Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
DCT Industrial Trust Inc. Yes x No ¨
DCT Industrial Operating Partnership LP Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
DCT Industrial Trust Inc. Yes x No ¨
DCT Industrial Operating Partnership LP Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
DCT Industrial Trust Inc.:
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
DCT Industrial Operating Partnership LP:
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DCT Industrial Trust Inc. Yes ¨ No x
DCT Industrial Operating Partnership LP Yes ¨ No x
As of July 27, 2018, 94,204,340 shares of common stock of DCT Industrial Trust Inc., par value $0.01 per share, were outstanding.
1
EXPLANATORY NOTE
This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2018 of DCT Industrial Trust Inc., a Maryland corporation, and DCT Industrial Operating Partnership LP, a Delaware limited partnership. Except as otherwise indicated herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
We are a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. DCT has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. We own our properties through the Operating Partnership and its subsidiaries. As of June 30, 2018, DCT owned approximately 96.7% of the outstanding equity interests in the Operating Partnership.
We operate DCT and the Operating Partnership as one enterprise. The management of DCT consists of the same members as the management of the Operating Partnership. As general partner with control of the Operating Partnership, DCT consolidates the Operating Partnership for financial reporting purposes. DCT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of DCT and the Operating Partnership are the same on their respective financial statements.
We believe combining the quarterly reports on Form 10-Q of DCT and the Operating Partnership into this single report results in the following benefits:
•
enhances investors’ understanding of DCT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•
eliminates duplicative disclosures and provides a more streamlined and readable presentation as a substantial portion of the Company’s disclosures apply to both DCT and the Operating Partnership; and
•
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
Stockholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the Consolidated Financial Statements of DCT and those of the Operating Partnership. Equity interests in the Operating Partnership held by entities other than DCT are classified within partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in DCT’s financial statements. Equity interests of 3.3% of the Operating Partnership were owned by executives and non-affiliated limited partners as of June 30, 2018.
To help investors understand the differences between DCT and the Operating Partnership, this report provides separate Consolidated Financial Statements for DCT and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes distinct information related to each entity.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for DCT and the Operating Partnership to establish that the requisite certifications have been made and that DCT and the Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.
1
DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Investments in and advances to unconsolidated joint ventures
73,031
72,231
Net investment in real estate
3,944,860
3,816,842
Cash and cash equivalents
19,843
10,522
Restricted cash
15,813
14,768
Straight-line rent and other receivables, net of allowance for doubtful
accounts of $230 and $425, respectively
82,726
80,119
Other assets, net
19,904
25,740
Assets held for sale
—
62,681
Total assets
$
4,083,146
$
4,010,672
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and accrued expenses
$
106,714
$
115,150
Distributions payable
35,184
35,070
Tenant prepaids and security deposits
36,654
34,946
Other liabilities
36,669
34,172
Intangible lease liabilities, net
16,985
18,482
Line of credit
324,000
234,000
Senior unsecured notes
1,287,426
1,328,225
Mortgage notes
163,330
160,129
Liabilities related to assets held for sale
—
1,035
Total liabilities
2,006,962
1,961,209
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none
outstanding
—
—
Shares-in-trust, $0.01 par value, 100,000,000 shares authorized, none
outstanding
—
—
Common stock, $0.01 par value, 500,000,000 shares authorized, 94,113,116
and 93,707,264 shares issued and outstanding as of June 30, 2018 and
December 31, 2017, respectively
941
937
Additional paid-in capital
3,000,086
2,985,122
Distributions in excess of earnings
(1,015,254
)
(1,022,605
)
Accumulated other comprehensive loss
(5,036
)
(11,893
)
Total stockholders’ equity
1,980,737
1,951,561
Noncontrolling interests
95,447
97,902
Total equity
2,076,184
2,049,463
Total liabilities and equity
$
4,083,146
$
4,010,672
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited, in thousands, except per share information)
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
REVENUES:
Rental revenues
$
109,781
$
104,217
$
219,204
$
209,641
Institutional capital management and other fees
288
304
672
776
Total revenues
110,069
104,521
219,876
210,417
OPERATING EXPENSES:
Rental expenses
9,246
9,226
19,485
18,688
Real estate taxes
17,061
15,529
33,785
32,295
Real estate related depreciation and amortization
41,896
41,447
83,128
83,052
General and administrative
12,824
7,821
20,288
15,013
Casualty loss (gain)
240
—
245
(270
)
Total operating expenses
81,267
74,023
156,931
148,778
Operating income
28,802
30,498
62,945
61,639
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated joint ventures, net
1,089
2,737
2,166
4,253
Gain on dispositions of real estate interests
11,784
28,076
43,974
28,102
Interest expense
(16,133
)
(16,805
)
(32,183
)
(33,560
)
Other expense
(114
)
(7
)
(80
)
(12
)
Impairment loss on land
—
(938
)
(371
)
(938
)
Income tax expense and other taxes
(140
)
(69
)
(221
)
(203
)
Consolidated net income of DCT Industrial Trust Inc.
