Duck Creek Technologies, Inc.
Q2 2013 Earnings Call Transcript

Published: 2 Aug 2013

[Operator:]

Good morning, and welcome to the DCT Industrial Second Quarter 2013 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Melissa Sachs, Vice President of Corporate Communications and Investor Relations. Please go ahead.

[Melissa Sachs:]

Thanks, Laura. Hello, everyone, and thank you for joining DCT Industrial Trust second 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, Neil Doyle, our Managing Director for the Central region, will be available to answer questions about the markets 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 limitations, 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 in our supplemental, which can be found in the Investor Relations section of our site at dctindustrial.com. And now, I will turn the call over to Phil.

[Phil Hawkins:]

Good morning, everyone and thanks for joining our call. We had another good quarter. Leasing activity was strong and we acquired a number of excellent assets with good NOI and value growth potential. We also continue to make significant progress with our development program in terms of growing the pipeline as well as leasing these assets. Leasing remains active with occupancy and lease economics continuing to gradually improve across all markets. Also important, small tenant leasing activity which picked up noticeably last quarter remains brisk. While new supply is increasing, it is still modest relative to existing inventory, tenant demand, and historical averages. Just as important, developers remained disciplined with respectable starts and leasing decisions driven at least in part by the fact that virtually all of the capital funding development is coming in the form of equity rather than non-recourse debt as in past cycles. While Matt will go into more detail key second quarter operating metrics included, we signed 4.4 million square feet of leases during the quarter and an additional 1.6 million square feet in July. Our leasing people are busy and upbeat about tenant activity, and we have a good pipeline of leases currently under negotiation. Same-store NOI increased 4% on a cash basis and 1.9% on a GAAP basis. Re-leasing spreads increased 3.7% on a GAAP basis and decreased 3.8% on a cash basis. And occupancy and our consolidated operating portfolio, was flat on a same portfolio basis after adjusting for acquisitions and dispositions during the quarter. Our market teams continue to make outstanding progress repositioning our portfolio through development, acquisitions, and dispositions. We are focusing on high-quality assets in in-fill locations with above average growth and value creation prospects. During the quarter, we closed on $157 million of acquisitions, including the previously announced $83 million acquisition of a joint venture partner’s 96.4% interest in a $7 billion portfolio. On average, including the JV acquisition, these assets were 81% occupied at the time of acquisition, reflecting our bias towards value creation and NOI growth potential. Leasing of these recently acquired assets is ahead of plan, as they are now 95% leased with all the increased occupancy occurring in July and early August. We have a strong pipeline of acquisition opportunities in which we are working, which lead us to increase acquisition guidance for the year which Matt will discuss in more detail. The most exciting value-add opportunity that we acquired in the second quarter actually looks like a stabilized asset in the earnings release, because it is 100% leased. Located at 4800 South Central Avenue, in Chicago, it is comprised of an 850,000 square foot industrial building and a separate 22-acre container yard. It is located in one of the premier in-fill locations in this market on I-55 equidistant from downtown Chicago and I-294. The seller will lease the project and continue operating his business through 2015 during which time, we will be working on plans and approvals to develop, to redevelop the 47 acres site with new state-of-the-art distribution buildings. In addition, the reconstruction of the adjacent I-55 interchange, which serves the site is well underway and will be completed in 2014. Several other interchanges along I-55 have yet to be redone, a competitive advantage for this location. We bought this site for $7.35 per land foot, which compares very favorably with recent transactions, plus we receive a 7.2% return in the first year with 2.5% annual rent bumps while we go through the planning and approval process. Neil Doyle, Managing Director of our Central Region is on our call this morning and can answer any questions you might have as he work closely on this deal with Brian Roach, who runs the Chicago market for DCT. They did a great job sourcing and creatively thinking through this opportunity. Moving on to development, we now have $137 million of projects under development, which are 52% leased and expected to generate a year one cash yield of 7.5%. We started construction in the second quarter on the 100,000 square foot 8th & Vineyard Building B in the Inland Empire West submarket of Southern California. We expect to start an additional $145 million to $170 million during the second half of the year, including the fully pre-leased 610,000 square foot Slover Logistics Center II and 928,000 square foot DCT Rialto Logistics Center, both located in the Inland Empire West submarket of Southern California, and our 650,000 square foot DCT White River Corporate Center 1, and 190,000 square foot DCT Sumner South Distribution Center both located in the Kent Valley submarket of Seattle. Also in the Kent Valley, we signed a lease entering the process of finalizing the acquisition of a land site for a 49,000 square foot builder’s suite in Auburn, Washington. Construction should start in the third quarter with occupancy commencing late in the first quarter next year. Knowing that at least a few of you are interested in the status of DCT 55 in Chicago, I am pleased to report that we are in the final stages of completing a lease for half of the 600,000 square foot building with excellent activity on the balance of the space. We have more work to do to cross the goal line, but feel good about our prospects for this project’s success in terms of timing, rental rates, and tenant credit. We remain focused on recycling capital, selling lower growth, non-core assets when we believe the proceeds can be reinvested at higher long-term returns via development and acquisitions in our core markets. In the second quarter, we closed on our remaining assets in San Antonio at a cap rate in the low 8% range. They are older Class B buildings in which we had just completed the lease up to 99% and believe that value had been maximized. And as we announced last week, we have entered into a contract to sell all of our Mexico assets for a price of $82.7 million. This translates into a year one return of 7.7% after taking into account the leasing capital associated with several recently signed leases for which the buyer assumes responsibility. Once we closed on the Mexico transaction, we will have exited a total of 10 markets, and we will be 100% focused on major distribution markets in the United States. We have several other buildings on the market and continue to be encouraged by market conditions by our debt and pricing. To-date, there appears to be little and no change in buyer behavior or pricing in response to the run up in interest rates. In summary, we are making great progress, and I am excited about our prospects for continued strategic, operational and capital deployment success. The market remains supportive and our marketing teams are doing a great job sourcing opportunities and creating value. With that, let me turn it over to Matt to provide further details on our results for the quarter as well as our updated 2013 guidance. Matt?

