Duck Creek Technologies, Inc.
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

Good morning and welcome to the DCT Industrial first quarter 2013 earnings call and webcast. (Operator Instructions) I would now like to turn the conference over to Ms. Melissa Sachs, VP, Corporate Communications and IR. Ms. Sachs, please go ahead.

[Melissa Sachs:]

Hello everyone, and thank you for joining DCT Industrial Trust's first quarter 2013 earnings call. Today's call will be led by Phil Hawkins, our Chief Executive Officer; and Matt Murphy, our Chief Financial Officer, who will provide more details on the quarter's results as well as our guidance for the balance of the year. Additionally, Mike Ruen, our Managing Director for the East will be available to answer questions about the market and our real estate activities. Before I turn the call over to Phil, I would like to remind everyone that management's remarks on today's call will include forward-looking statements within the meaning of federal securities laws. This includes without limitation statements regarding projections, plans or future expectations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks including those set forth in our earnings release and in our Form 10-K filed with the SEC as updated by our quarterly reports on Form 10-Q. Additionally, on this conference call, we may refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures are available on our supplemental, which can be found in the Investor Relations section of our website at dctindustrial.com. And now, I will turn the call over to Phil.

[Philip Hawkins:]

Good morning everyone and thanks for joining our call. We had a very good first quarter, getting the year off to an excellent start and continuing the positive momentum of 2012. Our market teams continue the strong execution with respect to our operating portfolio, development pipeline, capital deployment and asset sales. I am further encouraged by the continued improvement in each of our markets. Leasing activity is good. Supply remains in check relative to net absorption and net effective rents are steadily improving. Let me start off with highlights from our operating portfolio. Occupancy in our consolidated operating portfolio increased 40 basis points over last quarter to 92.7%. Same-store NOI increased 8% on a cash basis and 5.3% on a GAAP basis, driven by both higher occupancy and higher effective rents. Rental rates increased 6% on a GAAP basis and declined 1.9% on a cash basis. This is the seventh consecutive quarter in which GAAP rents have increased. In my opinion GAAP rents are a better indication of market strength than cash rents as they take into account free rent and rent bumps over the term approximating what brokers would call net effective rents in the marketplace. Our expected tenant retention of 46% was lower than typical, driven by several known move outs. Each of the major move outs was triggered by the same phenomenon that is fueling our successful development program, customer reconfiguration and expansion that we could not accommodate in the current location. However, despite lower than average retention our overall occupancy is still increased, which is encouraging. And finally small tenant remain active as well. With occupancy of spaces less than 50,000 feet, increasing 80 basis points over last quarter from 89.6% to 90.4%. As we expected first quarter leasing activity started out slow, which is not unusual, but it has a fairly brisk in all size ranges since then. Since the end of the first quarter, we have signed 34 leases, totaling 1.6 million square feet and have a significant number of deals in the lease negotiation stage. 27 of the 34 leases signed since quarter end are less than 50,000 square feet reflecting the continued activity of smaller users. In response to declining vacancies and relatively constrained supply, effective rents are increasing across all of our markets. And I am optimistic that this trend will continue throughout the year. This is driven in large part by reduced concessions, but base rates are also increasing in many of our markets. When compared to a year or more ago, the attitude of tenants and their brokers has also noticeably shifted. They are now less aggressive in pushing down on rents and more focused on speed to completion. Don't get overly excited however, as the pendulum has not shifted too