25,288
43,492
76,230
59,281
Net income attributable to noncontrolling interests
(1,172
)
(1,858
)
(3,291
)
(2,688
)
Net income attributable to common stockholders
24,116
41,634
72,939
56,593
Distributed and undistributed earnings allocated to participating securities
(191
)
(162
)
(408
)
(323
)
Adjusted net income attributable to common stockholders
$
23,925
$
41,472
$
72,531
$
56,270
NET EARNINGS PER COMMON SHARE:
Basic
$
0.25
$
0.45
$
0.77
$
0.61
Diluted
$
0.25
$
0.45
$
0.77
$
0.61
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic
94,101
92,307
93,956
92,030
Diluted
94,124
92,429
93,981
92,156
Distributions declared per common share
$
0.36
$
0.31
$
0.72
$
0.62
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Consolidated net income of DCT Industrial Trust Inc.
$
25,288
$
43,492
$
76,230
$
59,281
Other comprehensive income (loss):
Net derivative gain (loss) on cash flow hedging instruments
1,516
(1,503
)
5,171
(1,142
)
Net reclassification adjustment on cash flow hedging instruments
906
1,402
2,006
2,888
Other comprehensive income (loss)
2,422
(101
)
7,177
1,746
Comprehensive income
27,710
43,391
83,407
61,027
Comprehensive income attributable to noncontrolling interests
(1,278
)
(1,882
)
(3,611
)
(2,781
)
Comprehensive income attributable to common stockholders
$
26,432
$
41,509
$
79,796
$
58,246
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
(unaudited, in thousands)
Total Equity
Common Stock
Additional
Paid-in
Capital
Distributions in Excess
of Earnings
Accumulated Other Comprehen-
sive Loss
Non-controlling
Interests
Shares
Amount
Balance at December 31, 2017
$
2,049,463
93,707
$
937
$
2,985,122
$
(1,022,605
)
$
(11,893
)
$
97,902
Cumulative effect of revenue
accounting change (Note 2)
2,256
—
—
—
2,256
—
—
Net income
76,230
—
—
—
72,939
—
3,291
Other comprehensive income
7,177
—
—
—
—
6,857
320
Issuance of common stock, net
of offering costs
10,769
191
2
10,767
—
—
—
Issuance of common stock, stock-based compensation plans
(764
)
36
—
(764
)
—
—
—
Amortization of stock-based compensation
3,852
—
—
880
—
—
2,972
Distributions to common stockholders and noncontrolling interests
(71,588
)
—
—
—
(67,844
)
—
(3,744
)
Capital contributions from noncontrolling interests
873
—
—
—
—
—
873
Redemptions of noncontrolling interests
(2,084
)
179
2
4,081
—
—
(6,167
)
Balance at June 30, 2018
$
2,076,184
94,113
$
941
$
3,000,086
$
(1,015,254
)
$
(5,036
)
$
95,447
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended June 30,
2018
2017
OPERATING ACTIVITIES:
Consolidated net income of DCT Industrial Trust Inc.
$
76,230
$
59,281
Adjustments to reconcile consolidated net income of DCT Industrial Trust Inc.
to net cash provided by operating activities:
Real estate related depreciation and amortization
83,128
83,052
Gain on dispositions of real estate interests
(43,974
)
(28,102
)
Distributions of earnings from unconsolidated joint ventures
3,353
22,717
Equity in earnings of unconsolidated joint ventures, net
(2,166
)
(4,253
)
Impairment loss on land
371
938
Stock-based compensation
3,198
3,004
Casualty loss (gain)
245
(270
)
Straight-line rent
(2,553
)
(4,214
)
Other
2,286
2,515
Changes in operating assets and liabilities:
Other receivables and other assets
4,234
8,395
Accounts payable, accrued expenses and other liabilities
(5,179
)
(3,599
)
Net cash provided by operating activities
119,173
139,464
INVESTING ACTIVITIES:
Real estate acquisitions
(78,157
)
(35,555
)
Capital expenditures and development activities
(152,827
)
(97,532
)
Proceeds from dispositions of real estate investments
133,619
52,868
Investments in unconsolidated joint ventures
(622
)
(11,891
)
Proceeds from casualties
—
300
Distributions of investments in unconsolidated joint ventures
773
3,546
Other investing activities
(733
)
(3,278
)
Net cash used in investing activities
(97,947
)
(91,542
)
FINANCING ACTIVITIES:
Proceeds from senior unsecured revolving line of credit
145,000
189,000
Repayments of senior unsecured revolving line of credit
(55,000
)
(131,000
)
Proceeds from senior unsecured notes
—
51,940
Repayments of senior unsecured notes
(41,500
)
(76,000
)
Proceeds from mortgage notes
7,113
—
Principal payments on mortgage notes
(3,417
)
(37,770
)
Net settlement on issuance of stock-based compensation awards
(764
)
(1,452
)
Proceeds from issuance of common stock
10,963
60,694
Offering costs for issuance of common stock and OP Units
(194
)
(1,199
)
Redemption of noncontrolling interests
(2,084
)
(4,280
)
Dividends to common stockholders
(67,700
)
(56,908
)
Distributions paid to noncontrolling interests
(3,774
)
(2,868
)
Contributions from noncontrolling interests
873
532
Other financing activity
(365
)
(698
)