[Matt Murphy:]

Thanks, Phil, and hello everyone. I will talk to our results for the second quarter and discuss the progress on our capital plan. I will also update our guidance and outlook for the remainder of the year. Our second quarter results continue to reflect the progress we are making in the field and the constructive market fundamentals in our business. While our headline occupancy is down 80 basis points for the quarter all of this decline was caused by selling 1.6 million square feet that was 99% occupied and acquiring 3.8 million square feet that was 81% occupied during the quarter. On a same portfolio basis, our consolidated occupancy remained flat which was slightly ahead of our internal projections. In addition we had over 600,000 square feet of space that was leased but not occupied at June 30. This equates to 1% of our consolidated operating pool. All that 50,000 square feet of this space is now occupied. Leasing was strong in a quarter as we signed approximately 4.4 million square feet and tenant retention returned to more levels at 67.1%. More importantly our market leaders continue to feel good about the leasing markets and the outlook moving forward. Given all these factors, we continue to feel optimistic about our year end targeted 93% operating occupancy although it’s likely that the majority of this pickup will occur during the fourth quarter as occupancy should remain relatively flat during the third quarter. It should be noted however, that this guidance does not contemplate the potential effect of any future acquisitions or dispositions beyond the previously announced Mexico disposition. From a same-store perspective, we had another good quarter. Second quarter same-store NOI increased 4% over 2012 on a cash basis driven by revenue growth of 6.5%. Average occupancy in the same-store pool increased 130 basis points while free rents and other concessions continue to decline in all of our markets. This revenue increase was partially offset by $2.1 million increase in operating expenses primarily caused by property taxes. GAAP NOI increased 1.9% versus the second quarter of 2012. On a year-to-date basis same-store NOIs increased 3.5% on a GAAP basis and 6.2% on a cash basis. 17 of our 21 markets have experienced positive cash same-store NOI growth with nine of those markets experiencing double-digit growth. Turning to the balance sheet, our capital plan remains on track, we had a very active quarter on the investment front closing on $157 million of acquisitions and investing $35 million on our development business. This includes the acquisition of 45 acres of land in Houston which will allow for the development of three buildings representing almost 900,000 square feet in the targeted North and Northwest submarkets. When added to the $53 million we spent on acquisitions and developments in the first quarter, our total expenditures for 2013 stand at about $245 million through the end of the second quarter. Consistent with our strategy over the past couple of years, this activity has been funded by a combination of dispositions and equity issuance. We sold a little over $75 million of common stock in the first and second quarters through our ATM program and have completed year-to-date dispositions of a little over $110 million. When combined with the announced $82.7 million disposition of our Mexico portfolio, our sources of capital so far this year are well matched with the attractive investment opportunities we have been able to uncover. Given our success in sourcing investment opportunities, we are increasing our acquisition guidance by $100 million to a total $250 million to $350 million expected for 2013. We are also increasing our expected development starts to $200 million to $225 million including projects already started this year. We will continue to fund these activities with disposition in equity, and a sequence and mixed based upon market conditions. With respect to funds from operations for 2013 we have narrowed guidance by a penny at each end to $0.42 to $0.45 per diluted share leaving the midpoint unchanged. I think the best way to summarize the progression of guidance since last quarter is that better than expected operations both from an occupancy and a rental rate perspective have essentially offset the greater short-term dilution caused by the increase in our expected disposition activity during the year. While this may appear to be threading water from an FFO perspective we clearly view this as a positive as we continue to upgrade our portfolio as well as NAV and cash flow growth characteristics. With that, I will turn it over to Laura for questions. Thank you.

[Operator:]

(Operator Instructions) And the first question will come from Jamie Feldman of Bank of America/Merrill Lynch.

[Jamie Feldman:]

Great. Thank you and good morning. Phil, going back to your comments on supply and that being a major concern can you just a little bit more about that are there any markets where maybe we should be watching a little more than others and what gives you comfort to you that, this recovery is not going to if I can throw some water on this recovery?

