 2013, we sold $265.8 million of non-strategic assets for deployment into higher growth assets. This includes the divestiture of the entire portfolio located in Mexico. |
| Conservatively Managing Our Balance Sheet. We plan to maintain financial metrics, including leverage and coverage ratios on a basis consistent with our investment grade ratings. In addition, we believe that a conservatively managed balance sheet provides for a competitive long-term cost of capital. |
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Our Competitive Strengths
We believe that we distinguish ourselves from other owners, operators, acquirers and developers of industrial properties 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 local, 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 28 years commercial real estate experience and 17 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 86 experienced transaction and property management professionals working in 12 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 through 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 since 2010 was $14.0 million, demonstrating our ability to access a significant pipeline of smaller acquisitions. Further, consistent with our capital recycling strategy, we have disposed of a cumulative $1.4 billion of real estate investments since inception. |
| Extensive Development and Redevelopment Expertise. Our local market teams have significant experience in all facets of value-add activities including development and redevelopment capabilities. We believe our local teams knowledge of our focus markets and their relationships 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. |
| Capital Structure. Our capital structure provides us with sufficient financial flexibility and capacity to fund future growth. In addition to successfully raising $258.6 million in net proceeds from equity offerings in 2013, DCT received investment grade ratings from Moodys Investors Service and Standard & Poors Rating Services and issued $275.0 million (aggregate principal amount) of 10-year senior unsecured notes at 99.038% of face value for net proceeds of approximately $269.6 million after expenses. The notes have a fixed interest rate of 4.5%. As of December 31, 2013 we had $261.0 million available under our senior unsecured revolving credit facility and 334 of our consolidated operating properties with a gross book value of $2.8 billion were unencumbered. |
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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. Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, Note 14Segment 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.
Environmental Matters
We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we subjected a majority of the properties we have acquired, including land, to environmental reviews. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See further additional information in Item 1A. Risk Factors.
Employees
As of December 31, 2013, we had 136 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 and/or international 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. |
The value of our investments may not appreciate or may decline in value significantly below the amount we pay for these investments. 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.
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, financial condition and cash flows could suffer. Our ability to retain our management group, attract suitable replacements, or to attract new hires as needed, is dependent on the competitive nature of the employment market. Further, the loss of key personnel, or our inability to replace them, could be negatively perceived in the capital markets. We do not carry key man life insurance on any of our 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
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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 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. Similarly, we seek to acquire new properties in off-market transasctions, because such properties are typically more attractively priced, but we may be unable to obtain off-market deal flow in the future. 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.
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 either on our own or in joint ventures. 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.
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 partner in an investment might become bankrupt, which would mean that we could generally remain liable for the joint ventures liabilities; |
| that such 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 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; |
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| that joint venture agreements often restrict the transfer of a partners interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; |
| that our relationships with our partners 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 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; |
| that we may in certain circumstances be liable for the actions of our partners; and |
| that we may, as a general partner investing in a limited partnership, have liability for all of the liabilities of such partnership, even if 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. |
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.
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. We may decide to dispose of select real estate assets, thereby changing the holding period assumption in our valuation analyses for those assets, which could result in material impairment losses and adversely affect our financial results.
Economic conditions have required or could require 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 2Summary of Significant Accounting Policies and Item 7Critical Accounting Polices and 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, or that we will not change our intended holding period for real estate assets. 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, or changes in our anticipated holding period, may result in impairment charges or losses that could adversely affect our financial condition, results of operations and/or the market price of our stock. An impairment loss could be material to our results of operations in the period that it is recognized.
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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, Miami, Memphis, Nashville, Northern California, Pennsylvania, Seattle 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.
Although continuously reviewed, the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations and could result in 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, 2013, we owned 94.8% of the units of limited partnership interest in our operating partnership, or OP Units, certain unaffiliated limited partners owned 4.7% of the OP Units and certain of our officers and directors, owned the remaining 0.5% 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 from equity investments in real estate depend in part 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 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, in addition to risks discussed elsewhere in this section, be adversely affected by:
| changes in supply of or demand for similar or competing properties in an area; |
| 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 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; |
| customer turnover; |
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| 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. If our competitors offer space at rental rates or terms more attractive than we currently offer to our customers, we may lose customers or we may be pressured to reduce our rental rates or provide more favorable lease terms. 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.
We are dependent on customers for our revenues.
Lease payment or performance defaults by customers could adversely affect our financial condition and 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.
We may be unable to sell or re-lease a property if or when we decide to do so, including as a result of uncertain market conditions or vacancy, 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, the availability of attractive financing for potential buyers of our properties and the rate of occupancy of the property. 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.
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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.
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 2014, as outlined in Item 2, PropertiesLease Expirations. In addition, certain of the properties we acquire may have some level of vacancy at the time of closing. 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 of vacancy.
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 dispositions of property by REITs 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. We work to mitigate such risks through extensive diligence and research; 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, 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. 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 and Seattle. We carry reasonable and customary earthquake insurance on all of our properties located in areas historically subject to seismic activity with coverage limitations and deductibles that we believe are
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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.
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, including, without limitation, environmental 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.
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.
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We maintain a portfolio environmental insurance policy that provides coverage for potential environmental liabilities, subject to the policys coverage conditions and limitations, for most of our properties. From time to 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 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.
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.
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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, 2013, 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 may 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 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.
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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.
For example, 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.
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 document. 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.
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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 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