Net cash used in financing activities
(10,849
)
(10,009
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
10,377
37,913
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
25,845
18,074
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
36,222
$
55,987
Supplemental Disclosures of Cash Flow Information
Cash paid for interest, net of capitalized interest
$
29,190
$
30,616
Supplemental Disclosures of Non-Cash Activities
Retirement of fully depreciated and amortized assets
$
20,651
$
15,660
Redemptions of OP Units settled in shares of common stock
$
4,083
$
2,380
Increase in dividends declared and not paid
$
(114
)
$
(410
)
Contributions from noncontrolling interests
$
—
$
745
Decrease in capital expenditures accruals
$
(901
)
$
(8,301
)
Capitalized stock compensation
$
654
$
687
The accompanying notes are an integral part of these Consolidated Financial Statements.
7
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except unit information)
June 30, 2018
December 31, 2017
ASSETS
(unaudited)
Land
$
1,216,121
$
1,162,908
Buildings and improvements
3,385,873
3,284,976
Intangible lease assets
57,869
65,919
Construction in progress
173,139
149,994
Total investment in properties
4,833,002
4,663,797
Less accumulated depreciation and amortization
(961,173
)
(919,186
)
Net investment in properties
3,871,829
3,744,611
Investments in and advances to unconsolidated joint ventures
73,031
72,231
Net investment in real estate
3,944,860
3,816,842
Cash and cash equivalents
19,843
10,522
Restricted cash
15,813
14,768
Straight-line rent and other receivables, net of allowance
for doubtful accounts of $230 and $425, respectively
82,726
80,119
Other assets, net
19,904
25,740
Assets held for sale
—
62,681
Total assets
$
4,083,146
$
4,010,672
LIABILITIES AND CAPITAL
Liabilities:
Accounts payable and accrued expenses
$
106,714
$
115,150
Distributions payable
35,184
35,070
Tenant prepaids and security deposits
36,654
34,946
Other liabilities
36,669
34,172
Intangible lease liabilities, net
16,985
18,482
Line of credit
324,000
234,000
Senior unsecured notes
1,287,426
1,328,225
Mortgage notes
163,330
160,129
Liabilities related to assets held for sale
—
1,035
Total liabilities
2,006,962
1,961,209
Partners' Capital:
General Partner:
OP Units, 973,093 and 969,565 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
20,657
20,467
Limited Partners:
OP Units, 96,336,213 and 95,986,961 issued and outstanding as of
June 30, 2018 and December 31, 2017, respectively
2,045,062
2,026,234
Accumulated other comprehensive loss
(5,205
)
(12,303
)
Total partners' capital
2,060,514
2,034,398
Noncontrolling interests
15,670
15,065
Total capital
2,076,184
2,049,463
Total liabilities and capital
$
4,083,146
$
4,010,672
The accompanying notes are an integral part of these Consolidated Financial Statements.
8
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited, in thousands, except per unit information)
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
REVENUES:
Rental revenues
$
109,781
$
104,217
$
219,204
$
209,641
Institutional capital management and other fees
288
304
672
776
Total revenues
110,069
104,521
219,876
210,417
OPERATING EXPENSES:
Rental expenses
9,246
9,226
19,485
18,688
Real estate taxes
17,061
15,529
33,785
32,295
Real estate related depreciation and amortization
41,896
41,447
83,128
83,052
General and administrative
12,824
7,821
20,288
15,013
Casualty loss (gain)
240
—
245
(270
)
Total operating expenses
81,267
74,023
156,931
148,778
Operating income
28,802
30,498
62,945
61,639
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated joint ventures, net
1,089
2,737
2,166
4,253
Gain on dispositions of real estate interests
11,784
28,076
43,974
28,102
Interest expense
(16,133
)
(16,805
)
(32,183
)
(33,560
)
Other expense
(114
)
(7
)
(80
)
(12
)
Impairment loss on land
—
(938
)
(371
)
(938
)
Income tax expense and other taxes
(140
)
(69
)
(221
)
(203
)
Consolidated net income of DCT Industrial Operating Partnership LP
25,288
43,492
76,230
59,281
Net income attributable to noncontrolling interests
(366
)
(247
)
(754
)
(480
)
Net income attributable to OP Unitholders
24,922
43,245
75,476
58,801
Distributed and undistributed earnings allocated to participating securities
(191
)
(162
)
(408
)
(323
)
Adjusted net income attributable to OP Unitholders
$
24,731
$
43,083
$
75,068
$
58,478
NET EARNINGS PER OP UNIT:
Basic
$
0.25
$
0.45
$
0.77
$
0.61
Diluted
$
0.25
$
0.45
$
0.77
$
0.61
WEIGHTED AVERAGE OP UNITS OUTSTANDING:
Basic
97,311
95,827
97,223
95,622
Diluted
97,334
95,949
97,248
95,748
Distributions declared per OP Unit
$
0.36
$
0.31
$
0.72
$
0.62
The accompanying notes are an integral part of these Consolidated Financial Statements.