[Phil Hawkins:]

Well, certainly its right – is the question to be thinking about and monitoring. Supply is up some from six months ago for sure. Still in every market well below historical levels, but also very manageable relative to current absorption and also relative to current stock, inventory stock. Markets where developers and money are flowing the fastest, are the ones I would be watching and that would be, I am watching, Houston, Eastern and Central Pennsylvania where the large buildings, it’s not a lot of buildings, but it’s a few big buildings. Phoenix sticks out to me as a market where there has been a lot of construction and lot of big box construction and a market where I’m not sure, big box demand is as normal as the Inland Empire for example. Those were couple of markets that stick out to me. I still think even in those markets relative to demand and relative to stock, I still see – I am still encouraged but I do know there is other projects that could go, and if they do go, without leasing of the existing projects under construction or available that would cause scratching of your head. Gives me, what gives me some hope and to say, that I’m not concerned, of course I’m concerned, you are going to watch it. But it gives me some hope as again it goes back to the way just being funded which is equity. And equity investors, whether it be the developer themselves who have a balance sheet, i.e. the public REITs and maybe a few others or private developers who have pension fund, non-treated REIT and other similar type of forward equity or joint venture equity type structures. Those – that decision making is much different than a developer who has lots of upside from high leverage and fairly limited downside with non-recourse loans, that isn’t happening.

[Jamie Feldman:]

Okay, thanks. And then just a follow-up on that, as you think about your portfolio and your strategy within your markets I mean I guess you specifically how do you think you’re protected from new supply or is there anything unique about your model that’s going to hope things out longer for you guys?

[Phil Hawkins:]

Well, first I think where we had development going on I feel really good about it. Seattle, there is very little on the construction and it’s very difficult to get going there. We have a very unique project, actually several of them that are I think market leading. Inland Empire there is almost no vacancy in large buildings in the West, maybe actually in the whole market. So I feel really good about that is 6 million square feet under construction in a huge market with incredibly strong demand and we have some of the bigger buildings which is where the demand is in the – and the best locations in the West. Houston, we do one building at a time. They’re fairly small and the right size for that market, leasing is great. If leasing momentum slows we’ll pause. To me what – I’m not sure it’s unique about our model but it’s important about our model two things. One is we’re building one building at a time of each size. And two, we’re not taking on a large land bank. We can pause without significant economic pain which allows us to make a more rational decision I think when it comes to development.

[Jamie Feldman:]

Okay, thank you.

[Operator:]

And our next question will come from George Auerbach of The ISI Group. Mr. Auerbach I believe there is a problem with your phone. I wonder if you could try speaking again we are having troubling hearing you.

[George Auerbach:]

Great, sorry about that. Good morning. Phil, you mentioned that you haven’t seen any backup in secondary cap rates yet, I guess first of all have you been surprised that you haven’t seen any impact on pricing given the rate move? And two have you and what, will you change your strategy on dispositions based on your thoughts on this rate move?

[Phil Hawkins:]

Couple of things one is not surprised, but I certainly was worried about a lot of things when I saw rates pop with nobody really saw that coming when it happened. We all know rate increases are coming, but no one thought happening. You never know how buyers react. And I know how we reacted, which is more cautious, the yields on the margin when we think about buying, we were certainly thinking about a little differently the day after Bernanke started do like getting to or thinking about this and the markets reacted. There is so much capital. And I think the rationale for people looking in the secondary markets has been chasing higher yields, and that rationale maybe just as strong, if not even a little stronger when you are in an environment, where interest rates are coming up. You’ve got more cushion. We are actually seeing there is more interest in secondary markets today than it was three months ago, more investors interested in Columbus as an example. So, I am not surprised, but I would have been surprised the other way either.

[George Auerbach:]

Okay, thanks.

[Phil Hawkins:]

I am sorry the other question you asked was I will say follow up for real follow if you want, was how it is going to affect your disposition strategy?

[George Auerbach:]

Yes.

[Phil Hawkins:]

Our disposition strategy is asset-specific and price sensitive. I know we are a successful in exiting, well contracting exiting Mexico, but because of pricing that we thought was attractive relative to our opportunities elsewhere and in San Antonio, but to me we will sell what people want to buy. And we are going to try to sell fully leased assets or where we sell vacancy is to a user for projects that discerned skilled enough to take any further. So, I am not sure the change in interest rates has any effects on our disposition strategy other than we are paying attention to each individual market and each individual asset and it’s a dynamic world and I’m sure that, it will unfold a little differently than we expected to.

[George Auerbach:]

Great, thanks Phil.

[Operator:]

And the next question is from John Stewart of Green Street Advisors.

[John Stewart:]

Thank you. This might be for a combination of Phil and Neil, but clearly we saw some tangible progress on the portfolio repositioning during the quarter with Mexico and San Antonio. And so I guess the question is number one, Phil can you remind us, where you are headed in terms of target number of markets? And then Neil could you maybe weigh in on the Midwest strategy and touch on DCT 55 lease up relative to underwriting?

[Phil Hawkins:]

Okay, well thanks for asking the question for Neil, he will appreciate that. I think about it more as a percentage of total portfolio. And at this point, we are close to our original target of 20% of our assets in non-core markets, non-focused markets. Now, we may adjust that target to go beyond that target, but when we started this program, we were, that’s about how, that’s how we are thinking about it. We don’t need to be pure. We just need to be more focused and waited towards the markets we like. Today, honestly, the markets we are in, in the U.S., they are all doing well. We have got an operating platform that’s proven its ability to leasing those markets. The markets that probably people like the least of where there is less development going on, so it is actually a lag going into the recovery, but today that recovery is actually more accelerated and accentuated in those markets than maybe even on the coast relative to market rental rate growth and occupancy growth. So, I am in no hurry from here. I really think about it on an asset-by-asset basis today versus a year ago or two years ago, I was thinking about it both ways. And I say alright, we were thinking about it both ways. There are definitely benefits to concentrating in the portfolio, but then there is more benefits right now from an asset prospective. So, we will continue to look at it on an asset-by-asset basis. I don’t see any major kind of market exits in the horizon, but hopefully I am wrong. Neil, why don’t you answer the rest of John’s question?