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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 partnerships 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 partnerships 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 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.
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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 partnerships 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 partnerships 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.
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 persons 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
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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.
21
ITEM 2. | PROPERTIES |
Geographic Distribution
The following table describes the geographic diversification of our consolidated properties as of December 31, 2013:
Markets |
Number of Buildings |
Percent Owned (1) |
Square Feet |
Occupancy Percentage (2) |
Annualized Base Rent (3)(6) |
Percent of Total Annualized Base Rent |
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CONSOLIDATED OPERATING: |
(in thousands | ) | (in thousands | ) | ||||||||||||||||||||
Atlanta |
41 | 100.0 | % | 6,592 | 92.0 | % | $ | 19,496 | 8.4 | % | ||||||||||||||
Baltimore/Washington D.C. |
19 | 100.0 | % | 2,236 | 88.9 | % | 11,607 | 5.0 | % | |||||||||||||||
Charlotte |
1 | 100.0 | % | 472 | 100.0 | % | 1,604 | 0.7 | % | |||||||||||||||
Memphis |
8 | 100.0 | % | 3,712 | 83.4 | % | 8,006 | 3.5 | % | |||||||||||||||
Miami |
10 | 100.0 | % | 1,362 | 99.0 | % | 9,393 | 4.1 | % | |||||||||||||||
Nashville |
4 | 100.0 | % | 2,064 | 96.5 | % | 5,304 | 2.3 | % | |||||||||||||||
New Jersey |
14 | 100.0 | % | 1,926 | 94.4 | % | 9,718 | 4.2 | % | |||||||||||||||
Orlando |
20 | 100.0 | % | 1,864 | 83.1 | % | 6,169 | 2.7 | % | |||||||||||||||
Pennsylvania |
14 | 100.0 | % | 2,828 | 91.0 | % | 8,929 | 3.9 | % | |||||||||||||||
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East Segment Subtotal |
131 | 100.0 | % | 23,056 | 90.7 | % | 80,226 | 34.8 | % | |||||||||||||||
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Chicago |
34 | 100.0 | % | 6,742 | 95.4 | % | 22,005 | 9.5 | % | |||||||||||||||
Cincinnati |
31 | 100.0 | % | 3,782 | 93.8 | % | 12,040 | 5.2 | % | |||||||||||||||
Columbus |
12 | 100.0 | % | 3,480 | 87.0 | % | 7,590 | 3.3 | % | |||||||||||||||
Dallas |
34 | 100.0 | % | 5,160 | 97.9 | % | 16,670 | 7.2 | % | |||||||||||||||
Houston |
43 | 100.0 | % | 3,256 | 99.1 | % | 18,969 | 8.2 | % | |||||||||||||||
Indianapolis |
7 | 100.0 | % | 2,299 | 96.4 | % | 7,499 | 3.2 | % | |||||||||||||||
Louisville |
3 | 100.0 | % | 1,109 | 100.0 | % | 3,595 | 1.6 | % | |||||||||||||||
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Central Segment Subtotal |
164 | 100.0 | % | 25,828 | 95.3 | % | 88,368 | 38.2 | % | |||||||||||||||
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Denver |
2 | 100.0 | % | 278 | 96.5 | % | 1,259 | 0.5 | % | |||||||||||||||
Northern California |
27 | 100.0 | % | 3,171 | 93.1 | % | 16,502 | 7.1 | % | |||||||||||||||
Phoenix |
17 | 100.0 | % | 2,025 | 93.1 | % | 7,727 | 3.3 | % | |||||||||||||||
Seattle |
12 | 100.0 | % | 1,599 | 94.4 | % | 7,827 | 3.4 | % | |||||||||||||||
Southern California |
42 | 92.9 | % | 5,939 | 94.8 | % | 28,352 | 12.2 | % | |||||||||||||||
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West Segment Subtotal |
100 | 96.8 | % | 13,012 | 94.1 | % | 61,667 | 26.5 | % | |||||||||||||||
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Total/weighted averageoperating properties |
395 | 99.3 | % | 61,896 | 93.3 | % | 230,261 | 99.5 | % | |||||||||||||||
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REDEVELOPMENT PROPERTIES: |
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New Jersey |
1 | 100.0 | % | 107 | 0.0 | % | | 0.0 | % | |||||||||||||||
Phoenix |
1 | 100.0 | % | 76 | 0.0 | % | | 0.0 | % | |||||||||||||||
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Total/weighted averageredevelopment properties |
2 | 100.0 | % | 183 | 0.0 | % | | 0.0 | % | |||||||||||||||
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DEVELOPMENT PROPERTIES: |
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Chicago |
1 | 100.0 | % | 604 | 0.0 | % | | 0.0 | % | |||||||||||||||
Houston |
1 | 100.0 | % | 267 | 0.0 | % | | 0.0 | % | |||||||||||||||
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Total/weighted averagedevelopment properties |
2 | 100.0 | % | 871 | 0.0 | % | | 0.0 | % | |||||||||||||||
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HELD FOR SALE PROPERTIES: |
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Chicago |
1 | 100.0 | % | 222 | 100.0 | % | 1,102 | 0.5 | % | |||||||||||||||
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Total/weighted averageheld for sale |
1 | 100.0 | % | 222 | 100.0 | % | 1,102 | 0.5 | % | |||||||||||||||
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Total/weighted averageconsolidated properties |
400 | 99.3 | % | 63,172 | 91.8 | % | $ | 231,363 | (4) | 100.0 | % | |||||||||||||
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(See footnote definitions on next page)
22
The following table describes the geographic diversification of our investments in unconsolidated properties as of December 31, 2013:
Markets |
Number of Buildings |
Percent Owned (1) |
Square Feet |
Occupancy Percentage (2) |
Annualized Base Rent (3) |
Percent of Total Annualized Base Rent |
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(in thousands) | (in thousands) | |||||||||||||||||||||||
UNCONSOLIDATED OPERATING PROPERTIES: |
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IDI (Chicago, Nashville, Savannah) |
3 | 50.0 | % | 1,423 | 53.0 | % | $ | 1,631 | 4.1 | % | ||||||||||||||
Southern California Logistics Airport (5) |
6 | 50.0 | % | 2,160 | 99.6 | % | 7,871 | 20.0 | % | |||||||||||||||
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Total/weighted averageunconsolidated operating properties |
9 | 50.0 | % | 3,583 | 81.1 | % | 9,502 | 24.1 | % | |||||||||||||||
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OPERATING PROPERTIES IN CO-INVESTMENT VENTURES: |
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Atlanta |
1 | 3.6 | % | 491 | 100.0 | % | 1,753 | 4.4 | % | |||||||||||||||
Chicago |
2 | 20.0 | % | 1,033 | 100.0 | % | 3,238 | 8.2 | % | |||||||||||||||
Cincinnati |
3 | 13.6 | % | 892 | 100.0 | % | 2,977 | 7.5 | % | |||||||||||||||
Columbus |
2 | 5.7 | % | 451 | 100.0 | % | 1,356 | 3.4 | % | |||||||||||||||
Dallas |
3 | 15.3 | % | 1,186 | 100.0 | % | 3,622 | 9.1 | % | |||||||||||||||
Denver |
5 | 20.0 | % | 772 | 95.9 | % | 3,654 | 9.2 | % | |||||||||||||||
Indianapolis |
1 | 11.4 | % | 475 | 96.2 | % | 1,915 | 4.8 | % | |||||||||||||||
Louisville |
4 | 10.0 | % | 736 | 100.0 | % | 1,411 | 3.6 | % | |||||||||||||||
Minneapolis |
3 | 3.6 | % | 472 | 100.0 | % | 2,187 | 5.5 | % | |||||||||||||||
Nashville |
2 | 20.0 | % | 1,020 | 100.0 | % | 2,750 | 7.0 | % | |||||||||||||||
Orlando |
2 | 20.0 | % | 696 | 100.0 | % | 3,265 | 8.2 | % | |||||||||||||||
Pennsylvania |
1 | 11.4 | % | 502 | 100.0 | % | 1,990 | 5.0 | % | |||||||||||||||
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Total/weighted average |
29 | 14.3 | % | 8,726 | 99.4 | % | 30,118 | 75.9 | % | |||||||||||||||
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Total/weighted averageunconsolidated properties |
38 | 24.7 | % | 12,309 | 94.1 | % | $ | 39,620 | 100.0 | % | ||||||||||||||
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(1) | Percent owned is based on ownership weighted by square footage, if applicable. |
(2) | Based on leases commenced as of December 31, 2013. |
(3) | Annualized base rent is calculated as monthly contractual base rent (cash basis) per the terms of the lease in effect, as of December 31, 2013, multiplied by 12. |
(4) | Excludes total annualized base rent associated with tenants currently in free rent periods of $9.2 million based on the first months cash base rent. |
(5) | 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. |
(6) | Excludes total annualized base rent of $1.7 million from one non-industrial property acquired for future development. |
23
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 3.3 years as of December 31, 2013. Following is a schedule of expiring leases for our consolidated properties by square feet and by annualized minimum base rent as of December 31, 2013, assuming no exercise of lease renewal:
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) | |||||||||||||||||||
2014 (2) |
178 | 8,440 | 14.6 | % | $ | 35,217 | 13.4 | % | ||||||||||||
2015 |
162 | 10,199 | 17.6 | % | 42,062 | 16.0 | % | |||||||||||||
2016 |
200 | 10,110 | 17.4 | % | 44,166 | 16.9 | % | |||||||||||||
2017 |
143 | 8,223 | 14.2 | % | 34,223 | 13.1 | % | |||||||||||||
2018 |
107 | 6,621 | 11.4 | % | 30,394 | 11.6 | % | |||||||||||||
Thereafter |
157 | 14,392 | 24.8 | % | 75,932 | 29.0 | % | |||||||||||||
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Total occupied |
947 | 57,985 | 100.0 | % | $ | 261,994 | 100.0 | % | ||||||||||||
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Available or leased but not occupied |
5,187 | |||||||||||||||||||
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Total consolidated properties |
63,172 | |||||||||||||||||||
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(1) | Includes contractual rent changes. |
(2) | Includes leases that are on month-to-month terms. |
Customer Diversification
As of December 31, 2013, there were no customers that occupied more than 2.3% 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, 2013. These ten customers occupy a combined 6.3 million square feet or 10.0% of our consolidated properties.
Customer |
Percentage of Annualized Base Rent |
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Schenker, Inc. |
2.3 | % | ||
Deutsche Post World Net (DHL & Excel) |
1.5 | % | ||
The Clorox Company |
1.3 | % | ||
United Stationers Supply Company |
1.1 | % | ||
The Glidden Company |
1.1 | % | ||
YRC, LLC |
1.1 | % | ||
Bridgestone Corporation |
1.0 | % | ||
Ozburn-Hessey Logistics, L.L.C |
0.9 | % | ||
Genco I, Inc. |
0.9 | % | ||
Iron Mountain |
0.9 | % | ||
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Total |
12.1 | % | ||
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|
Although base rent is supported by long-term lease contracts, customers who file bankruptcy generally 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
24
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.
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 any significant financial difficulties of any tenants that would individually cause a material reduction in our revenues, and no customer represents more than 5% of our annual base rent.