9
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Consolidated net income of DCT Industrial Operating Partnership LP
$
25,288
$
43,492
$
76,230
$
59,281
Other comprehensive income (loss):
Net derivative gain (loss) on cash flow hedging instruments
1,516
(1,503
)
5,171
(1,142
)
Net reclassification adjustment on cash flow hedging instruments
906
1,402
2,006
2,888
Other comprehensive income (loss)
2,422
(101
)
7,177
1,746
Comprehensive income
27,710
43,391
83,407
61,027
Comprehensive income attributable to noncontrolling interests
(389
)
(236
)
(833
)
(483
)
Comprehensive income attributable to OP Unitholders
$
27,321
$
43,155
$
82,574
$
60,544
The accompanying notes are an integral part of these Consolidated Financial Statements.
10
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statement of Changes in Capital
(unaudited, in thousands)
Total Capital
General Partner
Limited Partners
Accumulated Other
Comprehensive Loss
Non-controlling Interests
OP Units
OP Units
Units
Amount
Units
Amount
Balance at December 31, 2017
$
2,049,463
970
$
20,467
95,987
$
2,026,234
$
(12,303
)
$
15,065
Cumulative effect of revenue accounting
change (Note 2)
2,256
—
23
—
2,233
—
—
Net income
76,230
—
755
—
74,721
—
754
Other comprehensive income
7,177
—
—
—
—
7,098
79
Issuance of OP Units, net of selling costs
10,769
—
—
191
10,769
—
—
Issuance of OP Units, share-based
compensation plans
(764
)
—
—
198
(764
)
—
—
Amortization of share-based compensation
3,852
—
—
—
3,852
—
—
Distributions to OP Unitholders
and noncontrolling interests
(71,588
)
—
(704
)
—
(69,725
)
—
(1,159
)
Capital contributions from
noncontrolling interests
873
—
—
—
—
—
873
Redemption of limited partner OP Units, net
(2,084
)
—
—
(37
)
(2,142
)
—
58
Conversion of limited partner OP Units
to OP Units of general partner
—
3
116
(3
)
(116
)
—
—
Balance at June 30, 2018
$
2,076,184
973
$
20,657
96,336
$
2,045,062
$
(5,205
)
$
15,670
The accompanying notes are an integral part of these Consolidated Financial Statements.
11
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended June 30,
2018
2017
OPERATING ACTIVITIES:
Consolidated net income of DCT Industrial Operating Partnership LP
$
76,230
$
59,281
Adjustments to reconcile consolidated net income of DCT Industrial Operating
Partnership LP to net cash provided by operating activities:
Real estate related depreciation and amortization
83,128
83,052
Gain on dispositions of real estate interests
(43,974
)
(28,102
)
Distributions of earnings from unconsolidated joint ventures
3,353
22,717
Equity in earnings of unconsolidated joint ventures, net
(2,166
)
(4,253
)
Impairment loss on land
371
938
Share-based compensation
3,198
3,004
Casualty loss (gain)
245
(270
)
Straight-line rent
(2,553
)
(4,214
)
Other
2,286
2,515
Changes in operating assets and liabilities:
Other receivables and other assets
4,234
8,395
Accounts payable, accrued expenses and other liabilities
(5,179
)
(3,599
)
Net cash provided by operating activities
119,173
139,464
INVESTING ACTIVITIES:
Real estate acquisitions
(78,157
)
(35,555
)
Capital expenditures and development activities
(152,827
)
(97,532
)
Proceeds from dispositions of real estate investments
133,619
52,868
Investments in unconsolidated joint ventures
(622
)
(11,891
)
Proceeds from casualties
—
300
Distributions of investments in unconsolidated joint ventures
773
3,546
Other investing activities
(733
)
(3,278
)
Net cash used in investing activities
(97,947
)
(91,542
)
FINANCING ACTIVITIES:
Proceeds from senior unsecured revolving line of credit
145,000
189,000
Repayments of senior unsecured revolving line of credit
(55,000
)
(131,000
)
Proceeds from senior unsecured notes
—
51,940
Repayments of senior unsecured notes
(41,500
)
(76,000
)
Proceeds from mortgage notes
7,113
—
Principal payments on mortgage notes
(3,417
)
(37,770
)
Net settlement on issuance of share-based compensation awards
(764
)
(1,452
)
Proceeds from the issuance of OP Units in exchange for contributions from the REIT, net
10,769
59,495
OP Unit redemptions
(2,084
)
(4,280
)
Distributions paid on OP Units
(70,315
)
(59,387
)
Distributions paid to noncontrolling interests
(1,159
)
(389
)
Contributions from noncontrolling interests
873
532
Other financing activity
(365
)
(698
)
Net cash used in financing activities
(10,849
)
(10,009
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
10,377
37,913
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
25,845
18,074
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
36,222
$
55,987
Supplemental Disclosures of Cash Flow Information
Cash paid for interest, net of capitalized interest
$
29,190
$
30,616
Supplemental Disclosures of Non-Cash Activities
Retirement of fully depreciated and amortized assets
$
20,651
$
15,660
Contributions from noncontrolling interests
$
—
$
745
Decrease in capital expenditures accruals
$
(901
)
$
(8,301
)
Capitalized stock compensation
$
654
$
687
The accompanying notes are an integral part of these Consolidated Financial Statements.