[Neil Doyle:]

Sure. John, relative to I am going to walk you sort of the four Midwest markets less Chicago. And then we’ll get to Chicago with DCT 55, but Cincinnati is doing very well for us probably because not only Cincinnati picked up and looking at the lowest vacancy rates since ‘07. But I think what has picked up for us in Cincinnati is the small users have come back, that’s really helped our portfolio. Louisville is very solid market overall and a very solid market for DCT as your essentially a sub 4% vacancy there. Indianapolis is sort of been the story of this year I think for everyone, where you were sub 5% vacant three or four months ago. Now, as all of the spec has started that, that number is going to rise to 7% or 8%, what is still been pretty solid for our portfolio as well as everyone overall? The one outlier here a little bit for us is Columbus and that’s simply, because we have one asset in Columbus we struggle with and not due to quality, not due to location. Simply, the demand in Columbus to-date has been a bit anemic, but there is some activity. There is about 1 5 million square feet under construction of that 400,000 square feet is spec. So, hopefully people are starting to believe in Columbus again and will see some more activity. Moving up to Chicago and targeting DCT 55, Chicago sort of holds its own vacancy is 8.6%, 8.7%. We have had almost 5 million square feet of net absorption this quarter. Probably the story is construction, of the deliveries in the quarter about 2.5 million square feet 1.6 of that was one single building a suit for Home Depot. So, construction has been relatively muted they have been certainly disciplined which leads to DCT 55. As you know that building which Shell completed earlier this year, as Phil mentioned, we are in the one yard line of finalizing a lease for half of the facility. I will tell you it’s meeting all our expectations relatively to the quality of the tenant, the term and the rents. And activity has been excellent really for the second half. And what that long story short is John is that the activity has rolled a bit from the 600,00, 700,000, 800,000 square feet user down to really the 300,000 square feet user, that is active in Chicago and fortunately that’s the way we have the product to accept. I hope that answers your question.

[John Stewart:]

Yes, very helpful. Thank you.

[Operator:]

And our next question will be John Guinee of Stifel.

[John Guinee:]

Okay, thank you. Two questions John Guinee, I think it is. First is Jeff around?

[Phil Hawkins:]

No. Jeff is not on the call.

[John Guinee:]

Okay. As you now Phil on the development side markets tightened developer show up little bit like locus land prices, which is just a plug figure in a development pro forma build up exponential can easily double. So, the question for you is, if you look at over the last few years, where you have seen significant increases in land price is one question? And then the second question for Matt drill down a little bit more on the increase in OpEx and is that here to stay?

[Phil Hawkins:]

Means I’ll start John with land prices, land prices in many markets have not moved much. Now, they didn’t go low either when I say haven’t moved much. They were in a lot of trade in ‘08 and ‘09, 2010 and even ‘11. I used the Inland Empire though – well, I think land prices have moved the most as in the Inland Empire where we bought some land in ‘08 it was early ‘09 (inaudible) that was abnormality where we bought it for $6.5 a foot, but we have bought us over land a for say $10 a foot roughly or land foot. And today I’d say that the next land right now is priced $14, $15 a foot for land that’s trading. Huston moved has up some obviously, but it’s not 50% probably down 25% and as you are right land prices move up as confidence in the ability to prudent production grows and as rents grow. But that hasn’t and you are seeing more demand for land. So, it’ more competitive which will, I think lead to further increases in land, as we go forward. Matt?

[Matt Murphy:]

With respect to the increase in OpEx, there is really two driving factors of that, the biggest – by far the single biggest increase has to do with property taxes, quite honest predominantly driven by Texas, we just got reassessments on those. So, what you are seeing in the second quarter is a little bit amplified because it’s a catchup for more than just the second quarter. I think quite honestly you have seen evaluations go up in Texas, we will protest those, we will win a certain part of it. But I do think with valuations going up, property taxes are going to fall to a certain degree. The other part that’s probably a little bit more fleeting has to do with the fact that you’ve got increased in cam in the second quarter of this year particularly in relation to last year, some of that is, over the course of the year, you see those numbers pretty stabilized. They will spike as activity spikes, you get a couple of big, sort of roof, repair projects, it will spike. So, I think, at the end of the day, I think it’s likely that property taxes will continue to increase in certain markets as valuations have. So, I think in that regard, it’s here to stay, it’s probably a good bad, if there is such a thing and in other parts but I think are little bit more cyclical, in related to timing.

[John Guinee:]

Alright, you have me until you said good bad, can you explain that?

[Matt Murphy:]

Well, we are pretty long on real estate, so that fact that property taxes are going up because valuations are going up, that’s ultimately a painful reflection of a very good trend.

[John Guinee:]

Alright, thank you.