much to the side of the landlords, but at least negotiations are more balanced and reasonable than they have been for quite some time. As I said on our earnings call last quarter, we are much more focused now on pushing effective rents than just a few quarters ago. Our occupancy maybe more important to this year's NOI, pushing rents and rent bumps drive future NOI growth as well as value creation, which I believe is more important to long-term success and shareholder value. We are busy again this quarter on the capital deployment front. We are under binding contract to purchase our joint venture partners 96.4% interest in a portfolio of seven assets for an incremental investment of $86 million. Simultaneously, with this acquisition, we'll be paying off a mortgage debt that currently encumbers the portfolio. While the assets were 71% leased at the time we agreed to buy them, we have since signed a lease for all of the 500,000 square foot Lehigh Valley building. We also believe, we have all the vacancy to fully address in the 104,000 square foot Harrisburg asset and we have an agreement in place to expand in existing tenant, and are in the final stages of negotiating a lease for the remainder of the space. These three leases will bring the portfolio to 99.6% leased with occupancy expected by mid July. The current annualized cash yield on the portfolio is 6% with a projected stabilized yield of 7.4%. We do intend to sell the buildings in Charlotte and Sacramento, as those markets are not core to our long-term strategy. The Sacramento building is now being marketed and we expect to bring the Charlotte building to the market in the near future. In addition to the joint venture acquisition, we pushed six additional buildings at a cost of $44 million. Three of these buildings are in Southern California, two in Atlanta and one in Dallas. The first year cash yield of these acquisitions is projected to be 5.7%, while the projected stabilized yield is 6.3%. Our development program continues to perform very well. During the quarter, we completed the stabilization of two assets with total projected cost of $20.4 million and a projected stabilized yield of 9.4%, well in excess of our initial performance. We also started two buildings in Houston, and a fully pre-leased building expansion in Nashville, bringing our current pipeline of projects under construction or in lease up to seven buildings with $131 million of projected investment. This pipeline is now 52% on lease with a projected stabilized yield of 7.5%. We're not expected to start construction until the third quarter. We signed leases with for all of our 610,000 square foot Slover II project in the Inland Empire West submarket of Southern California. These economics compare quite favorably to our pro forma and eliminating any downtime is also a big plus. Leasing activity in our developmental pipeline is excellent, and I am confident that we will be on or ahead of schedule with each one. Given market opportunities as well as the leasing success of our pipeline, we are now projecting developmental starts for the year, including those started in the first quarter to be in the $175 million to $225 million range, an increase from our guidance last quarter of $125 million to $200 million. On the capital recycling front, we sold three buildings during the quarter for $51 million, at an average year-one cash yield of 7.2%. We have one portfolio under contract and in due diligence, and another in contract negotiation. We are in the early stage of marketing for sale of several other buildings and portfolios. These are the buildings where we believe values and our NOI growth is maturing, so that the capital can be better invested into acquiring and developing new assets with better value creation and NOI growth potential. In addition to selling assets, we also used the ATM to specifically fund the joint venture portfolio acquisitions. Both portfolio management and balance sheet management are important priorities for DCT, and I am pleased that we continue to make steady progress on both fronts. So all-in-all a very busy and I believe very successful quarter. We're off to a great start. And I'm looking forward to continued progress throughout the year. With that, let me turn over to Matt Murphy to provide further details on our results for the quarter as well as our 2013 guidance.

[Matthew Murphy:]