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, 2013 (dollar amounts in thousands):
Number of Leases |
Annualized Base Rent (1) |
Percentage of Total Annualized Base Rent |
Occupied Square Feet |
Percentage of Total Occupied Square Feet |
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(in thousands) | ||||||||||||||||||||
Manufacturing |
250 | $ | 71,230 | 30.8 | % | 17,138 | 29.6 | % | ||||||||||||
Wholesale Trade |
229 | 48,733 | 21.1 | % | 12,741 | 22.0 | % | |||||||||||||
Transportation and Warehousing |
156 | 45,548 | 19.7 | % | 12,726 | 21.9 | % | |||||||||||||
Retail Trade |
92 | 22,992 | 10.0 | % | 6,667 | 11.5 | % | |||||||||||||
Administrative Support and Waste Management Services |
43 | 9,268 | 4.0 | % | 2,337 | 4.0 | % | |||||||||||||
Professional, Scientific and Technical Services |
55 | 10,754 | 4.6 | % | 1,955 | 3.3 | % | |||||||||||||
Media and Information |
16 | 3,963 | 1.7 | % | 567 | 1.0 | % | |||||||||||||
Rental Companies |
15 | 3,498 | 1.5 | % | 917 | 1.6 | % | |||||||||||||
Health Care and Social Assistance |
11 | 4,168 | 1.8 | % | 629 | 1.1 | % | |||||||||||||
Other |
80 | 11,209 | 4.8 | % | 2,308 | 4.0 | % | |||||||||||||
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Total |
947 | $ | 231,363 | 100.0 | % | 57,985 | 100.0 | % | ||||||||||||
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(1) | Annualized base rent is calculated as monthly contractual base rent (cash basis) per the terms of the lease in effect, as of December 31, 2013, multiplied by 12. |
Indebtedness
As of December 31, 2013, 63 of our 400 consolidated properties, with a combined gross book value of $674.2 million were encumbered by mortgage indebtedness totaling $285.7 million (excluding net premiums). See Notes to Consolidated Financial Statements, Note 5Outstanding Indebtedness and the accompanying Schedule III beginning on page F-44 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.
25
PART II
ITEM 5. | MARKET FOR REGISTRANTS 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 2013: |
High | Low | ||||||
December 31 |
$ | 8.00 | $ | 6.97 | ||||
September 30 |
$ | 7.96 | $ | 6.62 | ||||
June 30 |
$ | 8.45 | $ | 6.75 | ||||
March 31 |
$ | 7.48 | $ | 6.49 | ||||
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 |
On February 14, 2014 the closing price of our common stock was $7.60 per share, as reported on the NYSE and there were 324,266,885 shares of common stock outstanding, held by approximately 2,130 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. The tax characterization of dividends paid on our common stock for 2013, 2012 and 2011 are as follows:
2013 | 2012 | 2011 | ||||||||||
Ordinary income |
54.9 | % | 23.5 | % | 29.8 | % | ||||||
Return of capital |
37.9 | % | 76.5 | % | 63.4 | % | ||||||
Capital gains |
7.2 | % | 0.0 | % | 6.8 | % |
26
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, 2013 and 2012:
Amount Declared During Quarter Ended in 2013: |
Per Share | Date Paid | ||||||
December 31, |
$ | 0.07 | January 9, 2014 | |||||
September 30, |
0.07 | October 16, 2013 | ||||||
June 30, |
0.07 | July 17, 2013 | ||||||
March 31, |
0.07 | April 17, 2013 | ||||||
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Total 2013 |
$ | 0.28 | ||||||
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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 | ||||||
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Total 2012 |
$ | 0.28 | ||||||
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27
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 Poors 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.
December 31, 2008 |
December 31, 2009 |
December 31, 2010 |
December 31, 2011 |
December 31, 2012 |
December 31, 2013 |
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DCT Industrial Trust Inc. |
$ | 100.00 | $ | 99.21 | $ | 104.94 | $ | 101.19 | $ | 128.26 | $ | 140.91 | ||||||||||||
S&P 500® |
$ | 100.00 | $ | 123.45 | $ | 139.23 | $ | 139.23 | $ | 157.90 | $ | 204.63 | ||||||||||||
MSCI US REIT Index |
$ | 100.00 | $ | 128.61 | $ | 165.23 | $ | 179.60 | $ | 211.50 | $ | 216.73 | ||||||||||||
FTSE NAREIT Equity Industrial Index |
$ | 100.00 | $ | 112.17 | $ | 133.36 | $ | 126.48 | $ | 166.05 | $ | 178.34 |
Note: | The graph covers the period from December 31, 2008 to December 31, 2013 and assumes that $100 was invested in DCT Industrial Trust Inc. common stock and in each index on December 31, 2008 and that all dividends were reinvested. |
28
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, 2013, 2012, 2011, 2010 and 2009. Certain amounts presented for the periods ended December 31, 2012, 2011, 2010 and 2009 have been reclassified to conform to the 2013 presentation. The financial data in the table should be read in conjunction with Item 7. Managements 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, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(amounts in thousands, except per share data and building count) | ||||||||||||||||||||
Operating Data: |
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Rental revenues |
$ | 286,218 | $ | 236,839 | $ | 211,536 | $ | 190,404 | $ | 192,669 | ||||||||||
Total revenues |
$ | 289,005 | $ | 240,898 | $ | 215,827 | $ | 194,537 | $ | 195,370 | ||||||||||
Rental expenses and real estate taxes |
$ | 80,025 | $ | 66,390 | $ | 61,367 | $ | 58,437 | $ | 55,826 | ||||||||||
Property net operating income (5) |
$ | 206,193 | $ | 170,449 | $ | 150,169 | $ | 131,967 | $ | 136,843 | ||||||||||
Total operating expenses |
$ | 237,741 | $ | 200,972 | $ | 189,951 | $ | 178,400 | $ | 170,204 | ||||||||||
Loss from continuing operations |
$ | (9,251 | ) | $ | (28,540 | ) | $ | (42,503 | ) | $ | (44,618 | ) | $ | (34,624 | ) | |||||
Income from discontinued operations |
$ | 26,723 | $ | 11,800 | $ | 13,660 | $ | 1,551 | $ | 12,911 | ||||||||||
Gain on dispositions of real estate interests |
$ | 31 | $ | | $ | | $ | 13 | $ | 5 | ||||||||||
Net income (loss) attributable to common stockholders |
$ | 15,870 | $ | (15,086 | ) | $ | (25,250 | ) | $ | (37,830 | ) | $ | (18,585 | ) | ||||||
Earnings per Common ShareBasic and Diluted: |
||||||||||||||||||||
Loss from continuing operations |
$ | (0.03 | ) | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.18 | ) | $ | (0.16 | ) | |||||
Income from discontinued operations |
0.08 | 0.04 | 0.05 | 0.00 | 0.06 | |||||||||||||||
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Net income (loss) attributable to common stockholders |
$ | 0.05 | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.18 | ) | $ | (0.10 | ) | ||||||
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Weighted average common shares outstandingbasic and diluted |
298,769 | 254,831 | 242,591 | 212,412 | 192,900 | |||||||||||||||
Amounts Attributable to Common Stockholders: |
||||||||||||||||||||
Loss from continuing operations |
$ | (9,250 | ) | $ | (25,896 | ) | $ | (37,621 | ) | $ | (39,212 | ) | $ | (29,725 | ) | |||||
Income from discontinued operations (1) |
25,120 | 10,810 | 12,371 | 1,382 | 11,140 | |||||||||||||||
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Net income (loss) attributable to common stockholders |
15,870 | (15,086 | ) | (25,250 | ) | (37,830 | ) | (18,585 | ) | |||||||||||
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Distributed and undistributed earnings allocated to participating securities |
(692 | ) | (524 | ) | (443 | ) | (480 | ) | (436 | ) | ||||||||||
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Adjusted net income (loss) attributable to common stockholders |
$ | 15,178 | $ | (15,610 | ) | $ | (25,693 | ) | $ | (38,310 | ) | $ | (19,021 | ) | ||||||
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Common Share Distributions: |
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Common share cash distributions, declared |
$ | 85,079 | $ | 73,200 | $ | 68,789 | $ | 60,110 | $ | 59,364 | ||||||||||
Common share cash distributions, declared per share |
$ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.30 | ||||||||||
Other Data: |
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Consolidated operating square feet |
61,896 | 58,132 | 58,099 | 56,652 | 52,910 | |||||||||||||||
Consolidated operating buildings |
395 | 399 | 408 | 390 | 375 | |||||||||||||||
Total consolidated buildings square feet |
63,172 | 61,410 | 58,255 | 57,777 | 56,847 | |||||||||||||||
Total consolidated buildings |
400 | 409 | 409 | 398 | 394 |
(See footnote definitions on pages 31-32)
29