[Operator:]

And our next question is from Craig Mailman of KeyBanc.

[Craig Mailman:]

Hey guys. Just wanted to go back to your comments that small tenant leasings coming back and I heard the comment that Cincinnati is benefited, could you maybe just outline which other markets could see the biggest benefit in the near-term and then possibly breakout on the occupancy side, sort of what the vacancy or occupancy is for a space of 50,000 square feet and less versus your larger boxes?

[Phil Hawkins:]

Other than Southern California where we own a while good size boxes and the vast majority of tenants that we are looking for are large. And Houston where with the lot of small tenants could fall and it’s been active for a long time, every market needs small tenant leasing to remain strong. Maybe I guess Columbus we got one large box space and we don’t worry about Columbus from a small tenant perspective, I just like to have a large tenant show up. I think it’s every market. Assuming the home building dominated markets are the most in need, Atlanta, Orlando well New Jersey we’ve got number of smaller tenant spaces and a lot of this, fair amount of, small and medium size tenants. I mean there is not a market other than what I have ever listed that I would exclude from that.

[Matt Murphy:]

And then with respect to the specifics, we’re right, just a little bit under 90% in our 50,000 square feet and below. And to give you sort of a sense of perspective, that’s about 500 basis points a little bit more increased than it was a year ago at this time.

[Craig Mailman:]

Yeah, was it a peak?

[Matt Murphy:]

Not in front of me. My guess is the reason for that is the data that I am looking at doesn’t go back far enough into the peak that would have been in 2007, 2008. It’s going to be representative of overall occupancy would be my guess which is, probably a little bit lower than, an institutional quality portfolio like a public REIT which may stabilize in the 95 range looks smaller spaces probably true a little bit more. So, it might be 94 but I have that’s speculation not fact.

[Craig Mailman:]

Okay. And then just follow-up on your comments on expenses this quarter and just looking at same store you guys are above the high end of the range for the year, is it – what’s going to drive the back half to be that much lower as it just an incremental benefit from occupancy gains where is off or is there is something else going on?

[Matt Murphy:]

I am sorry, so when you’re asking sort of what the back half for the year looks like, you…

[Craig Mailman:]

You guys aren’t changing your guidance, right you still 3.5 to 5.5 but you are at 6.2 right now kind of what gets you to the midpoint of the range now or could we see the kind of the guidance target may be move up next quarter?

[Phil Hawkins:]

Well obviously, we are not going to talk about changing potential changes in future guidance but I think the short answer is occupancy increased meaningfully during 2012 and therefore the comps are getting higher. I think that is being – the impact of that is being mitigated if that’s the right word to some extent by the fact that rents are moving up quite a bit and you’re getting without occupancy, you’re getting free rent and concession burn offs that I think is a trend that continues into the future. So, I mean I think it’s simply algebra at that point that the increases will come down a little bit as a result of the fact that the back half of 2012 occupancy was higher than the first half.

[Craig Mailman:]

Great. Thank you.

[Phil Hawkins:]

Thanks, Craig.

[Operator:]

And our next question is from Brendan Maiorana of Wells Fargo.

[Brendan Maiorana:]

Thanks, good morning. So, Matt I just – I wanted to follow-up on that because your comments earlier in the call, in the prepared remarks I think you said operationally you guys were ahead but you’re selling more in terms of assets so that guidance midpoint and from an FFO perspective stay the same, so that sort of led me to believe that you’re running ahead on same-store. Is that correct I mean I can appreciate kind of the challenges in the back half of the year just running against part of confidence, it sounds like maybe you’re trending on better on NOI than you thought at the beginning of the year when guidance was given?

[Matt Murphy:]

Yeah, well I think we’ve increased it, we have obviously increased it on the back of the increased same-store numbers in the first quarter. What I said was we were slightly ahead of occupancy as of 6.30 and that better operations have offset the increased short-term dilution from the increased disposition activity. We have a range of same-store and I still think that even with that increase the expected outcome falls within that range. So, I think all of those are true. They don’t – every single piece, every time a single piece of that moves doesn’t move all of them because we have ranges and we have ranges we know pieces of it will move.

[Brendan Maiorana:]

Yeah, okay, got it. And then just occupancy I just want to make sure that I understood this correctly. So, your occupancy is targeted by year end is 93% on the operating property so that’s up from 91.9% today, but that’s inclusive of the sales in the Mexican asset which are 100% in our probably 30 basis points dilutive to the occupancy number?

[Matt Murphy:]

That’s exactly right. I don’t know about 30 basis points I haven’t done the math but it sounds about right the rest of it was exactly right.

[Brendan Maiorana:]

Okay, great. Thank you.

[Matt Murphy:]

Thanks Brendan.

[Operator:]

And the next question comes from Paul Adornato of BMO Capital Markets.

[Paul Adornato:]

Good morning. Just a follow up on the large tenant, small tenant discussion and that is how do you look at your overall portfolio in terms of large tenant versus small tenant, do you feel like you are properly positioned in that regard?