Thanks, Phil, and good morning, everyone. DCT's first quarter results reflect progress we've made on the operating front as well as the continued execution of our capital plan. I will dive a little deeper into the operating metrics that Phil touched upon, and talk through our funding strategy and expectations for the remainder of the year. Also, I will walk you through the thinking and the numbers behind raising our 2013 FFO guidance to $0.41 to $0.46 per share. The brightest spot of DCT's financial result continues to be the growth in NOI and cash flow with our same-store portfolio. This 53.8 million square foot portfolio represents over 90% of our consolidated operating assets based on square feet and it continues to perform very well. GAAP NOI on these assets increased 5.3% over 2012, while cash NOI grew 8%. This growth in NOI was ahead of our internal projections and was driven by an increase in average occupancy during the quarter of 210 basis points over 2012 as well as increased effective rents. First quarter cash revenue increased 7% year-over-year as free rents and other concessions continue to decline in all of our markets. 16 of our markets showed positive cash flow growth with 13 of those markets reaching double digits. This is the seventh consecutive quarter of positive same-store growth. While the pace of growth is likely to moderate as year-over-year occupancy increase is slow, our early outperformance and cautious optimism about the leasing market has caused us to increase our expectations for same-store cash NOI growth for all of 2013 to 3.5% to 5.5%. Portfolio occupancy was another positive this quarter, as consolidated operating occupancy increased 40 basis points to 92.7% during the quarter. And total consolidated occupancy, which includes development and redevelopment assets increased 90 basis points to 91.3%. As we predicted on our fourth quarter call, our first quarter retention of 46% was considerably lower than our recent history. This number was better than our expectations. However, as we had several tenants that we expected to vacate, ultimately renew and a few tenants, including three that occupied more than 100,000 square feet each signed short-to-near term extensions. So while the backdoor held better than expected, we also had a few wins in leasing relative to plan as well as instances, where signed tenants moved in sooner than anticipated. Although, this combined leave us approximately 80 basis points ahead of plan at the end of first quarter. And we are increasing our expectations for average occupancy in our operating portfolio for the year to between 92% and 94%. Turning to our capital markets activity during the quarter, we continue to execute on our plan of funding capital deployment with a combination of the sale of non-strategic assets, and the sale of equity where appropriate. We closed on the disposition of three properties during the quarter, which generated proceeds of $50.5 million. And we are also active on our ATM equity program, selling 10.4 million shares at an average price of $7.33 per share, raising approximately $76.1 million since yearend. We utilize the program in order to fund the pending joint venture acquisition as Phil described. Given the nature of the transaction, we've been confident that it would close for some time, but unable to preannounce the specifics, which made the use of the ATM an attractive way to fund the transaction. Combined with our activity in the fourth quarter of last year, we have raised a little over $135 million using the ATM, primarily to fund two specific transactions that we think will be accretive to earnings, earnings growth in NAV as well as improving our portfolio. Going forward, I think it's likely that dispositions will be the primary source of capital for DCT in the near-term as we fund our upcoming acquisition and development activities. However, we will continue to evaluate our funding options on a case-by-case basis as we determined the most appropriate and cost-effective source of capital. Unfortunately, most forms of capital are quite liquid in today's marketplace. Finally, consistent with our plan going into the year, we closed on the refinancing, which we announced on our fourth quarter call. This transaction allowed us to extend and reprice our existing $475 million bank facilities as well as borrow an additional $225 million that were used in part to retire $175 million of unsecured notes that matured in June of 2013, but were pre-payable at par in March. These facilities give us tremendous flexibility going forward as we execute our capital plan. With respect to capital deployment expectations for the year, we are increasing our guidance with respect to acquisitions to $150 million to $200 million for the year, as well as increasing guidance for construction starts for the year to $175 million to $225 million, which includes the $38.2 million of projects we started in the first quarter. The majority of this increase is due to the pre-leasing and resulting accelerated start of our 610,000 square foot Slover II facility in Southern California. Finally, I'd like to comment on our FFO guidance for the remainder of the year. As I mentioned, we have raised both ends of our guidance by $0.01, to $0.41 to $0.46 per diluted share. This improvement has been driven by a number of positive factors, as we've gotten off to a great start in 2013. On the capital market front, our equity transactions have performed better than our expectations, when we put together our initial guidance. Similarly, our disposition pricing has been in a more optimistic end of our estimates, and we believe this will continue through the year. Most importantly, we have begun the year modestly ahead of expectations with regards to renewals, occupancy and rental rates. We have made meaningful progress in terms occupancy in our smaller spaces, which we've said was imperative to continuity the occupancy gains we've enjoyed over the last several quarters. Plus, we feel pretty good about the general level of leasing activity in the markets, including activity on some of our key bets in 2013. Clearly, there is a lot of work yet to do in 2013, and the recovery thus far has been unsteady to be sure. But we continue to feel very good about what we've been able to accomplish in this environment thus far and very encouraged about how DCT is positioned to take advantage of what we see is excellent opportunities in the future. With that, I will turn it over to operator for questions. Thank you.