12
DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTERNSHIP LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization
DCT Industrial Trust Inc. is a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. As used herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
DCT was formed as a Maryland corporation in April 2002 and has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. DCT owns properties through the Operating Partnership and its subsidiaries. As of June 30, 2018, DCT owned approximately 96.7% of the outstanding equity interests in the Operating Partnership.
As of June 30, 2018, the Company owned interests in approximately 74.0 million square feet of properties leased to approximately 830 customers, including:
•
63.5 million square feet comprising 388 consolidated operating properties that were 96.9% occupied;
•
1.7 million square feet comprising seven consolidated properties developed by DCT which are shell-construction complete and in lease-up;
•
0.1 million square feet comprising one consolidated property under redevelopment;
•
1.1 million square feet comprising five consolidated value-add acquisitions; and
•
7.6 million square feet comprising 21 unconsolidated properties that were 99.0% occupied and which we operated on behalf of two unconsolidated joint ventures.
In addition, the Company has 17 projects under construction and 15 projects in pre-development. See “Note 3 – Investment in Properties” for further details related to our development activity.
Note 2 – Summary of Significant Accounting Policies
Interim Financial Information
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with our audited Consolidated Financial Statements as of December 31, 2017 and related notes thereto included in our Form 10-K filed on February 16, 2018.
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the financial position, results of operations and cash flows of the Company, the Operating Partnership, their wholly-owned qualified REIT subsidiaries and taxable REIT subsidiaries, and their consolidated joint ventures in which they have a controlling interest.
13
Equity interests in the Operating Partnership held by entities other than DCT are classified within partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in DCT’s financial statements. Equity interests in entities consolidated into the Operating Partnership that are held by third parties are reflected in our accompanying balance sheets as noncontrolling interests. We also have noncontrolling partnership interests in unconsolidated institutional capital management and other joint ventures, which are accounted for under the equity method. All significant intercompany transactions and balances have been eliminated in consolidation.
We hold interests in both consolidated and unconsolidated joint ventures for the purposes of operating and developing industrial real estate. All joint ventures over which we have financial and operating control, and variable interest entities (“VIEs”) in which we have determined that we are the primary beneficiary, are included in the Consolidated Financial Statements. We use the equity method of accounting for joint ventures where we exercise significant influence, but do not have control over major operating and management decisions and we include our share of earnings or losses of these joint ventures in our consolidated results of operations.
We analyze our joint ventures in accordance with GAAP to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Our judgment with respect to our level of influence or control over an entity and whether we are the primary beneficiary of a VIE involves consideration of various factors including the form of our ownership interest, our representation on the entity’s board of directors (or equivalent body), the size of our investment (including loans), our obligation or right to absorb its losses or receive its benefits and our ability to participate in major decisions.
If a joint venture does not meet the characteristics of a VIE, we apply the voting interest model to determine whether the entity should be consolidated. Our ability to assess our influence or control over an entity affects the presentation of these investments in the Consolidated Financial Statements and our financial position and results of operations.