[Phil Hawkins:]

From a large tenant perspective what we try to do is have a portfolio that can be multi-tenanted and whose size – and the size of those spaces would be not considered extraordinarily large or small. We have some flexibility left in the portfolio that I don’t think are good fits for us long-term, very small percentage of the portfolio, but clearly catering to little small tenants and higher office finished than we are comfortable with and frankly equipped to manage and do a good job with. The large buildings we have are in markets where those are appropriate. We stayed away from the builder suite business where you’re chasing ultra where I can say ultra large buildings well through the market where there is only a handful of tenants or maybe even just one tenant that would take them upon availability. So, I think I feel good about what we have on the high end of the range. I don’t think we are exposed with anything that I would consider to be extraordinarily large in any particular market, is nothing I can think of. And then I would call it prune a few buildings are the smaller in their range that are flexi or just small.

[Paul Adornato:]

Okay. And the development pipeline is as you said is almost always going to be multi-tenant and its composition?

[Phil Hawkins:]

Well, we may get lucky where we, Southern California we could easily divide those buildings up, Houston the building we leased up late last year or early this year could easily design to be multi-tenant but in this market we are able to get to low tenant occupancy. We thought we hoped and we tried for a year or lease DCT 55 a single tenant in Chicago we have actually thought that’s where the market opportunity was when we started construction. What’s ironic is that the market shifted. They can see for this, kind of 200,000 to 300,000 foot spaces declined pretty significantly, demand picked up and we actually saw a better opportunity to multi-tenant after a trying for a year or so for that single tenant user. So everything we designed has been and building is multi-tenant even if it’s leased to a single tenant user on the first generation.

[Paul Adornato:]

Okay, great. Thank you.

[Operator:]

And the next question is from Sheila McGrath of Evercore.

[Sheila McGrath:]

Yes, good morning. So, could you talk a little bit more about the two portfolio sales at San Antonio in Mexico, where they both portfolios widely marketed, was their lot of interest level and multiple bid?

[Phil Hawkins:]

Two different situations. We marketed through a broker, San Antonio and, given the age of the assets, quality assets honestly and then market, it was going to be more of a, it was going to be more of a, it wasn’t clear who the buyers are going to be and the buyers we expected to be private clearly and that to emerged with a good interest, strong interest and we were pleased that with pricing, and the execution. I mean I think the –see we did a great job and happy with how that went. Mexico was little different. We – you follow now Mexico and several of the FBARs. It was clear to me what was going down there, was it started couple years ago with the emergence of Mexican pension fund money being permitted to invest in real estate. And then the emergence of FBAR I don’t know two years ago or so. I was hopeful that pricing was going to move and I was pretty sure who I knew was going to buy our portfolio. We have had some in reserving inquires over the last 12 months and we knew who to call. And so, we made those phone calls. So we marketed ourselves and distributed packages and let people respond as they saw fit – we had great response as you might imagine it’s not 20 buyers down there, but it’s a more than a handful. And it wasn’t just FBAR it was pension funds and similar type of investors as well that expressed strong interest. In the end, we knew that the buyer of the portfolio, we knew them pretty well for some period of time and we had confidence, it really came down to confidence in their ability to execute and the amount of homework they did going into it, we were very impressed with the homework they did, the knowledge they had. I mean, that’s to me was important said they want to go down the road with somebody or a buyer that was learning on the job or learning as he went through due diligence I didn’t want with people involved and I did not want fall steps, if we could avoid them. And so I was really happy with how that went. Not closed but due diligence is waived and some money is hard in we’re confident as I think as is the buyer that we will close.

[Sheila McGrath:]

And just as a follow up, was there kind of low A cap rate in San Antonio and 77 in Mexico was that where you expected pricing to be or little better?

[Phil Hawkins:]

Well, that’s a good question. San Antonio was right where we expected to be. We tried to sell these assets and actually could have sold these assets a year and a half ago maybe Matt I’m looking at Matt.

[Matt Murphy:]

Yes.

[Phil Hawkins:]

When we sold all the other assets there and there is some leasing that we’re more confident and then buyers are giving us credit for, so we said lets go lease it. And so pricing is significantly better than it was at that point. Cap rates have moved some as well but leasing is what drove that. You know Mexico I sort of had in my mind kind of pricing in mind and we achieved it.

[Sheila McGrath:]

Okay, thank you.

[Operator:]

Next we have a question from Gabe Helmo of UBS.

[Ross Nussbaum:]

Hi, Phil. It’s Ross Nussbaum here with Gabe.

[Phil Hawkins:]

Hi Ross.

[Ross Nussbaum:]

How are you?

[Phil Hawkins:]

Good.

[Ross Nussbaum:]

Can you talk little bit about whether or not you took a look at the (inaudible) portfolio if at all how hard you went after it? And maybe second talk about how you would think about the quality of that portfolio visa-visa your own assets?

[Phil Hawkins:]

That’s a great question. As you probably know is fully marketed in 2011, I don’t say summer or fall. We looked at them we know the (inaudible) people and certainly know spend a little bit of time on that portfolio from our perspective we are trying to become more focused with our assets and concentrate assets in markets that we have people in there and which we and also which we have confidence in terms of long term market performance and in our opinion that wasn’t a good of a fit for us and our strategy and our situation as we would have like to have seen and so we did not submit a bid back when he was firmly marketing. And therefore we would not participate in any discussions that may have been going on over the last six months that ultimately comminuted with the buyer announced this week.