[Operator:]

(Operator Instructions) Our first question is from Jamie Feldman with Bank of America Merrill Lynch.

[Jamie Feldman:]

Phil you had commented that you think supply is pretty much in check. Can you just provide a little more color to just kind of what you're seeing in markets and if there is some markets that you are more concerned than others?

[Philip Hawkins:]

Well, to me I look at demand and I look at what's under construction and in the pipeline, and to be sure there is more capital and more supply than it was a year or two ago. I mean, we were unfortunate to have the balance sheet and the wherewithal to start early, and that was a lot of fun and high insight. But if you'll look at it now, demand has recovered pretty nicely in the markets we're allowed with the developments we're having and frankly we're well focused. So I how think about it, I look at some of the markets where we're not as focused on development and I see new starts and I look at the numbers, and even there we're not as focused on it as perhaps I am on other markets. I also think you know what they're going to be fine. And so to me that's as long as supply remains reasonable, and I wish it was non-existing except for us, but that's wishful thinking. As long as it remains reasonable and net absorption holds up, and that development is primarily funded by equity, which is what it has been, it's not debt, it is being funded by in addition to the REITs, it's being funded by pension funds, non-traded REITs and other equity sources that are up either doing it on their own and/or in joint venture or pre-commit structures that provided different level of discipline, a better level of discipline, than what we might have seen that before the crash, when it was driven by merchant builders with a short-term agenda and unlimited debt capital with fewer strings attached to it than comes with equity.

[Jamie Feldman:]

And I guess, along those lines of capital, you talked about using the disposition market. Can you talk a little bit about more about where pricing is today versus maybe last quarter? And where do you think you'll be selling?

[Philip Hawkins:]

I don't want to comment on, which markets we're selling in now, although on the market probably it's not hard to find out, it's just that I don't want to prejudge or jinx any deals that we feel good about, but needless to say, there are markets that primarily were either we are trying to reduce our exposure and do other assets that we just consider to be non-strategic, not consistent with our long-term ownership goals. Capital will continue to flow, every quarter I think it can't get any more, any better, and then it does and it's flowing more towards quality of the assets or function of the assets. And secondary markets than, say, a quarter or two ago, although a quarter is a pretty short period of time, but I think that's the main trend. And it's really flowing towards risk capital, we just talked about development, it's flowing toward secondary markets and it's flowing towards function of the assets. The coastal markets, where the markets that really recovered first. Coastal markets and primary, major non-coastal markets, I think continue to price come down there as well. But the spreads have definitely narrowed between the first loved markets with those that are now becoming more and more popular.

[Operator:]

Our next question is from John Stewart with Green Street Advisors.

[John Stewart:]

Phil, can you give us an update on the leasing progress at DCT 55?

[Philip Hawkins:]

Good activity, several active proposals, nothing of lease negotiation at this point in time.

[John Stewart:]

And it sounded like you said everything was on schedule or ahead of schedule, what's the timeline that you've got baked in for that project?

[Philip Hawkins:]

End of the year.

[Operator:]

Our next question is from Brendan Maiorana with Wells Fargo.

[Brendan Maiorana:]

This is probably for, Matt. So Matt, the amount of space that's leased, but not yet occupied went down along the quarter, I guess, it's probably why you guess, part of the reason for the occupancy uptick and maybe activity was little bit better too. But I think it's about 200,000 square feet versus 700,000 square feet at the end of the year. Does that reduction and maybe a narrow spread of lease versus occupied make it a little bit riskier for how we should think about the occupancy guidance going forward?