We concluded our Operating Partnership meets the criteria of a VIE as the Operating Partnership’s limited partners do not have the right to remove the general partner and do not have substantive participating rights in the operations of the Operating Partnership. Under the Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Partnership Agreement”), DCT is the primary beneficiary of the Operating Partnership as we have the obligation to absorb losses and receive benefits, and the power to control substantially all the activities which most significantly impact the economic performance of the Operating Partnership. Accordingly, the Operating Partnership is consolidated within DCT’s financial statements.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. We have not realized any losses in our cash and cash equivalents and believe that these short-term instruments are not exposed to any significant credit risk. Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and capital replacement reserves, security deposits and amounts held by intermediary agents to be used for tax-deferred, like-kind exchange transactions. As of June 30, 2018 and June 30, 2017, approximately $14.0 million and $36.3 million, respectively, of restricted cash was included in “Cash, Cash Equivalents and Restricted Cash” in our Consolidated Statements of Cash Flows related to tax deferred, like-kind exchange transactions.
The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Consolidated Balance Sheets to amounts reported within our Consolidated Statements of Cash Flows (in thousands):
As of June 30,
2018
2017
Cash and cash equivalents
$
19,843
$
17,229
Restricted cash
15,813
38,339
Restricted cash included in Other assets, net (1)
566
419
Total cash, cash equivalents and restricted cash
$
36,222
$
55,987
(1) Includes cash balances presented in assets held for sale in our Consolidated Balance Sheets.
14
Revenue Recognition
At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) are equal to 90% or more of the excess estimated fair value (over retained investment tax credits) of the leased building. Generally, our leases do not meet any of the listed criteria above and are classified as operating leases.
We record rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, receivables from tenants that we expect to collect over the remaining lease term are recorded on the balance sheet as straight-line rent receivables. The total increase to “Rental revenues” due to straight-line rent adjustments was approximately $0.9 million and $2.6 million for the three and six months ended June 30, 2018, respectively, and approximately and $0.8 million and $4.2 million for the three and six months ended June 30, 2017, respectively.
If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant generally is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When we are the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into rental revenues over the lease term. When the tenant is the owner of the tenant improvements, we record any tenant improvement allowance funded as a lease incentive and amortize it as a reduction of rental revenue over the lease term. Tenant recovery income includes reimbursements due from tenants pursuant to their leases for real estate taxes, insurance, repairs and maintenance and other recoverable property operating expenses and is recognized as “Rental revenues” during the period the related expenses are incurred. The reimbursements are recognized and presented on a gross basis, as the Company generally has control for fulfillment of services and other costs that are reimbursable, with respect to purchasing goods and services from third party suppliers. Tenant recovery income recognized as “Rental revenues” was approximately $26.6 million and $53.5 million for the three and six months ended June 30, 2018, respectively, and approximately $24.7 million and $50.6 million for the three and six months ended June 30, 2017. We maintain an allowance for estimated losses that may result from the inability of our customers to make required payments. If a customer fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances.
In connection with property acquisitions qualifying as asset acquisitions or business combinations, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an intangible lease asset or liability and amortized to “Rental revenues” over the reasonably assured term of the related leases. We consider a reasonably assured term to be the measurement period equal to the remaining non-cancelable term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. The unamortized balances of these assets and liabilities associated with the early termination of leases are fully amortized to their respective revenue line items in our Consolidated Statements of Operations on a straight-line basis over the estimated remaining contractual lease term. The total net impact to “Rental revenues” due to the amortization of above and below market rents was an increase of approximately $0.9 million and $1.6 million for the three and six months ended June 30, 2018, respectively, and approximately $0.7 million and $1.4 million for the three and six months ended June 30, 2017, respectively.
Early lease termination fees are recorded in “Rental revenues” on a straight-line basis over the estimated remaining contractual lease term or upon collection if collectability is not assured. Early lease termination fees were approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2018, respectively, and approximately $0.4 million and $0.9 million for the three and six months ended June 30, 2017, respectively.
We earn revenues from asset management fees, acquisition fees, property management fees and fees for other services pursuant to joint venture and other third-party agreements. These are included in our Consolidated Statements of Operations in “Institutional capital management and other fees.” We recognize revenues from asset management fees, acquisition fees, property management fees and fees for other services when the related underlying performance obligations to the customer are satisfied, which is when the services are performed.
15
New Accounting Standards
New Accounting Standards Adopted
In May 2014, FASB issued ASU 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), that requires companies to recognize revenue from contracts with customers based upon the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. The FASB subsequently issued additional ASUs which improve guidance and provide clarification of the new standard. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The Company adopted the standard effective January 1, 2018 and utilized the modified retrospective transition method.
Given the nature of our business, our primary revenue stream is from relatively short-term operating leases with tenants. Additionally, our historical property dispositions have been cash sales with no contingencies and no future involvement in the property operations. Our revenues that are under the scope of ASU 2014-09 are related to our asset management fees, acquisition fees, property management fees and fees for other services pursuant to joint venture and other third-party agreements, which are included in our Consolidated Statements of Operations in “Institutional capital management and other fees" as shown below:
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Rental revenues
$
109,781
$
104,217
$
219,204
$
209,641
Institutional capital management and other fees
288
304
672
776
Total revenues
$
110,069
$
104,521
$
219,876
$
210,417
As a result of adoption, the total impact to our financial statements in the first quarter of 2018 was a cumulative adjustment recorded as an increase of $2.3 million to “Investments in and advances to unconsolidated joint ventures” and a decrease to “Distributions in excess of earnings” related to the de-recognition of deferred gains related to a previous contributions of real estate properties into our joint ventures. No other material impacts to the Consolidated Financial Statements and related disclosures or internal control environment were identified upon adoption.