[Ross Nussbaum:]

And I know you are familiar with the portfolio so if you had to stack it up against your own, how would you rate it, who is the winner?

[Phil Hawkins:]

Well, I like our markets it’s a lot better. Our market concentrations are far better in my opinion, on the other hand I like, it’s a good portfolio, higher quality then Cabot in the past I think, its relative to subjective judgmental comment but I think the quality is better and so I think I understand why others were interested in it, interested in what something we felt was the right way to achieve our objectives for portfolio concentrations as well as, future growth prospects.

[Ross Nussbaum:]

Okay. And then if I could ask a follow up on a separate topic, you talked about the dividend for a minute, so dividend has been flat for four years now, my gut tells me if you could turn back the clock four years, you probably would have taken the dividend down another penny. So maybe you could started increasing by this point in time, but when you sit down with the board, and you look at your earnings trajectory not just over the next couple of quarters but over the next couple of years, and you think about in appropriate payout ratio and you think about that in context of potential rising interest rate environment and should the dividend to keep up with that. How should shareholders be thinking about how the dividend growth, now that it looks like you’re covering the dividend, how that’s going to match up against your earnings growth from a payout ratio context.

[Phil Hawkins:]

It was nice to be in a situation where we’re comfortably covering the dividend and not in our minds but everybody else’s mind. So I like to enjoy that for one moment. Given the external growth opportunities that we see and given our experience to the last five six years with dividend that was not always comfortable covered. I think it’s buyers to wait for the dividend to get closer to the taxable minimum and that’s as much art and science. So, we can’t get it down to the final note but we need to grow, further grow into that dividend before we get into discussion, I think about increasing a given the opportunity to deploy that capital in a way that I think that’s exciting from a current shareholder perspective.

[Ross Nussbaum:]

So, that may not be 12-month event are we talking that could be two years out?

[Phil Hawkins:]

I will wait till we talk about guidance next year and do we even have that discussion assuming I like the future growth prospects of our business, but also know that a lot can happen over the next 12 to 24 months, so no sense trying to predict what that might be.

[Ross Nussbaum:]

Appreciate it, thanks.

[Phil Hawkins:]

Thanks Ross.

[Operator:]

And the next question is from (inaudible) of SunTrust.

[Unidentified Analyst:]

Hey guys. How are you guys been?

[Phil Hawkins:]

Great.

[Unidentified Analyst:]

That’s good. Just had a quick question, if you look at the incremental demand coming from e-commerce today, versus maybe three years ago, could you help to create paint that picture and given that perhaps e-commerce companies like Amazon and eBay try to move more towards quicker delivery versus tax benefits. How that impacts markets like Cincinnati, Indianapolis or even Phoenix where they might stand lose incremental demand going forward and how that shapes your opinion on where you want be?

[Phil Hawkins:]

Let me bifurcate the answer, because when people think about e-commerce they think about Amazon. Large mega dominant names so they’re out there building large mega buildings. And with strategies there’s easily and always followed, that’s not a business that we consider something that we’re particularly well suited for because you end up with buildings you wonder what’s going to happen when you buy – build a 40 foot clear 1.2 million square feet building in the secondary market in the Midwest. What are you going to do with it upon release, you got to sell that building quickly and that’s not our model. The rest – there is a huge number of e-commerce driven tenants. Many of whom maybe most of whom have their routes in traditional retail and they are taking space in existing stock more often than not in many different markets and we are seeing a lot of demand. So for example we just leased a building in Central Pennsylvania to One King’s Lane e-commerce company that I had never heard of but a lot of people in our companies were very impressed with the name showing my age. We leased in Cincinnati, we’ve done several e-commerce tenant leases. And so, as a result it’s not just Amazon or same day delivery major megapolitan cities it’s really these companies Volvo has done well very well, very well in part because of transportation hubs. Cincinnati seeing benefit, Memphis seeing benefits, so it’s not just being next to New York, San Francisco, LA, Chicago, it is a pervasive trend across more size spectrum than you might imagine from just reading about the 10 million square foot plus builder suites for Amazon that happened in a year. Therefore it’s a net benefit to honestly even secondary markets and we see as much of it in the Cincinnati and others as an example so I think Cincinnati is a beneficiary not threatened by it.

[Unidentified Analyst:]

And you think that’s the same rationale for a market like Indianapolis and Phoenix that happened traditionally distribution focused from those big box you think they’ll still do well going forward?

[Phil Hawkins:]

I don’t well, first of all Phoenix has been a huge home for Amazon and so we’ve not been a participant. We’ve not had much vacancy in Phoenix and what we have I can’t think of a e-commerce tenant kind of in the 100,000 foot range or 200,000 foot range we just haven’t had a lot of that that’s not our that hasn’t been our activity. So, I can’t speak to Phoenix below the level of that 1 million foot or there has been several million foot that has been built in Phoenix for our friends in Amazon anyway. Well there is another market, Indianapolis again we don’t a lot of vacancy and Neil do you have comments on Indianapolis with respect to e-commerce.