[Matthew Murphy:]

Well, obviously the first part of your statement is just fact. And to me, if you think about a two to four month cycle time between when most spaces lease and occupy, to me it's a natural sort of result of the slower leasing in the first quarter. And so that doesn't surprise me at all. You've heard Phil talk about how it's picked up, sort of, since then. So no, I don't think so. I mean obviously, I am taking that into account as we think through the occupancy guidance in total. I guess what I've also said is one of the other things that's impacting the numbers in the first quarter and therefore at the end of it, is the sort of proliferation, if you will, of the short-term tenant, I think cycle time. When you're building out a 400,000 square foot space, it's got to be three to four months deal, whereas if you have these smaller tenants that tend to get in and get out quicker, so the occupancy takes place sooner and therefore you have lots of drag and therefore less opportunity for the situation worth leased and not occupied. So no, I would not. I mean, obviously I'm comfortable with the occupancy guidance, or we wouldn't have put it out, but I wouldn't extrapolate more into that than I think it's just a sort of point and time measure that ebbs and flows.

[Brendan Maiorana:]

And then for, Phil, I suppose the TRT buying, I guess roughly 50% of that that venture floating on your balance sheet. One, was that a prescribed takeout in terms of how the pricing was determined; and then two, are you likely to get more takeouts of some of your venture partners as we look forward throughout the next several months and years.

[Philip Hawkins:]

It was not prescribed or contractual. It really was the outcome of a series of discussions that we've had with our partner about that specific portfolio. Those seven assets were encumbered by debt and we're talking through with the best means of addressing that debt and that they did to rebalance that loan. A similar trigger, frankly, to the Boubyan discussions last quarter. I would say that it's not necessarily indicative of more to come. You never know, hopefully we have good relationships with each of our partners and if there is anything that could be done in either direction that would help facilitate further the investment goals of respective of us and our partner, fully may haven't, but there is nothing eminent and I don't think it's necessarily prescriptive at least of the near future.

[Operator:]

Our next question is from Steve Sakwa with ISI Group.

[George Auerbach:]

It's actually George Auerbach here. Matt, you gave some guidance around the acquisition volumes and the development start volume for the year. Can you talk about the disposition volumes that you expect for the rest of the year?

[Matthew Murphy:]

George, I think the way to think about it, we've always been reluctant, if that's the right word, to talk about dispositions specifically and really more talked about the funding of our capital deployment would be done as a combination of dispositions and equity and ultimately as those markets move as the opportunity is set, so that crystallizes itself, we decide which is the more appropriate sort of source of that capital. So I'm probably not going to change that basic practice other than to say that I do think as Phil mentioned, we are working on a number of dispositions opportunities. I think it is extremely likely that the next sort of tranche, if you will, deployment will be funded by dispositions, consistent with a lot of the trends that Phil has already described in terms of compression in cap rate differential between primary and secondary markets et cetera. It's a good environment to be selling assets that are in vogue if you will in these secondary markets, so I think you'll us do more of that, with the mix between the two, I think the right way to think about it is sort of center in on the deployment goals and guidance that we put out there and think about it as a mix between the two. But we actually let off with equity and I think it's likely it's going to be dispositions next.

[George Auerbach:]

I guess where would the Mexican assets be in your preference list for dispositions this year, just given out sort of the GAAP rate improvement in that market?

[Philip Hawkins:]

Mexican assets, I would say that we look at all of our assts and we will think about it proactively, but I wouldn't want to single out Mexico one way or the other.

[George Auerbach:]

And finally, Matt and Phil, you both mentioned the cap rate spread between As and Bs and in terms of market and assets, I guess on sort of sliding scale between too wide, too narrow, just right, what do you think that spread is today?

[Philip Hawkins:]

In terms of buyer or seller, I guess I don't know. Obviously, capital is abundant. And I think more about capital flows in general and not surprised that as capital is frustrated with finding a place to go, then it goes where it hasn't been, but I don't know, I think the capital is going to remain abundant and spreads are going to remain where they are or probably tightened a little bit.

[Operator:]

Our next question is from Craig Mailman with KeyBanc Capital Markets.

[Craig Mailman:]

Just sort of follow-up on George's question, Matt, what is your funding needs for the balance of the year?