Substantially all of our revenues are generated from lease rentals, which fall under the scope of the new lease accounting ASU discussed below in New Accounting Standards Issued but not yet Adopted. We are still evaluating the treatment of nonlease components in our leases that primarily relate tenant recovery income for such items as common area maintenance expenses, which are also under the scope of the new lease accounting ASU.
16
New Accounting Standards Issued but not yet Adopted
In February 2016, the FASB issued an ASU that modifies existing accounting standards for lease accounting. The new standard requires a lessee to record a lease asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. Leases in which we are the lessors will be accounted as sales-type leases, direct financing leases or operating leases. Revenue related to the lease components of a lease contract will be recognized on a straight-line basis. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016.
Additionally, in July 2018, the FASB issued various practical expedients that impact both lessors and lessees that are also effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016. Specifically, the FASB issued a package of practical expedients that if adopted, must all be adopted. These expedients apply to all leases entered into prior to adoption and allow a Company to not: (1) reassess whether existing arrangements contain a lease (2) reassess lease classification and (3) re-evaluate treatment of initial direct costs. The Company expects to elect this package of practical expedients.
Also, another lessor relevant practical expedient was issued in July 2018, that allows lessors to be allowed to combine lease and associated nonlease components for accounting under the new lease standard if the timing and pattern of transfer of nonlease components match those of the related lease components and the lease is classified as operating on a stand-alone basis.
The Company, as a lessee, has a limited number of office and ground leases which will require further evaluation by the Company, but we anticipate they will be treated as operating leases, which will result in the Company recording a lease liability for our obligation for payments over the remaining lease term and an offsetting right-of-use asset in our Consolidated Balance Sheets. As disclosed in our annual Consolidated Financial Statements as of December 31, 2017 and related notes thereto included in our Form 10-K, we had $18.9 million of future noncancelable lease payments primarily related to our office and ground leases that will be required to be recorded on our Consolidated Balance Sheets. Our operating leases for which we are the lessee will generally have an expense pattern consistent with our historical recognition for operating leases. We don't anticipate the impact of the lease accounting ASU for leases in which we are the lessee to have a material impact on our Consolidated Financial Statements.
Leases in which we are the lessor will continue to be accounted for as operating leases with minimal impact on the Company's financial condition or results of operation; however, this standard may impact the timing of recognition and disclosures related to our tenant recovery income earned from leasing our consolidated operating properties. As such, we are currently evaluating the impact of nonlease components such as tenant recovery income. Additionally, the standard only allows for the capitalization of the initial direct costs that would have been incurred if the lease had not been obtained. The adoption of this guidance will impact our current policy regarding the capitalization of internal direct costs related to the successful origination of new leases and likely will reduce the amount of costs we currently capitalize for new leases. During the six months ended June 30, 2018, we capitalized $1.6 million of internal direct costs related to successful origination of new leases.
We are currently evaluating the impacts of the new lease standard for leases in which we are the lessee, which includes changing internal policies and processes with regards to the cost to obtain leases, evaluating the appropriate accounting treatment for nonlease elements in which we are the lessor and evaluating the impact on our internal controls. The standard requires a modified retrospective transition approach for all capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued additional transition relief, which allows a company to present the cumulative impacts of adoption of the lease standard on a modified retrospective approach via a cumulative-effect adjustment in opening retained earnings in the year of adoption instead of being required to restate the impacts of the new lease standard to all comparable periods presented in the year of adoption. The Company expects to adopt this standard effective January 1, 2019 using the newly issued modified retrospective transition method.
Note 3 – Investment in Properties
Our consolidated investment in properties consists of our operating portfolio, value-add acquisitions, properties under development, properties in pre-development, redevelopment properties and land held for development or other purposes. The historical cost of our investment in properties was (in thousands):
17
As of June 30, 2018
As of December 31, 2017
Operating portfolio
$
4,296,341
$
4,249,242
Properties under development
359,835
280,492
Properties in pre-development
76,864
51,883
Properties under redevelopment(1)
10,133
9,481
Value-add acquisitions(2)
86,173
68,673
Land held(3)
3,656
4,026
Total investment in properties
4,833,002
4,663,797
Less accumulated depreciation and amortization
(961,173
)
(919,186
)
Net investment in properties
$
3,871,829
$
3,744,611
(1)
Represents properties out of service while significant physical renovation of the property is underway or while the property is in lease-up subsequent to such renovation. May include properties taken out of service to change the properties' use and/or enhance its functionality.