For the Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(amounts in thousands, except per share data and building count) | ||||||||||||||||||||
Balance Sheet Data: |
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Net investment in real estate |
$ | 3,141,877 | $ | 2,910,613 | $ | 2,711,027 | $ | 2,647,186 | $ | 2,576,410 | ||||||||||
Total assets |
$ | 3,265,963 | $ | 3,057,199 | $ | 2,793,298 | $ | 2,719,889 | $ | 2,644,292 | ||||||||||
Senior unsecured notes |
$ | 1,122,407 | $ | 1,025,000 | $ | 935,000 | $ | 786,000 | $ | 625,000 | ||||||||||
Mortgage notes |
$ | 290,960 | $ | 317,314 | $ | 317,783 | $ | 425,359 | $ | 511,715 | ||||||||||
Total liabilities |
$ | 1,598,771 | $ | 1,583,640 | $ | 1,389,183 | $ | 1,319,051 | $ | 1,220,659 | ||||||||||
Cash Flow Data: |
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Net cash provided by operating activities |
$ | 152,893 | $ | 118,956 | $ | 106,482 | $ | 91,002 | $ | 109,749 | ||||||||||
Net cash used in investing activities |
$ | (301,058 | ) | $ | (299,138 | ) | $ | (177,823 | ) | $ | (138,334 | ) | $ | (17,673 | ) | |||||
Net cash provided by (used in) financing activities |
$ | 167,695 | $ | 180,044 | $ | 66,845 | $ | 45,542 | $ | (92,637 | ) | |||||||||
Funds From Operations: (2) |
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Net income (loss) attributable to common stockholders |
$ | 15,870 | $ | (15,086 | ) | $ | (25,250 | ) | $ | (37,830 | ) | $ | (18,585 | ) | ||||||
Adjustments: | ||||||||||||||||||||
Real estate related depreciation and amortization |
137,120 | 126,687 | 128,989 | 115,904 | 111,250 | |||||||||||||||
Equity in (earnings) loss of unconsolidated joint ventures, net |
(2,405 | ) | (1,087 | ) | 2,556 | 2,986 | (2,698 | ) | ||||||||||||
Equity in FFO of unconsolidated joint ventures |
10,152 | 10,312 | 4,732 | 4,001 | 11,807 | |||||||||||||||
Loss on business combinations |
| | | 395 | 10,325 | |||||||||||||||
Impairment losses on depreciable real estate (4) |
13,279 | 11,422 | 10,160 | 8,012 | 681 | |||||||||||||||
Gain on dispositions of real estate interests |
(33,650 | ) | (13,383 | ) | (12,030 | ) | (2,091 | ) | (1,354 | ) | ||||||||||
Gain on dispositions of non-depreciable real estate |
31 | | | 13 | 783 | |||||||||||||||
Noncontrolling interest in the operating partnerships share of the above adjustments |
(8,211 | ) | (12,522 | ) | (14,252 | ) | (13,426 | ) | (17,907 | ) | ||||||||||
FFO attributable to unitholders |
8,437 | 9,743 | 9,901 | 8,678 | 14,881 | |||||||||||||||
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FFO attributable to common stockholders and unitholdersbasic and diluted |
140,623 | 116,086 | 104,806 | 86,642 | 109,183 | |||||||||||||||
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Adjustments: |
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Impairment losses on non-depreciable real estate (3) |
| | | 3,992 | 300 | |||||||||||||||
Debt modification costs |
| | | 1,136 | | |||||||||||||||
Acquisition costs (3) |
3,578 | 1,975 | 1,902 | 1,228 | | |||||||||||||||
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FFO, as adjusted, attributable to common stockholders and unitholders, basic and diluted (2): |
$ | 144,201 | $ | 118,061 | $ | 106,708 | $ | 92,998 | $ | 109,483 | ||||||||||
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FFO per common share and unitbasic and diluted |
$ | 0.44 | $ | 0.41 | $ | 0.39 | $ | 0.36 | $ | 0.48 | ||||||||||
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FFO as adjusted, per common share and unitbasic and diluted (2)(4): |
$ | 0.45 | $ | 0.42 | $ | 0.40 | $ | 0.39 | $ | 0.49 | ||||||||||
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FFO weighted average common shares and units outstanding: |
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Common shares |
298,769 | 254,831 | 242,591 | 212,412 | 192,900 | |||||||||||||||
Participating securities |
2,462 | 1,896 | 1,601 | 1,689 | 1,535 | |||||||||||||||
Units |
19,079 | 23,358 | 25,310 | 26,351 | 30,660 | |||||||||||||||
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FFO weighted average common shares, participating securities and units outstandingbasic: |
320,310 | 280,085 | 269,502 | 240,452 | 225,095 | |||||||||||||||
Dilutive common stock equivalents |
893 | 623 | 449 | 357 | 189 | |||||||||||||||
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FFO weighted average common shares and units outstandingdiluted: |
321,203 | 280,708 | 269,951 | 240,809 | 225,284 | |||||||||||||||
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(See footnote definitions on pages 31-32)
30
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, 2013, 2012, 2011, 2010 and 2009 (in thousands):
For the Years Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Property NOI (5) |
$ | 206,193 | $ | 170,449 | $ | 150,169 | $ | 131,967 | $ | 136,843 | ||||||||||
Institutional capital management and other fees |
2,787 | 4,059 | 4,291 | 4,133 | 2,701 | |||||||||||||||
Impairment losses |
| | | (4,100 | ) | | ||||||||||||||
Real estate related depreciation and amortization |
(130,002 | ) | (109,993 | ) | (103,333 | ) | (91,129 | ) | (86,407 | ) | ||||||||||
Casualty and involuntary conversion gain |
296 | 1,174 | | | | |||||||||||||||
Development profit |
268 | 307 | | | | |||||||||||||||
General and administrative |
(28,010 | ) | (25,763 | ) | (25,251 | ) | (24,733 | ) | (27,971 | ) | ||||||||||
Impairment losses on investments in unconsolidated joint ventures |
| | (1,953 | ) | (216 | ) | (300 | ) | ||||||||||||
Loss on business combination |
| | | (395 | ) | (10,325 | ) | |||||||||||||
Equity in earnings (loss) of unconsolidated joint ventures, net |
2,405 | 1,087 | (2,556 | ) | (2,986 | ) | 2,698 | |||||||||||||
Interest expense |
(63,394 | ) | (69,274 | ) | (63,645 | ) | (56,272 | ) | (52,053 | ) | ||||||||||
Interest and other income (expense) |
274 | 85 | (93 | ) | (235 | ) | 1,584 | |||||||||||||
Income tax benefit (expense) and other taxes |
(68 | ) | (671 | ) | (132 | ) | (652 | ) | (1,394 | ) | ||||||||||
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Loss from continuing operations |
$ | (9,251 | ) | $ | (28,540 | ) | $ | (42,503 | ) | $ | (44,618 | ) | $ | (34,624 | ) | |||||
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(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 Industrials 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. NAREITs 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. |
31
(3) | Excluding amounts attributable to noncontrolling interests. |
(4) | Under NAREITs 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. |
32
ITEM 7. | MANAGEMENTS 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 United States. DCT is the sole general partner of, and as of December 31, 2013 owned an approximate 94.8% 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 pages 31-32, 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 occupancy, rents and operating income at existing properties and acquiring and developing high-quality properties with attractive operating income and value growth prospects.
Fundamentals for industrial real estate continue to improve in response to general improvement in the economy as well as trends that particularly favor industrial assets, including the growth of e-commerce and United States based manufacturing. We expect moderate economic growth to continue throughout 2014, which should result in continued positive demand for warehouse space as companies expand and upgrade their distribution and production platforms.
In response to positive net absorption and lower market vacancy levels, rental rates are increasing in most of our markets, although they generally remain below peak levels. Rental concessions, such as free rent, have also declined in all markets. Consistent with recent experience and based on current market conditions, we expect average net effective rental rates on new leases signed in 2014 to be 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.
New development has begun to increase in certain markets where fundamentals have improved, however construction is below current levels of net absorption in most markets and well below peak levels. We expect that the operating environment will continue to be 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 2014 than it was in 2013, primarily as a result of higher occupancy in 2014 and the impact of increasing rental rates on leases signed in 2014 compared to expiring leases.
In terms of capital investment, we will continue to pursue the acquisition 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.