[Matthew Murphy:]

I think we are likely to spend based on the scheduled developments that we talked about roughly a $100 million or maybe a little less than that as we build out those starts that we have identified, obviously timing will impact that to a certain degree. We've raised most of the capital through ATM, as Phil and I, described for the TRT. And you know there is another roughly $50 million to $100 within the range of acquisitions. So I guess that gets you to $150 million, between $125 and $200 million depending on timing and where we hit on the various ranges of that deployment activity.

[Craig Mailman:]

And then just on the same-store NOI, you obviously went through a lot of the drivers there, but how much of that increase is really due to the above the average escalators you guys have been getting in rents lately?

[Matthew Murphy:]

In the same-store pool, the free rent burning off aspect is little over $2 million of the roughly $4 million of cash NOI growth. And I'm going to talk about cash because that's the thing that makes sense in the context of this question. It is little in excess of $1 million that is based upon bumps in contractual leases that were in place throughout those periods. So a large part of that cash, and obviously the 210 basis points is a driver of this number, but I don't think it's important to not lose sight of the fact that it's just pure cash growth embedded in the leases that we've been getting and sometimes that's contractual bombs, some times it's free rent that burns out overtime, it's still a major driver of the cash flow, growth in on a cash basis same-store NOI growth.

[Craig Mailman:]

And so it seems to me, it can still be a pretty powerful driver and just to go to Phil's kind of point about pushing rents, obviously getting this 2% to 3% escalators in new leases is still sort of a priority here along with base rates?

[Philip Hawkins:]

Absolutely, and particularly for the employees of our company who are listening. It is easy to not push. It's valuable to push. And it is something that I have been talking about internally now for sometime and I don't want to push to the point of exitincting ourselves, but it is something that we should be mindful of. I believe we are mindful of in pushing the rents, not just going for quick occupancy, clearly not looking to have vacancy forever either. We are in a marketplace with competition, but if we're smart and astute, I think pushing rents and pushing bumps can add a lot of value to our company.

[Operator:]

Our next question is from Mitch Germain with JMP Securities

[Mitch Germain:]

As for the Slover, it seems like most of the developments, kind of 250,000 square foot or below. Is there anything really behind that? Is that really where the demand is or any real particular reason, Phil?

[Philip Hawkins:]

Well, it really reflects the market. So Houston which is not a big box market, we're building one bulk building and then at some parts building the light industrial building. Chicago is 600,000, so that's plenty big. We have got several larger projects in Miami, which is doing quite well. Clearly that's built to the airport market as well. But what's on the drawing board, we have obviously Slover II and Slover I, which is under construction. Now, we have a realtor, which should be a 900,000 foot project in Empire West. We'll have a larger building in Seattle. And so really we're building to the market and the opportunities that we see. And frankly, those markets that we're building in are doing quite well in the sweet spots that we think we pick.

[Mitch Germain:]

And, Matt, if you can just remind me what's left on the ATM?

[Matthew Murphy:]

It's basically done at the end of the first quarter. You will see us, even though excited I don't think we'll likely use in the short term, we will sort of reload that program, but it's basically done with the 20 million shares.

[Operator:]

Your next question is from Mike Mueller with JPMorgan.

[Mike Mueller:]

Just wondering on the leasing spreads, if we're looking at the cash spreads. I know you had said about GAAP spreads, Phil, but if we're focusing on cash. Do you think they roll in term positive this year just given what's actually rolling now when it was signed?

[Philip Hawkins:]

It's not going to be rolling for the first time to be positive, we were positive several quarters last year when, won't we, Matt? It's not a threshold we crossed for the first time. It's going to depend on mix. As we've said for a while we are adding thresholds and whether we're over it or still below it a little bit, it's going to depend on mix. How old is the leasing rolling over? What market is it rolling over, the type of spaces rolling in? I know this is a cheap answer to a good question, but to me, we're not going to permanently cross that threshold, but we've certainly are in much better shape today with respect to cash rents than we were a year ago. And just to make a point, when you have market rent bumps and those rent bumps, just say the average 3% typical market, maybe 2.5% to 3%, whatever it is, you need to have market rent growth, cash rent growth of 3% a year just to have flat rent growth on a cash basis. So even the fact that it's flat, doesn't necessarily means that rents aren't moving. They just had to be moving in tandem with rent bumps that are consistent with the marketplace.