[Neil Doyle:]

Phil only that from an e-commerce at the end of the day from a regional distribution standpoint is going to follow the same fundamentals as our typically brick and mortar. If (inaudible) is in place to be to serve x number of people in x number of days well (inaudible) is going to win, relative to (inaudible) proper I think that your e-commerce they’re going to serve the demographic and whether it’s so for the larger regional buildings the Amazon’s whether the Indianapolis and Cincinnati it may not be our game anyway when it get downs to serving a local demographics all whom will be served one way or the other whether is next day, next hour or three days I think we all will be well positioned there as we are today in Indianapolis, Cincinnati et cetera, it’s our typical portfolio. But no major movements one way or the other in Indianapolis, we haven’t benefited greatly nor we seen any harm from e-commerce movement in Indianapolis.

[Unidentified Analyst:]

Okay and thanks for that. And just one second question, I appreciate that you guys are seeking out deals that whether it’s offside or whether it’s value that can be added, can you just and maybe talk a little bit about, what the processes that you guys go through before these deals that possibly others aren’t finding and maybe off markets are kind of overuse term but, what that really means?

[Phil Hawkins:]

Hey Neil why don’t you take that one?

[Neil Doyle:]

Well if I could (inaudible) is 4800 essential as an example because you have all read about that and heard about that this morning. This is what you call an off market deal was it broker represented, yes. Was it marketed fundamentally sound package, no. And there is a situation where an owner-user is looking to cash out of real estate that has appreciated over the years, he stabilized with his own business, he can replicate that business probably somewhere else, he doesn’t need Class A. The broker entertains several people that will look at this, it’s difficult to do a redevelopment like this is going to have many challenges, physical, political, environmental, etcetera that will often scare away lot of the developers heavy on debt, now you are back to who can participate in inferior location who is comfortable participating in inferior location and that seems to hurt a little more. Now you are down to a couple of entities that he is comfortable dealing with and that when you start your pitching and you win or you lose in that situation he was comfortable with our ability to close. He was comfortable with our ability to allow him the lease back that he needs to properly operate and relocate his business. We were very excited about the inferior location. We are very excited about the ramp basis both today and little in tomorrow when he vacates the premises in ‘15 or ‘16 I should say. And what we’re most excited about is an absolute dearth of new product in an inferior location. So we are not going to replace the square footage you see today but what we are going to replace is with is going to be class A modern that’s going to allow us better returns then we are stabilized today that’s the premise of the redevelopment as well as the opportunity to deploy more capital at an inferior location with a very little competition. So, it’s more labor intensive from our standpoint certainly, but that’s where our market teams are set up to do and that’s what Brian Roche in Chicago and his market team accomplished.

[Phil Hawkins:]

And I’ll just add it’s a very local business one-off hand to hand combat trying to find a deal and trying to convince the seller that our offer our package are valuation is the right decision to make.

[Unidentified Analyst:]

Okay. And on a go forward basis your acquisition guidance how should we think about the split between more fully stabilized assets versus may be deals with little more here on it?

[Phil Hawkins:]

I think what you will see in the future is pretty similar to what we’ve done in the past I mean it’s, it’s difficult to predict with specificity but we got a pretty long track record, we been migrating to more value add but they come as they come.

[Unidentified Analyst:]

Okay, thank you guys.

[Phil Hawkins:]

Thank you.

[Operator:]

(Operator Instructions) And our next question is a follow-up from Jamie Feldman of Bank of America/Merrill Lynch.

[Jamie Feldman:]

Great, thank you. Can you guys talk a little bit about leasing spreads, you had a decent quarter for on the GAAP side, and they’re still negative on the cash side, what are you thinking for the rest of the year, and how you think about your expirations in ‘14 are you getting to your above or below market?

[Phil Hawkins:]

No Jamie, still take in parts, one of the things rents spreads, you guys having broken record on this but I’ll, mix is a big part of rent spread. So we had, we were down 3.8% cash this quarter up 3.7 on a GAAP basis, but that was driven in large part by a single large transaction in Cincinnati that was, it was a lease that was signed in 2005, 700,000 square feet, signed in 2005 had a healthy bumps. You take that out of the equation which you can’t do, but you take that out of the equation and its 10% on a GAAP basis and almost 2.5% on a cash basis. So, it’s why such a volatile statistic, I think the trend line is what you look at, the trend how it has continue to become more favorable, no reason at all to expect that won’t continue, in fact there’s every reason in the world to expect it will, as market fundamentals continue to improve across the board. So, you’re never going to get me to predict, a spot rent growth number because it is so difficult to predict because of mix, but the trend line is clearly positive. With regard to 2014 we’ve got about 10.6 million square feet that rolls next year. So, we had 70% that’s the business of industrial. I think clearly you’ll see that would be better than it has been for the past couple of years. I do think ultimately net-net we are – will be rolling up rents in 2014. I don’t know the magnitude. You’ve got to look at the individual mix. We are not talking about 2014 guidance. But I do think the trend line continues to improve.

[Jamie Feldman:]

Okay, great, very helpful. Thanks.

[Phil Hawkins:]

Thanks Jamie.

[Operator:]

And this does conclude our question-and-answer session. I would like to turn the conference back over to Phil Hawkins for any closing remarks.

[Phil Hawkins:]

Thanks to everyone for participating. We appreciate you spending the time to follow DCT and we are all available to answer any other questions you might have. Have a great rest of the summer as you get near the end of earnings call season. Take care.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.