33
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 common shares, proceeds from asset sales or through additional borrowings. Please see Liquidity and Capital Resources on page 49 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 During 2013
Significant transactions for the year ended December 31, 2013
| Acquisitions |
| During the year ended December 31, 2013, we acquired 38 buildings totaling approximately 7.1 million square feet. These properties were acquired for a total purchase price of $359.5 million, excluding our existing ownership of 3.6% in the seven properties previously held by TRT-DCT Venture I (see Notes to the Consolidated Financial Statements, Note 4Investment in and Advances to Unconsolidated Joint Ventures for further detail). |
| During the year ended December 31, 2013, we acquired five land parcels for future development which total approximately 128.6 acres located in the Southern California, Seattle, Miami, and Houston markets for a total purchase price of $40.5 million. |
34
| Development Activities |
During 2013, we continued to expand our development activities. The table below represents a summary of our consolidated development activity as of December 31, 2013:
Project |
Market | Acres | Number of Buildings |
Square Feet | Percent Owned |
Cumulative Costs at 12/31/2013 |
Projected Investment |
Completion Date (1) |
Percent Leased |
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(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||
Development Activities |
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Projects in Lease Up |
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DCT Airtex Industrial Center |
Houston | 13 | 1 | 267 | 100 | % | $ | 12,161 | $ | 14,983 | Q4-2013 | 100 | % | |||||||||||||||||||||||
DCT 55 |
Chicago | 33 | 1 | 604 | 100 | % | 26,218 | 28,318 | Q4-2012 | 66 | % | |||||||||||||||||||||||||
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Total | 46 | 2 | 871 | 100 | % | $ | 38,379 | $ | 43,301 | 77 | % | |||||||||||||||||||||||||
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Under Construction |
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DCT Beltway Tanner Business Center |
Houston | 11 | 1 | 133 | 100 | % | $ | 10,201 | $ | 15,153 | Q1-2014 | 0 | % | |||||||||||||||||||||||
8th & Vineyard B |
So. California | 4 | 1 | 99 | 91 | % | 5,243 | 6,197 | Q1-2014 | 0 | % | |||||||||||||||||||||||||
DCT Summer South Distribution Center |
Seattle | 9 | 1 | 188 | 100 | % | 9,194 | 13,060 | Q1-2014 | 0 | % | |||||||||||||||||||||||||
DCT White River Corporate Center Phase I |
Seattle | 30 | 1 | 649 | 100 | % | 23,051 | 42,433 | Q2-2014 | 0 | % | |||||||||||||||||||||||||
Slover Logistics Center II |
So. California | 28 | 1 | 610 | 100 | % | 24,241 | 37,496 | Q1-2014 | 100 | % | |||||||||||||||||||||||||
DCT Auburn 44 |
Seattle | 3 | 1 | 49 | 100 | % | 3,341 | 4,547 | Q1-2014 | 100 | % | |||||||||||||||||||||||||
DCT Rialto Logistics Center |
So. California | 42 | 1 | 928 | 100 | % | 21,480 | 59,523 | Q3-2014 | 0 | % | |||||||||||||||||||||||||
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Total | 127 | 7 | 2,656 | 100 | % | $ | 96,751 | $ | 178,409 | 25 | % | |||||||||||||||||||||||||
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Build-to-Suit for Sale |
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8th & Vineyard A |
So. California | 6 | 1 | 130 | 91 | % | $ | 7,773 | $ | 8,703 | Q1-2014 | N/A | ||||||||||||||||||||||||
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Total | 6 | 1 | 130 | 91 | % | $ | 7,773 | $ | 8,703 | |||||||||||||||||||||||||||
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Total Development Activities |
|
179 | 10 | 3,657 | 99 | % | $ | 142,903 | $ | 230,413 | 38 | % | ||||||||||||||||||||||||
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(1) | The completion date represents the date of building shell completion or estimated date of shell completion. |
Construction was completed during the second quarter of 2013 on the Dulles Summit build-to-suit project. We recognized development profits, net of tax of approximately $0.3 million for the year ended December 31, 2013 related to the development of the Dulles Summit build-to-suit project. As of December 31, 2013, we had one build-to-suit for sale project, 8th and Vineyard A, under contract. Due to the terms of the contract, timing of payments and the sale recognition criteria of GAAP, no profit was recognized in 2013. The construction and sale were completed in January 2014, at which time the development profit was recognized.
| Dispositions |
| During the year ended December 31, 2013, we sold 51 operating properties, totaling approximately 6.8 million square feet, to third-parties for combined gross proceeds of approximately $265.8 million. This included the disposition of DCTs entire portfolio of Mexico assets consisting of 15 buildings totaling 1.7 million square feet, for gross proceeds of approximately $82.7 million. |
| We recognized gains of approximately $33.6 million on the disposition of 36 operating properties and recognized an impairment loss of approximately $13.3 million on the disposition of a portfolio in Dallas. |
| Significant Activity with Joint Ventures |
| During May 2013, we purchased the remaining 96.4% interest in seven properties from TRT-DCT JV I for additional consideration of $82.8 million. Additionally, we sold one of the properties during 2013 and the remaining six properties were consolidated as of December 31, 2013. |
35
| Debt Activity |
| During February 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 five years, extended our existing $300.0 million senior unsecured line of credit for a period of four years and received a commitment for an additional $175.0 million senior unsecured term loan with a term of two years. We closed on the additional $175.0 million in March 2013, which was used to refinance a scheduled June 2013 maturity of $175.0 million of other senior unsecured debt. |
| During October 2013, the operating partnership issued $275.0 million aggregate principal amount of 4.50% senior notes due 2023 at 99.038% of face value in a private placement for net proceeds of approximately $269.6 million after offering costs. We primarily used the net proceeds to repay a $15.9 million mortgage note that was scheduled to mature in October 2013, a $50.0 million senior unsecured note that was scheduled to mature in January of 2014 and our $175.0 million senior unsecured term loan that was scheduled to mature in February 2015, which were pre-payable without prepayment penalties. |
| Equity activity |
| On May 29, 2013, we registered a third continuous equity offering program, to replace our continuous equity offering program previously registered on November 20, 2012. Pursuant to this offering, we may sell up to 20 million shares of common stock from time-to-time through May 29, 2016 in at-the-market offerings or certain other transactions. During the year ended December 31, 2013, we issued approximately 13.8 million shares through the second and third continuous equity offering programs at an average price of $7.37 per share for proceeds of $100.4 million, net of offering expenses. The proceeds from the sale of shares were used for general corporate purposes, including funding acquisitions and repaying debt. As of December 31, 2013, 16.6 million shares remain available to be issued under the current offering. |
| On August 13, 2013, we issued 23.0 million shares of common stock in a public offering at a price of $7.20 per share for proceeds of $158.2 million, net of offering expenses. |
Critical Accounting Policies and 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 (GAAP). The preparation of these financial statements requires us to make estimates and judgments 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 managements 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.
36
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, pre-development, 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.
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 principal operations, at our weighted average borrowing rate during the period. A qualifying investment is an investment in an unconsolidated joint venture provided that our investees activities include the use of funds to acquire qualifying assets, such as development or predevelopment activities, and planned principal operations have not commenced.
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.
37
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 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.
Real estate, including land, building, building and land improvements, and tenant 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 whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be 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 assess 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 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 managements 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 managements judgment of factors such as market knowledge, market supply and demand factors, historical experience, lease terms, customers 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
38
uncertain factors, either individually or taken as a whole. Should the actual results differ from managements 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 recorded at the lower of their carrying amount or fair value (typically estimated based on the contracted sales price) less costs to sell. Impairment of assets held for sale is a component of Income from discontinued operations in the Consolidated Statements of Operations and is further detailed in Notes to Consolidated Financial Statements Note 15Discontinued Operations and Assets Held for Sale.
Impairment of Investments in and Advances to Unconsolidated Joint Ventures
We evaluate our investments in and advances to unconsolidated joint ventures 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 investments 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 whole by management in determining the valuation of our investment. Should the actual results differ from managements 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, 2013 compared to the year ended December 31, 2012
As of December 31, 2013, the Company owned interests in, managed or had under development approximately 75.5 million square feet of properties leased to approximately 900 customers, including 12.3 million square feet of unconsolidated properties on behalf of four institutional capital management joint venture partners and we consolidated 395 operating properties, two redevelopment properties, two development properties and one property which was held for sale. As of December 31, 2012, we consolidated 399 operating properties, four redevelopment properties, three development properties and three properties which were held for sale.