[Mike Mueller:]

So it sounds like, what you're saying is you're hovering around the breakeven, you're going to be over or under by a little bit? And then do you think if we're looking at a year or so that's when it becomes little more consistent that you're in positive territory.

[Philip Hawkins:]

I think we're still building off pre-recession leases, about half our leases this year, Mike, are a pre-recession leases and therefore tougher comps if you will and half or not. So for last couple of quarters, we weren't just a little bit positive, we were quite a bit positive given our cash, rents spreads. We'd love to see that happen again and no doubt, we will. But also I suspect this may not be in the last quarter of slightly negative cash rents either. I don't know it depends.

[Mike Mueller:]

The occupancy momentum, can you talk a little bit about that, was it very back-end loaded in the quarter? Was it pretty much throughout the quarter? And then, obviously you don't have stats out for what's happening in Q2, but is that momentum continuing in the Q2?

[Philip Hawkins:]

Yes, I think it was really pretty consistent throughout the quarter. As I said one of the things that had benefited us relative to plan was that we retained more of than we thought we were going to. Some of that was on a short-term basis. But obviously those people will leave at some point. And I it didn't really fluctuate much during the quarter. The foot side of getting those sort of shorter term retentions is that that will ultimately erode what we expect retention to be in the second quarter, I think for sure. So again I think it is slow and steady progress. And I think you'll continue to see that happen, and second quarter occupancy is going to be flattish to where we are today. Obviously, I thought it was going to be a little worse than flat in the first quarter and some things bailed us out from that. So we are seeing modest growth through the year. And it is climbing towards the back-end of the year, which I think is pretty historically consistent and feels right given sort of the activities that's in the markets today.

[Matthew Murphy:]

I think the most important part of our quarter, it wasn't even in the quarter, it was April leasing results. On our last quarterly call, I talked about how leasing was slow through late January, February. And I don't mean just lease signing, I mean proposal activity. And on the quarter, actually it has picked up. It did pickup. So frankly it turn in and it stayed pretty brisk. That has picked up and resulted in a good March and a terrific April with some other leases that we're working on, that will I think continue the momentum into the May. No predictions that can go beyond today I guess given the economy, but as reinforces the market we're in or the environment we're in, which is we're going to have really good months. We're going to have weak months and just the kind of inconsistent slow growth that we are seeing in the economy, but overall the trend is positive with respect to I think occupancy, net absorption and rental rates. Now, I'd like to say April was a terrific month in my perspective, more so than what we actually did in the first quarter.

[Operator:]

We have a follow-up question from John Stewart with Green Street Advisors.

[Eric Frankel:]

This is Eric Frankel here with John Stewart. I was wondering if you could touch upon the first quarter dispositions, I understand that two to three assets will fund out the joint venture that was dissolved last quarter. But the price per pounds just seemed a little bit low, just wondering if you can add a little more color?

[Matthew Murphy:]

Well it really reflects the market that we're selling. Memphis really is going to drive that and in the sale of Memphis in general, we sold some other assets in Memphis earlier in fourth quarter, really driven by replacement cost caps. What we found in the marketplace is that buyers not surprisingly are thinking about where new buildings can be built and are being built. There is supply in Memphis, primarily on the Mississippi side of the quarter. But there is supply there. So I think you're talking about relatively low price per foot markets. And in on a square footage basis, it's driven by Memphis and that's fairly low cost per foot market.

[Eric Frankel:]

And just also curious on the Dallas too, I think after the quarter you guys close on the buildings in Dallas and you also sold another building for roughly the same price on a per foot square foot basis, maybe, Mike, maybe you could touch upon what you guys are thinking about when you do that type of asset recycling.