(2)
Consolidated properties that were acquired and upon acquisition met either of the following criteria:
•
Occupancy of less than 75% upon acquisition; or
•
Occupancy of less than 75% expected to occur due to known move-outs within 24 months of the acquisition date.
Consolidated properties that were acquired vacant or with known move-outs within 24 months of the acquisition date with the intention to have the property out of service for significant physical renovations are classified as redevelopment properties.
(3)
Land held that is not intended to be improved or developed in the near future.
Acquisition Activity
During the six months ended June 30, 2018, we acquired three buildings totaling approximately 221.0 thousand square feet located in our Denver, Northern California and Seattle markets for a total purchase price of approximately $34.1 million.
Development Activity
Our properties under development include the following:
•
Seven buildings in our Chicago, Dallas, Denver, Miami and Northern California markets totaling approximately 1.7 million square feet that we completed shell-construction as of June 30, 2018 with cumulative costs to date of approximately $128.0 million. These properties are 11.2% leased and occupied based on weighted average square feet as of June 30, 2018.
•
Seventeen projects under construction totaling approximately 4.8 million square feet with cumulative costs to date of approximately $231.8 million.
During the six months ended June 30, 2018, we acquired approximately 143.2 acres of land for development in our Chicago, Cincinnati, New Jersey, Northern California, Pennsylvania and Southern California markets for approximately $44.6 million.
Disposition Activity
During the six months ended June 30, 2018, we sold 16 consolidated operating properties totaling approximately 2.6 million square feet from our Atlanta, Charlotte, Memphis, Northern California, Phoenix and Southern California markets to third-parties for gross proceeds of approximately $137.3 million. We recognized net gains of approximately $44.0 million on the disposition of these properties.
Impairment Loss on Land
During the six months ended June 30, 2018, the Company recognized a $0.4 million impairment loss on land held and used. Located in Reno, Nevada, the land was being held for future development. Based on the Company’s intent to sell and various market estimates, we recorded an impairment to recognize the land at estimated fair value, which was primarily based on level 3 fair value inputs.
18
Intangible Lease Assets and Liabilities
Aggregate amortization expense for intangible lease assets recognized in connection with property acquisitions (excluding assets and liabilities related to above and below market rents; see “Note 2 – Summary of Significant Accounting Policies” for additional information) was approximately $2.5 million and $4.7 million for the three and six months ended June 30, 2018, respectively, and approximately $2.6 million and $5.4 million for the three and six months ended June 30, 2017, respectively. Our intangible lease assets and liabilities included the following (in thousands):
As of June 30, 2018
As of December 31, 2017
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Other intangible lease assets
$
54,811
$
(32,694
)
$
22,117
$
62,785
$
(37,114
)
$
25,671
Above market rent
$
3,058
$
(1,908
)
$
1,150
$
3,134
$
(1,756
)
$
1,378
Below market rent
$
(27,556
)
$
10,571
$
(16,985
)
$
(28,883
)
$
10,401
$
(18,482
)
Note 4 – Investments in and Advances to Unconsolidated Joint Ventures
We enter into joint ventures primarily for purposes of operating and developing industrial real estate. Our investments in these joint ventures are included in “Investments in and advances to unconsolidated joint ventures” in our Consolidated Balance Sheets.
The following table summarizes our unconsolidated joint ventures (dollars in thousands):
As of June 30, 2018
Investments in and Advances to as of
Ownership Percentage
Number of Buildings
June 30, 2018
December 31, 2017
Unconsolidated Joint Ventures
Institutional Joint Ventures:
DCT/SPF Industrial Operating LLC
20.0
%
13
$
38,522
$
36,630
TRT-DCT Venture III
10.0
%
—
8
220
Total Institutional Joint Ventures
13
38,530
36,850
Other:
SCLA(1)
50.0
%
8
34,501
35,381
Total
21
$
73,031
$
72,231
(1)
Although we contributed 100% of the initial cash equity capital required by the venture, after return of certain preferential distributions on capital invested, profits and losses are generally split 50/50.
Guarantees
There are no lines of credit or side agreements related to, or between, our unconsolidated joint ventures and us, and there are no derivative financial instruments between our unconsolidated joint ventures and us. In addition, we do not believe we have any material exposure to financial guarantees.
19
Note 5 – Financial Instruments and Hedging Activities
Fair Value of Financial Instruments
As of June 30, 2018 and December 31, 2017, the fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximated their carrying values due to the short-term nature of settlement of these instruments. The fair values of other financial instruments subject to fair value disclosures were determined based on available market information and valuation methodologies we believe to be appropriate estimates for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. Our estimates may differ from the actual amounts that we could realize upon disposition. The following table summarizes these financial instruments (in thousands):