39
Comparison of the year ended December 31, 2013 to the year ended December 31, 2012
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, 2013 compared to the year ended December 31, 2012. 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. We generally consider buildings stabilized when occupancy reaches 90%. 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 321 operating properties and was comprised of 48.6 million square feet. A discussion of these changes follows the table (in thousands):
Year Ended December 31, |
$ Change | Percent Change |
||||||||||||||
2013 | 2012 | |||||||||||||||
Rental Revenues |
||||||||||||||||
Same store, excluding revenues related to early lease terminations |
$ | 233,191 | $ | 226,927 | $ | 6,264 | 2.8 | % | ||||||||
Non-same store operating properties |
51,073 | 9,175 | 41,898 | 456.7 | % | |||||||||||
Development and redevelopment |
652 | 185 | 467 | 252.4 | % | |||||||||||
Revenues related to early lease terminations |
1,302 | 552 | 750 | 135.9 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total rental revenues |
286,218 | 236,839 | 49,379 | 20.8 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Rental Expenses and Real Estate Taxes |
||||||||||||||||
Same store |
67,010 | 63,908 | 3,102 | 4.9 | % | |||||||||||
Non-same store operating properties |
12,784 | 2,249 | 10,535 | 468.4 | % | |||||||||||
Development and redevelopment |
231 | 233 | (2 | ) | -0.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total rental expenses and real estate taxes |
80,025 | 66,390 | 13,635 | 20.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Property Net Operating Income (1) |
||||||||||||||||
Same store, excluding revenues related to early lease terminations |
166,181 | 163,019 | 3,162 | 1.9 | % | |||||||||||
Non-same store operating properties |
38,289 | 6,926 | 31,363 | 452.8 | % | |||||||||||
Development and redevelopment |
421 | (48 | ) | 469 | 977.1 | % | ||||||||||
Revenues related to early lease terminations |
1,302 | 552 | 750 | 135.9 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total property net operating income |
206,193 | 170,449 | 35,744 | 21.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Revenue and Other Income (Loss) |
||||||||||||||||
Development profit |
268 | 307 | (39 | ) | -12.7 | % | ||||||||||
Institutional capital management and other fees |
2,787 | 4,059 | (1,272 | ) | -31.3 | % | ||||||||||
Equity in earnings of unconsolidated joint ventures, net |
2,405 | 1,087 | 1,318 | 121.3 | % | |||||||||||
Interest and other income |
274 | 85 | 189 | 222.4 | % | |||||||||||
Casualty and involuntary conversion gain |
296 | 1,174 | (878 | ) | -74.8 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other revenue and other income |
6,030 | 6,712 | (682 | ) | -10.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Expenses |
||||||||||||||||
Real estate related depreciation and amortization |
130,002 | 109,993 | 20,009 | 18.2 | % | |||||||||||
Interest expense |
63,394 | 69,274 | (5,880 | ) | -8.5 | % | ||||||||||
General and administrative |
28,010 | 25,763 | 2,247 | 8.7 | % | |||||||||||
Income tax expense and other taxes |
68 | 671 | (603 | ) | -89.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
221,474 | 205,701 | 15,773 | 7.7 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations |
26,723 | 11,800 | 14,923 | 126.5 | % | |||||||||||
Net (income) loss attributable to noncontrolling interests |
(1,602 | ) | 1,654 | (3,256 | ) | -196.9 | % | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to common stockholders |
$ | 15,870 | $ | (15,086 | ) | $ | 30,956 | 205.2 | % | |||||||
|
|
|
|
|
|
|
|
(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 pages 31-32, above. |
40
Rental Revenues and Leasing Activity
Rental revenues, which are comprised of base rent, straight-line rent, amortization of above and below market rent intangibles, tenant recovery income, other rental revenues and early lease termination fees, increased $49.4 million for the year ended December 31, 2013 compared to the same period in 2012, primarily due to the following changes:
| $43.1 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. Since December 31, 2012, we acquired 38 operating properties, six properties for development and completed development of five properties. |
| $6.3 million increase in total revenue in our same store portfolio due primarily to the following: |
| $6.7 million increase in base rent primarily resulting from increased rental rates and a 100 basis point increase in average occupancy year over year; |
| $3.2 million increase in operating expense recoveries related to a higher average occupancy; and |
| $1.3 million increase in other rental revenues primarily related to increases in amortization of below market rent and other rents; which was partially offset by |
| $5.0 million decrease in straight-line rental revenue as a result of fewer rent concessions. |
The following table illustrates the components of our consolidated rental revenues for the years ended December 31, 2013 and 2012 (in thousands):
Year Ended December 31, |
||||||||||||
2013 | 2012 | $ Change | ||||||||||
Base rent |
$ | 212,045 | $ | 176,798 | $ | 35,247 | ||||||
Straight-line rent |
5,335 | 6,254 | (919 | ) | ||||||||
Amortization of above and below market rent intangibles |
1,581 | 826 | 755 | |||||||||
Tenant recovery income |
63,829 | 51,695 | 12,134 | |||||||||
Other rental income |
2,126 | 714 | 1,412 | |||||||||
Revenues related to early lease terminations |
1,302 | 552 | 750 | |||||||||
|
|
|
|
|
|
|||||||
Total rental revenues |
$ | 286,218 | $ | 236,839 | $ | 49,379 | ||||||
|
|
|
|
|
|
The following table provides a summary of our leasing activity for the year ended December 31, 2013:
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) | (in months) | |||||||||||||||||||||||||||
Year to date 2013 |
299 | 13,836 | $ | 4.37 | 6.60 | % | 53 | $ | 1.77 | 72.0 | % |
(1) | Excludes 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 an annual ratio of the change in net effective rent (including straight-line rent adjustments as required by GAAP) compared to the net effective rent of the comparable lease. Leases where there were no prior comparable leases, due to extended downtime, or materially different lease structures and short-term lease of less than 12 months, are excluded. |
(4) | The lease term is in months. Assumes no exercise of lease renewal options, if any. |
41
(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 percentage of customers renewing their respective leases weighted by average square feet. |
During the year ended December 31, 2013, we signed 102 leases with free rent, which were for 5.8 million square feet of property with total concessions of $6.6 million.
Rental Expenses and Real Estate Taxes
Rental expenses and real estate taxes increased $13.6 million for the year ended December 31, 2013 compared to the same period in 2012, primarily due to:
| $10.5 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, 2013; and |
| $3.1 million increase in rental expenses and real estate taxes year over year in our same store portfolio, which was primarily due to increases in property taxes, snow removal, management fees and bad debt expense. |
Other Revenue and Other Income (Loss)
Total other revenue and other income (loss) decreased $0.7 million for the year ended December 31, 2013 as compared to the same period in 2012, primarily due to:
| $1.3 million decrease in institutional capital management fees as a result of a decrease in assets under management due to the sale of properties from our unconsolidated joint ventures; and |
| $0.9 million decrease in casualty gains related to amounts received from insurance companies during 2012 for casualty events at certain properties; partially offset by |
| $1.3 million increase in equity in earnings of unconsolidated joint ventures primarily as a result of an increase in occupancy in three of our joint ventures. |
Other Expenses
Other expenses increased $15.8 million for the year ended December 31, 2013 as compared to the same period in 2012, primarily as a result of:
| $20.0 million increase in depreciation and amortization expense, resulting from real estate acquisitions and capital additions; and |
| $2.2 million increase in general and administrative expenses primarily related to higher acquisition costs and personnel costs, partially offset by an increase in capitalized overhead as a result of increased development, leasing and other capital activities; partially offset by |
| $5.9 million decrease in interest expense as a result of the $175.0 million term loan paid down in March 2013, lower borrowings on our revolving line of credit, hedging ineffectiveness of $0.7 million during 2012 and an increase in capitalized interest in 2013 related to increased development activities. |
Income from Discontinued Operations
Income from discontinued operations increased $14.9 million for the year ended December 31, 2013 as compared to the same period in 2012. This increase is primarily related to the gain on dispositions totaling $33.6 million partially offset by impairment charges of $13.3 million recorded on sales of properties during 2013, as compared to gain on
42
dispositions totaling $13.4 million partially offset by impairment charges of $11.4 million recorded on sales of properties during 2012. Additionally, the increase was offset by lower operating and other income from properties sold or held for sale in 2013 compared to 2012.
Summary of the year ended December 31, 2012 compared to the year ended December 31, 2011
As of December 31, 2012, 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.