[Michael Ruen:]

Let me tell about Dallas, but I don't think we sold the building in Dallas. We close on an acquisition in Dallas. We brought a building. We brought a project in Dallas. We did not sell anything in Dallas. But I'll tell you price per foot and even initial cap rates could be identical. That is the very, very, very tip of the iceberg as far as we're concerned. I think about it and where do we go from here, how functional is the asset, how will rents grow, where rental to market, and how do we create value from here. And are good at? There is some assets where you will see us sell, I hope, over the next few months or quarters, where another buyer will be a better buyer for those assets. We have certain strengths that I am really proud of, but we also can't be everything to everybody. So you'll see us sell assets that I consider are non-strategic, not just from a economic perspective, well, that's a certainly key driver, but also from a strategic or frankly just an organizational perspective. Is that what we want to do? Is there we want to spend time on. Are we really good at it? That's what we're thinking about. You may see and I could see on a piece of paper they're kind of kind of superficial metrics or the high level metrics, look identical and yet those buildings are very different.

[Eric Frankel:]

I was thinking of Atlanta by the way, my apologies.

[Matthew Murphy:]

And, Eric, I will add this though from a regional perspective, obviously, whenever we look at disposing of assets, we'd love to redeploy in the region where we're taking assets out of place. So we do look at that, but we look first at the broad picture.

[Philip Hawkins:]

Atlanta was a solitary user, which is always attractive from a economic perspective since they have a little different motivation than an investor.

[Operator:]

Your next question is from Jamie Feldman from Bank of America Merrill Lynch.

[Jamie Feldman:]

I was hoping you could talk a little bit more about the pickup in small tenant leasing you're seeing. Are there certain markets, are there certain sectors, is it more housing related than other?

[Philip Hawkins:]

First, it's fairly great, again it's a cheap answer to a good question and I apologize, but it's true, it's broad based. It is not a particular market. However, housing is more noticeable now than it was. And looking at first quarter results that excludes April, but my guess is that it will continue similarly. 25% of those leased deals were housing related. And so it's clearly, a couple of quarters ago we said, we can feel it, we can smell it, but we can't really talk of it, it is not going to show for it. I think now you are seeing foreign companies, betting companies with no mechanical contract. I mean a lot of different companies that are now out there, and Mike can talk maybe in terms of Orlando. Orlando demand is picking up, and clearly that's in Phoenix, but my real quick comment on Orlando in housing, and housing in general, because you are in the middle of this.

[Michael Ruen:]

We have seen an increase related to housing. Obviously, for the quarters, it's still just, you just commented, 25% of the deals were related to housing. Whether that's a trend or anomaly, we'll see. But interestingly enough, but the markets they got hit the hardest with respect to housing in the recession are markets that are coming back and bouncing more quickly like Orlando, like Atlanta, like Phoenix. If you take the quarter and just look at transaction count, 80% of deals were less than 50,000 square feet. So it bodes very well and that it is broad, but I would also point out though it's important to class B activity, which often is associated with the smaller users.

[Operator:]

Nest question is from Craig Mailman with KeyBanc Capital Markets

[Craig Mailman:]

Just want to clarify on the TRT JV acquisition, the $85 million that includes the debt you're assuming and paying down?

[Philip Hawkins:]

Yeah. We're certainly paying off the debt and, essentially, our cash investment including paying off the debt.

[Craig Mailman:]

And then just separately, Matt, just curious if you actually start reaching out to the rating agencies, thinking about maybe getting rated and doing unsecured debt that way rather than sort of the private placements.

[Matthew Murphy:]

I think we have said all along that it is a strategic objective of the company to have access to the public bond market. I think quite honestly the structure, given the financing that we have just described and completed, really allows us the flexibility to term that debt out at a time of our choosing and the nature of our choosing. There is no question that's one of the options.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Phil Hawkins for any closing remarks.

[Phil Hawkins:]

Thanks everybody, appreciate your time and look forward to continued conversations.

[Operator:]

This conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.