43
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. We generally consider buildings stabilized when occupancy reaches 90%. The same store portfolio for the periods presented totaled 288 buildings comprised of approximately 44.6 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 |
$ | 203,850 | $ | 199,023 | $ | 4,827 | 2.4 | % | ||||||||
Non-same store operating properties |
32,252 | 11,899 | 20,353 | 171.0 | % | |||||||||||
Development and redevelopment |
185 | | 185 | 100.0 | % | |||||||||||
Revenues related to early lease terminations |
552 | 614 | (62 | ) | -10.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total rental revenues |
236,839 | 211,536 | 25,303 | 12.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Rental Expenses and Real Estate Taxes |
||||||||||||||||
Same store |
57,486 | 57,344 | 142 | 0.2 | % | |||||||||||
Non-same store operating properties |
8,672 | 3,882 | 4,790 | 123.4 | % | |||||||||||
Development and redevelopment |
232 | 141 | 91 | 64.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total rental expenses and real estate taxes |
66,390 | 61,367 | 5,023 | 8.2 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Property Net Operating Income (1) |
||||||||||||||||
Same store, excluding revenues related to early lease terminations |
146,364 | 141,679 | 4,685 | 3.3 | % | |||||||||||
Non-same store operating properties |
23,580 | 8,017 | 15,563 | 194.1 | % | |||||||||||
Development and redevelopment |
(47 | ) | (141 | ) | 94 | 66.7 | % | |||||||||
Revenues related to early lease terminations |
552 | 614 | (62 | ) | -10.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total property net operating income |
170,449 | 150,169 | 20,280 | 13.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Revenue and Other Income (Loss) |
||||||||||||||||
Development profit |
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) |
85 | (93 | ) | 178 | 191.4 | % | ||||||||||
Casualty and involuntary conversion gain |
1,174 | | 1,174 | 100.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other revenue and other income |
6,712 | 1,642 | 5,070 | 308.8 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Expenses |
||||||||||||||||
Real estate related depreciation and amortization |
109,993 | 103,333 | 6,660 | 6.4 | % | |||||||||||
Interest expense |
69,274 | 63,645 | 5,629 | 8.8 | % | |||||||||||
General and administrative |
25,763 | 25,251 | 512 | 2.0 | % | |||||||||||
Impairment losses on investments in unconsolidated joint ventures |
| 1,953 | (1,953 | ) | -100.0 | % | ||||||||||
Income tax expense and other taxes |
671 | 132 | 539 | 408.3 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
205,701 | 194,314 | 11,387 | 5.9 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations |
11,800 | 13,660 | (1,860 | ) | -13.6 | % | ||||||||||
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 pages 31-32, above. |
44
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 $25.3 million for the year ended December 31, 2012 compared to the same period in 2011, primarily due to the following changes:
| $20.5 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. Since December 31, 2011, we acquired 29 operating properties, four redevelopment properties and completed development or redevelopment of three properties. |
| $4.8 million increase in total revenue in our same store portfolio due primarily to the following: |
| $4.8 million increase in base rent primarily resulting from increased rental rates and a 140 basis point increase in average occupancy year over year; and |
| $3.5 million increase in operating expense recoveries related to a higher average occupancy; which was partially offset by |
| $3.2 million decrease in straight-line rental revenue as a result of fewer rent concessions; and |
| $0.2 million decrease in early lease termination fees. |
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, |
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2012 | 2011 | $ Change | ||||||||||
Base rent |
$ | 176,798 | $ | 157,885 | $ | 18,913 | ||||||
Straight-line rent |
6,254 | 8,301 | (2,047 | ) | ||||||||
Amortization of above and below market rent intangibles |
826 | 387 | 439 | |||||||||
Tenant recovery income |
51,695 | 43,579 | 8,116 | |||||||||
Other rental income |
714 | 770 | (56 | ) | ||||||||
Revenues related to early lease terminations |
552 | 614 | (62 | ) | ||||||||
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Total rental revenues |
$ | 236,839 | $ | 211,536 | $ | 25,303 | ||||||
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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) |
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(in thousands) | (in months) | |||||||||||||||||||||||||||
Year to date 2012 |
305 | 15,492 | $ | 3.81 | 4.60 | % | 56 | $ | 1.83 | 73.4 | % |
(1) | Excludes 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 an annual ratio of the change in net effective rent (including straight-line rent adjustments as required by GAAP) compared to the net effective rent of the comparable lease. Leases where there were no prior comparable leases, due to extended downtime, or materially different lease structures and short-term lease of less than 12 months, are excluded. |
(4) | The lease term is in months. Assumes no exercise of lease renewal options, if any. |
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(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 percentage of customers renewing their respective leases weighted by average square feet. |
Rental Expenses and Real Estate Taxes
Rental expenses and real estate taxes increased $5.0 million for the year ended December 31, 2012 compared to the same period in 2011, primarily due to a $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.
Other Revenue and Other Income (Loss)
Total other revenue and other income (loss) increased $5.1 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 in two of our joint ventures, as well as gains recognized on the sale of two properties in our joint ventures; and |
| $1.2 million increase in casualty gains related to amounts received from insurance companies subsequent to December 31, 2012 for casualty events at certain properties. |
Other Expenses
Other expenses increased $11.4 million for the year ended December 31, 2012 as compared to the same period in 2011, primarily as a result of:
| $6.7 million increase in real estate depreciation and amortization expense resulting from real estate acquisitions and capital additions; |
| $5.6 million increase in interest expense primarily related 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 6Financial Instruments and Hedging Activities for further detail related to the hedge activity); and |
| $0.5 million increase in general and administrative expenses, primarily related to an increase in acquisition costs for the increased number of properties acquired during 2012; 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 $1.9 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.
Segment Summary for the years ended December 31, 2013, 2012 and 2011
The Companys 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 15Discontinued Operations and Assets Held for Sale for additional information):
As of December 31, | Year Ended December 31, |
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Number of buildings |
Square feet |
Occupancy at period end |
Segment assets (1) |
Rental revenues (2) |
Property net operating income (3) |
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EAST: |
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2013 |
132 | 23,163 | 90.3 | % | $ | 1,026,416 | $ | 95,682 | $ | 69,853 | ||||||||||||||
2012 |
117 | 19,651 | 86.0 | % | $ | 875,845 | $ | 82,909 | $ | 60,666 | ||||||||||||||
2011 |
110 | 18,970 | 89.0 | % | $ | 936,305 | $ | 79,920 | $ | 58,212 | ||||||||||||||
CENTRAL: |
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2013 |
166 | 26,699 | 92.2 | % | $ | 1,034,814 | $ | 111,017 | $ | 76,327 | ||||||||||||||
2012 |
151 | 23,663 | 90.8 | % | $ | 1,107,561 | $ | 90,037 | $ | 61,800 | ||||||||||||||
2011 |
137 | 20,367 | 90.7 | % | $ | 1,021,956 | $ | 76,376 | $ | 50,660 | ||||||||||||||
WEST: |
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2013 |
101 | 13,088 | 93.6 | % | $ | 1,018,246 | $ | 79,519 | $ | 60,013 | ||||||||||||||
2012 |
90 | 11,456 | 97.2 | % | $ | 863,003 | $ | 63,893 | $ | 47,983 | ||||||||||||||
2011 |
78 | 10,042 | 91.3 | % | $ | 669,591 | $ | 55,240 | $ | 41,297 |
(1) | Segment assets include all assets comprising operating properties included in a segment, less non-segment cash and cash equivalents, other non-segment assets, and assets held for sale. 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 are included in discontinued operations and 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 pages 31-32, above. |
The following table reflects our total assets, net of accumulated depreciation and amortization, by segment (in thousands):
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
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Segments: |
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East assets |
$ | 1,026,416 | $ | 875,845 | $ | 936,305 | ||||||
Central assets |
1,034,814 | 1,107,561 | 1,021,956 | |||||||||
West assets |
1,018,246 | 863,003 | 669,591 | |||||||||
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Total segment net assets |
3,079,476 | 2,846,409 | 2,627,852 | |||||||||
Non-segment assets: |
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Non-segment cash and cash equivalents |
25,671 | 8,653 | 11,624 | |||||||||
Other non-segment assets (1) |
152,620 | 149,285 | 153,822 | |||||||||
Assets held for sale |
8,196 | 52,852 | | |||||||||
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Total assets |
$ | 3,265,963 | $ | 3,057,199 | $ | 2,793,298 | ||||||
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(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 increased by approximately $150.6 million in 2013 due to the acquisition of 13 properties and completion of development of two operating properties since December 31, 2012. |
| East Segment assets decreased by approximately $60.5 million in 2012 due to the disposition of 20 properties, partially offset by the acquisition of seven properties and the completion of the development of two properties since December 31, 2011. |
| East Segment property NOI, after reclassification for discontinued operations, increased approximately $9.2 million, for the year ended December 31, 2013 as compared to the same period in 2012 primarily as a result of: |
| $12.8 million increase in rental revenues, of which $6.7 million is attributed to property acquisitions and $6.1 million is attributed to increased occupancy and higher rental revenues at existing properties; which was partially offset by |
| $3.6 million increase in operating expenses primarily comprised of increased property taxes, property insurance and maintenance. |
| 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 increased occupancy and higher rental revenues at existing properties; which was partially offset by |
| $0.5 million increase in operating expenses primarily comprised of increased property taxes, property insurance and maintenance primarily due to property acquisitions. |
Central Segment
| Central Segment assets decreased by approximately $72.7 million in 2013 due to the disposition of 47 properties, including the disposition of our entire portfolio in Mexico consisting of 15 properties, partially offset by the acquisition of 14 properties and completion of development of one property since December 31, 2012. |
| Central Segment assets increased by approximately $85.6 million in 2012 due to the acquisition of 12 properties and completion of development of one property, partially offset by the disposition of 16 properties since December 31, 2011. |
| Central Segment property NOI, after reclassification for discontinued operations, increased approximately $14.5 million, for the year ended December 31, 2013 as compared to the same period in 2012 primarily as a result of: |
| $21.0 million increase in rental revenues, of which $3.7 million is attributed to property acquisitions and $17.3 million is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $6.5 million increase in operating expenses primarily comprised of increased property taxes, property insurance primarily due to property acquisitions and an increase in bad debt related to a tenant default. |
| Central Segment property NOI, after reclassification for discontinued operations, increased approximately $11.1 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 is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
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| $2.6 million increase in operating expenses primarily comprised of increased property taxes and property insurance primarily due to property acquisitions. |
West Segment
| West Segment assets increased by approximately $155.2 million in 2013 due to the acquisition of 11 properties and completion of development of one property, partially offset by the disposition of one property since December 31, 2012. |
| West Segment assets increased by approximately $193.4 million in 2012 due to the acquisition of 12 properties since December 31, 2011. |
| West Segment property NOI, after reclassification for discontinued operations, increased approximately $12.0 million, for the year ended December 31, 2013 as compared to the same period in 2012 primarily as a result of: |
| $15.6 million increase in rental revenues, of which $2.9 million is attributed to property acquisitions and $12.7 million which is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $3.6 million increase in operating expenses primarily comprised of increased property taxes and property insurance. |
| West Segment property NOI, after reclassification for discontinued operations, increased approximately $6.7 million, for the year ended December 31, 2012 as compared to the same period in 2011 primarily as a result of: |
| $8.7 million increase in rental revenues, of which $2.2 million is attributed to property acquisitions and $6.5 million is attributed to an increase in occupancy and higher rental revenues at existing properties; which was partially offset by |
| $2.0 million increase in operating expenses primarily comprised of increased property taxes and property insurance. |
Liquidity and Capital Resources
Overview
We currently expect that our principal sources of working capital and funding for potential capital requirements for expansions and renovation of properties, developments, acquisitions, and debt service and distributions to shareholders will include:
| Cash flows from operations; |
| Proceeds from dispositions; |
| Borrowings under our senior unsecured revolving credit facility; |
| Other forms of secured or unsecured financings; |
| Offerings of common stock or other securities; |
| Current cash balances; and |
| Distributions from institutional capital management and other joint ventures. |
Our sources of capital will be used to meet our liquidity requirements and capital commitments, including operating activities, debt service obligations, equityholder distributions, capital expenditures at our properties, development funding requirements and future acquisitions. We expect to utilize the same sources of capital to meet our short-term and long-term liquidity requirements.
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Cash Flows
Year ended December 31, 2013 compared to year ended December 31, 2012
Cash and cash equivalents were $32.2 million and $12.7 million as of December 31, 2013 and December 31, 2012, respectively.
The table below summarizes our cash flow activity for the years ended December 31, 2013 and 2012 (in thousands):
Year Ended December 31, |
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2013 | 2012 | Change | ||||||||||
Net cash provided by operating activities |
$ | 152,893 | $ | 118,956 | $ | 33,937 | ||||||
Net cash used in investing activities |
$ | (301,058 | ) | $ | (299,138 | ) | $ | (1,920 | ) | |||
Net cash provided by financing activities |
$ | 167,695 | $ | 180,044 | $ | (12,349 | ) |
Net cash provided by operating activities increased $33.9 million primarily due to an increase in property net operating income, as a result of an increase in occupancy and rental rates (see Rental Revenues and Leasing Activity on page 41 for further details), and an increase in accounts payable, accrued expenses and other liabilities, and a decrease in straight-line rent due to fewer rent concessions.
Net cash used in investing activities increased $1.9 million primarily due to an increase in real estate acquisitions of $42.7 million, a $20.7 million decrease in distributions of investments in unconsolidated joint ventures resulting from the sale of three properties in our unconsolidated joint ventures in 2012 and an increase of cash outflows related to capital expenditures of $56.8 million as reflected in the table below. These activities were partially offset by an increase in dispositions of $104.5 million and a decrease in investments in unconsolidated joint ventures of $16.7 million.
Going forward, we will pursue the acquisition of buildings and land, and consider selective development of new buildings in markets where we perceive that demand and market rental rates will provide attractive financial returns. The amount of cash used related to acquisitions and development and redevelopment investments will vary from period to period based on a number of factors, including, among others, current and anticipated future market conditions impacting the desirability of investments, leasing results with respect to our existing development and redevelopment projects and our ability to locate attractive opportunities. See Development Activities on page 35 for further details regarding projected investment of our current development activities as well as cumulative costs incurred during the year ended December 31, 2013. Our total capital expenditures for the years ended December 31, 2013 and 2012 were comprised of the following (in thousands):
Year Ended December 31, |
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2013 | 2012 | $ Change | ||||||||||
Development |
$ | 107,950 | $ | 46,701 | $ | 61,249 | ||||||
Redevelopment |
5,948 | 3,319 | 2,629 | |||||||||
Due diligence and other |
9,209 | 4,782 | 4,427 | |||||||||
Other capital improvements |
4,024 | 5,710 | (1,686 | ) | ||||||||
Building and land improvements |
12,394 | 12,619 | (225 | ) | ||||||||
Tenant improvements and leasing costs |
26,219 | 31,388 | (5,169 | ) | ||||||||
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Total capital expenditures and development activities |
165,744 | 104,519 | 61,225 | |||||||||
Accruals and other adjustments |
(12,822 | ) | (8,424 | ) | (4,398 | ) | ||||||
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Total cash paid for capital expenditures and development activities |
$ | 152,922 | $ | 96,095 | $ | 56,827 | ||||||
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We capitalize costs directly related to the development, predevelopment, redevelopment or improvement of our investments in real estate. Building and land improvements comprise capital expenditures related to maintaining our consolidated operating activities. Due diligence capital improvements relate to acquired operating properties and are generally incurred within 12 months of the acquisition date.
We capitalize indirect costs such as personnel, office and administrative expenses that are directly related to our development, redevelopment projects and successful origination of new leases based on an estimate of the time spent on the development and leasing activities. These capitalized costs for the years ended December 31, 2013, 2012 and 2011 were $7.8 million, $6.3 million and $5.0 million, respectively. During the year ended December 31, 2013, 2012 and 2011 total interest expense capitalized was $8.3 million, $4.3 million and $2.7 million, respectively.
Net cash provided by financing activities decreased $12.3 million primarily due to a decrease of $125.2 million in net proceeds from debt activity. During 2013, our senior unsecured revolving credit facilitys repayments exceeded our proceeds from borrowings by $71.0 million while in 2012 our proceeds from borrowings exceeded our repayments by $110.0 million. Proceeds from senior unsecured notes exceeded repayments of senior unsecured notes by $97.4 million and $90.0 million, respectively, during 2013 and 2012. Principal payments on mortgage notes exceeded proceeds from mortgage notes by $24.2 million and $72.7 million, respectively, during 2013 and 2012.
Additionally, net cash provided by financing activities decreased due to an increase of $11.4 million in our dividends and distributions paid to common stockholders and noncontrolling interests. These changes were partially offset by an increase of $87.3 million of net proceeds from the issuance of common stock, a $33.6 million payment made to settle our cash flow hedge in 2012 and a $1.8 million decrease in cash outflow relating to redemptions of noncontrolling interests.
Year ended December 31, 2012 compared to year ended December 31, 2011
Cash and cash equivalents were $12.7 million and $12.8 million as of December 31, 2012 and December 31, 2011, respectively.
The table below summarizes our cash flow activity for the years ended December 31, 2012 and 2011 (in thousands):
Year Ended December 31, |
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2012 | 2011 | Change | ||||||||||
Net cash provided by operating activities |
$ | 118,956 | $ | 106,482 | $ | 12,474 | ||||||
Net cash used in investing activities |